Putting your hard-earned money into real estate is a great way to do so. Buying a vacation rental is a great way to make more money and build a business simultaneously. This is especially true now, when the cottage industry, which is what some people call the vacation rental business, is booming.
Keep these five simple (but important!) steps in mind if you want to join this new industry as it grows.
1. Set goals
Before you look at potential properties (and after you’ve been pre-approved and done the first few rounds of financial paperwork), ask yourself: what is the goal of this rental property? If you want to make extra money, be more specific about how much you want to make each month. How about once a year? When it’s time to figure out how much money you could make, you’ll know exactly what makes sense for you and what doesn’t.
Mark J. Kohler, a real estate investor and business and finance expert, says that you should also set a deadline to keep you on track with a process that can take a long time:
“Set a date for when you want to buy your first rental. Don’t give up. Tell your friends and family what you want to do. Instead of just saying “buy a rental by X date,” write it down and give yourself short deadlines for looking at properties and making decisions. Set goals that are easier to reach so you can get to the closing.”
2. Find out how much the house is worth.
When you find a few possible rentals that you like, take some time to find out how valuable the home is financially and in terms of how it works. There are a few ways to figure out the value in terms of money:
Home Value Estimator: This tool uses its machine learning algorithm to estimate your home’s value based on the estimates of five leading sources. This will help you figure out if the house is priced too high, too low, or just right.
Statewide Home Values: Use this tool from Bankrate if you don’t have a specific area or neighborhood in mind but know the state where you want to buy a rental. With it, you can see the average prices of homes in each state.
Don’t forget to look at the crime rate and the walk score. The walk score may be good for active renters who would rather walk than drive or those who don’t want to spend money on a rental car.
3. Figure out how much upkeep and maintenance might cost
Taking care of a rental property is just as much work as taking care of your own home, if not more. Not only do you need to think about general deep cleaning tasks like unclogging drains and touching up paint, but you also need to consider renovations that involve new technologies like smart locks and app-controlled heating and air conditioning, which will all cost money.
There are a few easy ways to figure out how much these things will cost:
- Ask property managers in your area what common maintenance problems they deal with often. Depending on where the property is, you may also have to take care of problems caused by the weather. Think: by a lake, the ocean, or a mountain.
- Call companies and agencies in your area: Not sure how much heating bills usually cost? What about the bill for water? Call the local company or agency in charge, as they can probably give you an average cost.
4. Figure out the money-making chance
Before you buy a vacation rental property and assume you’ll make money no matter what, figure out how much you could make by doing the math. Use this simple calculator from Rented.com. You can put in the average number of occupants, the average length of time rented (you can choose a few days instead of the usual 6 to 12 months), and the rate.
Don’t forget to take out your mortgage payment to determine how much you’d have each month to spend (or put back into the house).
This math will help you eliminate properties that won’t help you reach your financial goals. When you have a lot of choices, this is a simple way to get rid of the ones that won’t work and focus on the ones that could be the most valuable.
5. Weigh the dangers
Found the right place to rent? Don’t sign anything just yet. First, think about the risks that could come with owning a rental property. A financial expert, Dana Anspach, suggests that you think about the following possible risks:
- Your property may sit empty between tenants, which could lower your overall return.
- If you need to kick out a bad guest, you may have to pay some legal fees.
- If a guest breaks something on your property, you might have to pay more to fix it.
Some risks, like a water heater breaking all of a sudden, can’t be avoided, but some can be lessened with the right paperwork. Visit LegalTemplates.com to look at our sample rental agreement and learn about short-term lease agreements, which are great for vacation rentals.
Bonus tip! Get things going
By following these tips, ensure you get the most out of the vacation rental you buy. Set up the right contracts, make goals, and look at the financial opportunities so you can be well-informed as you look at properties and learn about your options. In the end, buying and running the business will be as stress-free as possible, and you’ll find a good chance to make money that will pay off as the business grows.