An Easy-to-Follow Guide for Vacation Rentals and Long-Term Rentals
This extensive two-part guide will show you everything you need to know to venture into the world of investing in vacation and long-term rentals. We’ll cover everything from how to find the best location, to how to price your rental properly, and cover the best and worst places to invest right now.
What Are Vacation Rentals and Long-Term Rentals?
Over the past few years, vacation rentals have grown in popularity. This follows the growing success of online platforms such as Airbnb, and HomeAway (who also owns VRBO and was recently acquired by Expedia) in destinations across the globe.
However, vacation rentals are nothing new. In fact, the first recorded vacation property was way back in 1624, when Louis VIII commissioned a hunting lodge for his summer vacations.
Fast-forward to the 1800s and families began investing in timeshares to have affordable family holidays. It wasn’t until the 1950s that vacation rentals were listed in local newspapers, beginning the surge of popularity.
Now, the vacation rental market is worth $85 billion. HomeAway alone lists more than 2.8 million rooms.
So what’s the difference between a vacation rental and a long-term rental?
A vacation rental (or short-term rental) refers to a furnished home, apartment, condo or other property type that’s rented out for a short-term stay. They are usually rented out by the week, but many also offer nightly rates.
Most vacation rentals are rented out when the owner is not using them. However, it is becoming more common for the properties to be ‘shared spaces’, where the owner stays in part of the house and rents out another part.
Vacation rentals are especially popular with those attending events such as music festivals or sporting events, since hotels tend to be significantly more expensive and difficult to book. They also offer the opportunity for groups or extended families to stay together under one roof.
Long-term rentals, on the other hand, refer to houses, apartments, or condos that are rented out on a long-term basis and the owner receives monthly payments. These types of rentals involve a lease agreement and are a more permanent arrangement.
5 Reasons Why Vacation Rentals Are So Popular with Travelers
According to VRMA.org, in 2010, only 1 in 10 travelers used a vacation rental on their trip. However, fast-forward to 2015 and this number rose to 1 in 4. Vacation rentals are growing in popularity and when we take a look at the stats, it’s clear to see why...
Vacation Rentals Save Travelers Money
Compared to hotels, vacation rentals are surprisingly affordable and much less restrictive. A study by TripAdvisor found that vacation rentals are actually 39% cheaper than hotels on average. The space offered by a vacation home means more guests can stay together, reducing the cost per person without compromising on space.
They Offer More Comfort
Staying in a hotel means being confined to a single room and having to share most amenities with other guests. In vacation rentals, guests can spread out over multiple rooms and get the added bonus of privacy not offered by a hotel. Nothing says comfort like a fully-functioning kitchen, a private pool or even a private beach. These are all things that are out of reach of the large hotel chains, but something vacation rentals can offer.
They Offer More Privacy
Nothing is worse than trying to get a good night’s sleep in a hotel while late-night check-ins clatter down the halls right outside your room. Vacation rentals give added peace and quiet that offer an oasis in busy cities. They also give the added security of knowing you won’t bump into strangers when you arrive home from a late dinner with your family.
They Are Great for Kids
Hotels are not well-suited for young kids. Being confined to one or two rooms and often unwelcome in bar areas in the evenings means kids quickly become restless and difficult to entertain. Vacation rentals offer the space kids need to play and entertain themselves. Travelers don’t have to worry about them disturbing neighbors and can be sure they are safe at all times.
They Are Great for Pets
There aren’t many major hotels that will accommodate pets on your travels, but many vacation rentals do. This means travelers can bring their pets along with them and enjoy a holiday without worrying about pet-sitters or booking expensive kennels.
With the many benefits vacation rentals have to offer, it’s clear to see why they are becoming the go-to for travelers.
Vacation or Long-Term? Which is the Right Investment for You?
Renting your property out as a holiday getaway will usually yield far higher average rates than renting it long-term can. In fact, it’s often possible to triple the income on platforms such as Airbnb. That makes this type of rental an appealing strategy, but it does come with drawbacks.
While triple income sounds great, it doesn’t factor in vacancy rates, supplies, and management costs. These can eat into profit margins. Whereas long-term rentals are much more reliable when it comes to consistent rent.
Experienced investors will know that rental income can be dictated by a host of other factors, such as demand, storms, vacation hotspot changes and even gas prices.
The bottom line is if you’re looking to maximize how much rent you can get from renting out a property, a vacation rental is a great option. You might also enjoy the flexibility of owning a vacation home that you can both use yourself and rent out to make some extra income. However, if you’re looking for more consistent income without the added bonus of being able to use the property or you’re not in a position to handle the seasonality, a long-term rental may be better.
Types of Vacation Rentals
If you are going ahead with a vacation rental, the next step is to figure what kind of property you are going to invest in.
Condos (or condominiums) are self-contained, occupying part of a building and can vary in size. They usually comprise of one to three bedrooms, one to two bedrooms, a living area, and a functional kitchen.
- Less maintenance
- Lower up-front expenses
- Larger condos can fit multiple guests so higher returns
- Not suitable for large parties
- Can’t offer added amenities such as private pool
- Lacks the privacy and space of a house or cottage
- Condos often have restrictive HOA rules
If you’re looking to invest in a condo in the Scottsdale area, you can check out Scottsdale condos for sale here.
Professionally Managed Resort-Condominium Complex
Some resorts are entirely or partially owned by individual owners similar to the way other condos are. The difference here is that the “front desk” or concierge handles the actual bookings and maintenance.
- Popular due to variety of amenities offered
- Very low effort required by the owner
- High HOA dues
- High management fees
Houses generally come with everything you would need and often multiple amenities, a garden and other extras including a pool.
- Plenty of space for families and large groups
- Popular with travelers with children and/or pets
- Extra amenities available (e.g. pool, hot tub)
- Maintenance required
- High up-front cost
If you’re looking to invest in a home in the Scottsdale area, you can check out Scottsdale condos for sale here.
Cottages are typically small homes and viewed as rustic and cozy. They are often found in rural or semi-rural areas.
- Offers space for families and pets
- Growing in popularity due to the quaint experience
- Smaller up-front cost than a house
- Requires maintenance and upkeep
- Although popular, cottages are still a niche market
- Usually in the countryside so harder to maintain and manage
Bed and Breakfast
B&B’s are usually for short stays and offer only breakfast as a meal package. They can be unique and themed and often have good city links.
- Popular with travelers because of convenience
- Better rates due to more amenities included
- High up-front cost
- Requires staff on site for meals
Cabins are traditionally built from logs and offer a cozy and relaxing environment. They are often found in mountains or woodland and are growing in popularity with travelers looking for experiences.
- Low running costs and energy efficient
- Popular niche with travelers
- Good for families and pets
- High maintenance due to exposure to weather
- Usually in isolated areas so difficult to get to if issues arise
Types of Long-Term Rentals
If you’ve decided that a long-term investment sounds like a better option for you, below are some of the pros and cons of the different property types.
If they are not used for a vacation home, they will usually be unfurnished. However some investors do offer partial furnishing for an increased rate.
- Easy to manage with minimal input
- Comparatively low upfront cost compared to other options (no need to furnish)
- Appreciation will improve investment over time
- Lawn and other exterior maintenance
These are smaller and more private than high rises but often have fewer amenities and less flexibility with leases.
- Offers more privacy and is generally quieter than a high-rise because there are fewer occupants
- Often fewer HOA restrictions than a high-rise condo
- Less amenities than a high-rise or mid-rise condo
- More HOA restrictions than a single family home
These are tall buildings that usually have good amenities and are often newer builds, making them somewhat more modern than low rises. They sometimes include a doorman for added security.
- Additional amenities
- High initial investment.
- Significant management involved
- Tenants expect more services and amenities than low-rise
Most Popular Vacation Rental Services
The Trip Advisor group of websites receive around 340 million visitors per month. That’s a significant proportion of vacation rental traffic overall. It’s free to list properties, making this a great marketing option for your vacation rental property.
Airbnb was founded in 2008 in San Francisco. It is one of the fastest growing vacation rental sites worldwide.
They have around 65 million visits each month, with over 50% coming from the United States. Although this seems less than Trip Advisor, remember that this is a single website, whereas TripAdvisor is a family of sites including review sites which inflate their monthly traffic numbers.
Like Trip Advisor, it is free to list your vacation rental property on this site, making it another fantastic marketing opportunity.
Airbnb is ideal for listing any vacation rental in Arizona.
Booking.com is the world’s number one accommodation site with over 430 million monthly visitors. It is important to note that this website lists hotels and B&Bs as well as vacation rentals, meaning more competition. Again, it’s free to list your property and properties are also directly listed on Google Maps.
HomeAway has dominated the vacation rental space for years. With 25 websites in its network, it’s no surprise it receives around 70 million visits every month and is usually one of the top-ranking sites on Google. They offer a fully packaged subscription service which allows you to list your vacation rental across their 25 high-traffic websites which include VRBO.
HomeAway / VRBO will account for a major portion of your vacation rental income in AZ.
8 Benefits of Investing in Vacation Rentals
If you’re still unsure if this is the best option for you, let’s take a look at some of the benefits of investing in a vacation rental.
1. The short-term rental market is growing
Between 2017 and 2021, the rental market will grow by an impressive 7%, making it worth nearly $200 billion. It’s becoming more popular and trendy to stay in someone else’s space instead of owning.
2. Vacation rentals can make more profit that long-term rentals
Due to cost affecting factors, short-term vacation rentals have the potential to generate greater income than long-term ones. In the right circumstances, this can be substantial. For example, a long-term rental that brings in $700 a month has the potential to bring in $100+ a night as a vacation rental in the right location.
3. Vacation rentals diversify your investments
If you own other rental properties, short-term rentals can help you venture into new markets. They can also be great to get you into property investment as a starter project. The revenue from a short-term rental may also generate enough to cover the mortgage costs and still produce cash-flow. This provides an attractive way into the long-term rental market if this is your end-goal.
4. Vacation rental properties suit any budget
They come in all shapes and sizes which means that you can find one that doesn’t break the bank and is manageable for you to maintain. It’s easy to begin small and work your way up to larger investments.
5. They give better tax advantages
You will be able to deduct mortgage interest on these properties and business expenses related to it from your tax bill. You can also depreciate them on our taxes (even though they’re likely appreciating in reality). Make sure you research specific tax deductibles when researching properties so you have a clear picture of the costs involved.
6. Marketplaces make it easy to book customers
7. You’ll have a vacation home to enjoy
Even if it is primarily used to rent out, there will still be downtime in seasons where you can utilize the place yourself for a cheap and hassle-free vacation. Imagine having a vacation spot for you and your family to enjoy in the slow season.
8. Increase Value Through Appreciation
In addition to the rental income, a holiday rental can generate money through appreciation over time. Real estate usually appreciates over time, even over down-turns in the market, and if you do decide to sell, it can often be done at a profit if timed correctly.
Things to Consider Before Investing In Vacation And Long-Term Rental Properties
Now you understand the benefits of investing in a rental property, it’s important to consider some important factors:
Location is the most important factor when investing in a rental property. You need to find a location that is popular with holiday-goers but also that hasn’t become inflated due to popularity.
Locations that are familiar to you or have a reliable vacation tradition are good places to start. Will seasonal changes affect the bookings? Plan for low and peak seasons. This is especially true in Arizona!
You want to be looking for a rental that will yield you a high rental rate, give you a return on your investment and be sustainable. We can help with that.
2. Laws and Regulations
It is important to know whether vacations rentals are permitted in the property or area. Some cities impose a cap on the number of days your property can be rented out for and there can be high fines for breaking these rules, so do your research first. Home Owners Associations (HOAs) may also impose restrictions.
3. Maintenance costs
Think about how close you are to the property. Can you get there and resolve issues, or will you need to pay someone to do that for you? Make sure you have some money set aside for repairs and plan for the cost of upkeep and maintenance each year.
4. Getting a Mortgage
The mortgage rate is typically higher on second homes and investment properties, so make sure you know what you are entering into. You will still need to be able to prove that you can make the mortgage payments on a second home. If you are planning to rent it out you will also be subject to a higher mortgage as it will be classed as an investment home.
You will need insurance as with any other property. It is possible to extend the policy on your current home to also cover a holiday home in some cases, but not if you intend to rent it out consistently. It will then become a business activity and you will need a business liability policy in place. If renting as a short-term (less than 30 day rental), you’ll need a policy that’s specific to short-term / vacation rentals.
You need to be able to attract tenants into your property. Think about how you will do this. As noted, a lot of marketplaces will essentially advertise for you when your property is listed on their websites. Social media streams can also be a great place to market your property without a large budget. It’s best to have a solid marketing plan in place before you get started, especially if you have a long-term rental. Vacation rentals can normally be rented easily on sites such as Airbnb and VRBO. In some areas (including Scottsdale / Phoenix) it’s common to use real estate agents to rent long-term rentals (as well as some more upscale short-term rentals). Commissions for this type of service can vary greatly.
Identifying the Best Places for Buying a Vacation Home
So now the question is, how do you identify the place location for investing in a vacation rental? Here are a few important factors to consider:
High rental demand
You want to find a place that is attractive to tourists or businesses. This is the way to secure a high occupancy rate and generate decent income. What’s also important to remember that places with the highest demand may not yield the best return due to high property prices.
High rental income
If you choose a popular destination to invest in, you will get not only a high occupancy rate but also a high nightly rate. However, it’s also important to remember that the hottest destinations have the most competition, so you need to offer something that stands out in the market.
Affordable property prices
Finding a market with reasonable and affordable property prices is preferable, but not always possible. The sale price is going to be one of the major deciding factors for you, after all. However, areas with low property prices may not be the most sought after vacation spots. So it’s important to balance budget with demand.
You can use marketing sites such as Airbnb to research areas with the best occupancy rates, rental incomes and property prices. This will help you make an informed decision.
If you’re investing in Arizona. We can help you perform all of this research.
Valuing Your Rental Property Correctly
1. Calculate your annual gross rental revenue
Compare the market to find realistic monthly rent rates. Multiply this by 12 for annual rental revenue.
2. Calculate your annual profit
Calculate the net operating income by taking your annual gross rent minus mortgage interest, insurance, property taxes, HOA dues, marketing, and maintenance costs. This will give you your bottom line profit for the year.
3. Calculate your annual return (cap rate)
Divide your annual income by the purchase price of the home (including all closing costs) to determine your annual rate of return.
4. Forecast the property price and expectations
Check the history of prices and do your best to predict trends and have realistic expectations.
Think about any new laws or regulations that may come into effect.
5. Don’t forget taxes
Take into account your tax savings. You’ll want to talk to your CPA about this.
6. Check comparable sales
You can check comparable sales online and check if the asking price measures up to comparable sales. If you’re in the Valley (Greater Phoenix Area), we’ll do this for you.
Costs Of Running Vacation And Long-Term Rental Properties
Where many investors make mistakes is working out their costs when buying a rental property. There are many more expenses besides the cost of the property and the basic taxes. In this section, we’ll cover each expense you need to take into account when investing in a rental property.
These vary widely depending on which state you’re in. Make sure you ask your Realtor about the annual taxes before making a purchase. You should be able to afford the property tax even if you’re not renting your property since you may experience slow seasons. Property taxes are paid monthly and are usually tax deductible.
Rental Income Taxes
These taxes are paid at the end of each year. However, if you rent your property out for less than a certain number of days you likely won’t have to pay rental income tax.
Occupancy taxes (also referred to as hotel tax) ranges from 5 to 19% per night. These taxes are collected from guests and you are then responsible for paying them to your city. However, if you list your rental property through a marketing site such as AirBnB, these often take these taxes for you. So make sure you are aware of the policies of the sites you market on.
It’s vital to insure your rental property with either landlord’s insurance or homeowner’s insurance. The type you choose will depend on how often you rent out the property. Make sure you get the correct cover and research your options thoroughly.
If your rental property is part of a planned community with shared areas such as a pool, tennis court or lawn area, you will be responsible for paying HOA fees. These will vary based on the amenities offered and the size of the property. These are usually paid either monthly or quarterly and can be tax deductible for rental properties.
In a long-term rental, tenants will be responsible for paying their own utilities. However, you are responsible when renting out a vacation property. Call the utility companies to find out how much these will cost and factor them into your overall expenses.
If you decide to hire a manager to take over responsibility for the day-to-day running of your rental property, this fee needs to be factored in. These fees can vary from 8% to 50% of your gross rent.
If you have the cash to pay for your rental property, you won’t have any costs associated with financing. However, if you do need to seek finance, make sure to factor the monthly cost of your repayments into your overall expenses.
Common Myths About Investing in Vacation/Long-Term Rental Properties
1. You can do everything yourself
With online marketplaces such as Airbnb growing in popularity, a common belief is it’s easy to list your property as a vacation rental and simply start booking guests. However, there is a lot of work involved in making your venture a success. You will need to market the property, manage finances, clean the property, welcome guests, etc. Although it’s not necessary to hire a manager, you may need to think about cleaning services, a marketing team, or other outside help.
2. Bad reviews are the end of you
Many rental property owners are terrified of receiving bad reviews and it often hinders their marketing efforts. As long as you do everything in your power to provide top-notch service and experience for guests, there is nothing to worry about. You may still encounter guests that seem impossible to please, but a bad review is not the end of your business. It’s a learning experience that will help you improve.
To avoid bad reviews, set realistic expectations for guests, make sure your property is clean and to a high standard, and give excellent customer service throughout.
3. Your rental property will get trashed
One of the major reasons investors hesitate going forward with a vacation rental is the fear of the property being damaged by guests. However, this is an extremely rare occurrence. However, you can keep yourself covered by ensuring your insurance policy covers damage. What’s more, marketing platforms such as Airbnb and HomeAway have safeguards protecting property owners from damage. You can require a security deposit from guests or, becoming more common, is to require guests to purchase an insurance policy from a third party that protects you, the owner. These policies are generally around $90 to $120 per stay.
4. You Need Property Management to be Successful
One of the biggest myths when it comes to investing in a rental property is that hiring a property manager will make your rental property a success. However, the truth is hiring management can be an expense many investors can’t afford. Make sure to calculate all of your necessary expenses before budgeting for a manager. If you’ll struggle to give a chunk of your initial earnings away, it may be best to start by managing the property yourself until you’ve increased cash flow enough to take on an extra expense.
The Worst Places to Buy a Vacation/Long-Term Rental Home
Interestingly, some of the most popular vacation spots across the US yield the lowest returns on investment. Inflated property prices and high property taxes mean these popular locations prove difficult to profit from.
Rented analyzed real estate price, rental rates, insurance, taxes and costs to assign an ROI score from 0 to 100 for each location. Below are some of the worst places to invest in right now. However, this list is not exhaustive - make sure you do your research when choosing a location for your rental property.
The average vacation rental income in Honolulu is about $39,047, according to Rented, with the median home value around $662,636. Rented gave an ROI score of 18.6
Long Island, New York
Average home values on Long Island are around $383,869, according to Zillow. With vacation rental income around $13,226. However, when you travel up to the Hamptons, home values soar up to $1,293,800. Rented gave an ROI score of 18.6.
Naples is an extremely popular vacation area, with the average home value around $808,091. The estimated vacation rental income is about $31,562. Rented gave an ROI score of 11.6.
The worst place to invest in a vacation rental is currently Aspen. Although the top rental estimate is $93,122, the average home value is $1,359,558. Rented gave an ROI score of 9.9.
Future Trends in Investing In Vacation Rentals/Long Term Rentals And How To Be Prepared
When investing in a rental property, it’s always best to look ahead to what the future might hold. By getting ahead of trends in the market, you can be sure your investment will yield the maximum profits.
1. Increased Popularity
Vacation rentals are continually growing in popularity, with an annual growth rate of 9.7%. Now is a great time to enter this market and make use of the growing marketing platforms such as Airbnb and HomeAway, which are increasingly cornering the market.
To take advantage of this trend, investors should aim to utilize the major marketing platforms to grow their marketing reach.
2. Increased Services and Smart Technologies
As the market of vacation rentals is becoming more saturated, the trend is moving towards increased services and improving customer experience. In order to compete with hotels and other vacation rentals, homeowners are offering more amenities, better check-in/check-out tools, and a better level of customer service.
What’s more, homeowners are increasingly taking advantage of smart technologies such as smart locks and video doorbells to improve customer experience even more.
To take advantage, new investors should focus on customer experience and incorporating smart technologies to stand out from the more saturated market.
3. Changes in Terms
The term vacation rental is changing. Now, property owners rent out their properties for festivals, sporting events, meetings, and much more. The idea of them being limited to “vacations” is becoming outdated.
Get ahead of this trend by marketing your property to more than just vacationers. This is an easy method of increasing revenue and broadening the client base. Airbnb has a special filter for homes that are business travel suitable.
4. Changes to Regulations
The hotel industry has called for government regulations on vacation rental properties which would mean rentals would follow the same regulations as hotels regarding occupancy rules, safety, tax reporting and other aspects. Ensure you stay up to date on the latest rules and regulations so your short-term rental remains compliant now and in the future.
The Bottom Line
There is a lot to take into account when venturing into the property market. But by doing your research and planning as much as you can in advance, you’ll set yourself up for a profitable investment.