A Profitable Investment: Growing Wealth Through Vacation Rental Income

The proliferation of sites like Airbnb, VRBO, and HomeAway has given the U.S. private accommodations market a boost, making vacation rentals a popular option for vacationers who want something more to choose from than a hotel. That's created a strong real estate market for first-time investors looking to grow wealth. It can be a highly profitable investment if planned and managed carefully. Here are some factors to consider if you're considering purchasing a vacation rental property:

Location!

Location is what it's all about in real estate. Deciding where to buy can make or break your investment. You've probably been on enough vacations to know where people like to spend their hard-earned vacation dollars. Focus on properties set among beautiful natural surroundings (i.e. the beach, mountains, forestland, etc.) and near intriguing amenities and sites, which can make a vacation property near cities like San Diego, San Francisco, Los Angeles or New York a great investment.

Financing your investment

Carefully assess your financial situation and your creditworthiness to determine whether taking out a second mortgage is a viable move. Pay particular attention to your income if you're taking out a second mortgage because lenders scrutinize debt-to-income ratio. Be realistic about your available income: Is it sufficient for a two-mortgage arrangement? The next step is to select your best financing option, whether it's a conventional or short-term loan.

Project profitability

Once you've identified a desirable vacation spot, assess its value to ensure that your investment is a risk worth taking. Take advantage of online home value calculators like this Penny Mac home worth tool to give you an accurate picture of the profitability of a vacation home. You need to know whether you can afford a vacation property during periods of vacancy, so pay close attention to both vacancy rates and rental rates in the area to determine whether your potential monthly income will be enough to ensure adequate profit.

Don't forget to factor in costs like property and rental income taxes, utilities, maintenance upkeep, insurance and homeowner association fees (you can keep insurance premiums down by bundling your coverage and installing a security system). If the numbers don't indicate profitability, it's probably in your best interest to look elsewhere.

Value added

Always bear in mind that you'll be in direct competition with other real estate investors, people looking to create wealth just like you, so it's important to look for a location with built-in advantages and to add appealing amenities. Spend a week in the community where you want to buy so you're familiar with what there is to do, including attractions, activities and great places to eat. Vacationers are looking for a memorable experience in a property that has a lot to offer - the more value you can provide, the more appealing you'll be to potential guests.

Property management

If, like many real estate investors, you need someone to look after the place, it'll be necessary to find a reliable and experienced property manager, or a property management company. A property manager will be responsible for everything from emergency repairs to keeping the place clean for your guests. Vacation rental property management companies charge based on their service level. You can defray some of that cost by looking for things to manage yourself, like cleaning, unless you're too far away to make that possible. 

A vacation rental can be a great investment if you're looking for a sustainable way to generate income and bolster your financial portfolio. Be diligent about location, and determine whether expenses, upkeep and projected occupancy rates add up to a truly profitable opportunity.

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Brittany Fisher
Creator and Head Writer at Financiallywell.info
brittany@financiallywell.info