For many, the idea of investing in a vacation rental sounds enticing. After all, there’s the potential to earn equity while someone else pays off the mortgage. Further, you could pick a location that offers great tax advantages. Last but not least, you can use the property yourself if you want to! How do you pick the best place to buy a short-term vacation rental? Looking into the best places to buy vacation rental property is a great place to start.
Keep reading to discover several important factors when buying a vacation rental, plus a review of some of the best vacation rental markets in 2022 and 2023.
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The Importance of Location For Vacation Rental Properties
The location where you buy your next vacation rental investment property will greatly impact its performance. Primary cities like San Diego and Miami, have proven to be great spots for savvy investors. However, their return on investment isn’t without a significant caveat: availability. Primary cities have proven so lucrative for vacation rental investments that opportunities in these markets have lessened as their popularity grew. That means it’s time for investors to consider alternative cities or those that are less popular but share a similar earning potential.
According to the National Association Realtors (NAR), sales of investment homes increased 4.5 percent year-over-year, a figure that has risen steadily for the past seven years. “Despite a smaller share of distressed properties coming onto the market, investment purchases reversed course after declining for four straight years,” said Lawrence Yun, NAR’s chief economist.
“Steadily increasing home prices and strong rental demand appear to be giving more individual investors assurance that purchasing real estate will diversify their portfolios and generate additional income if they decide to rent out the home.”
Read on to learn exactly where to look when choosing the right investment property.
11 Factors To Consider Before Buying A Vacation Rental Property
- Personal use: One of the benefits that motivates individuals to buy a vacation investment property is personal use. Many individuals enjoy being able to visit the property for vacation purposes and also to be able to lend the property to family and friends. It is important to ask yourself if the investment is more important to you personally or financially, as the answer can affect your strategy.
- Rental income: If you own property in one of the best vacation rental markets, then perhaps rental income will be produced in a steady stream. However, not all markets will be conducive to creating an income stream that will consistently cover all expenses. If creating cash flow is your primary motivation behind investing in a vacation rental investment property, then it is worthwhile to consider one of the top vacation rental markets or to invest in a traditional rental property.
- Appreciation: In addition to rental income, an important factor to consider is property appreciation. Although real estate market predictions are predominantly speculations, investors should keep in mind that many markets can have big price swings in correlation with the current economic landscape. Investors who carefully research markets conducive to property appreciation in the long run will be best prepared to build equity over time.
- Expenses: Expenses can range anywhere from routine incidentals such as the mortgage, fees, and utilities to unplanned repairs and emergencies. These expenses add up quickly and can overtake your cash flow if you are not careful. Experienced investors will often advise beginners to over-project their expense budget, as well as create cash reserves for unplanned incidents.
- Taxes: Taxes are a complex vehicle that can be perceived as both an advantage and disadvantage simultaneously. First, those considering investing in a vacation rental should ask themselves if they can afford local, state, and federal property taxes, as well as taxes assessed on any income made from rentals. Some of this financial pressure, however, can be relieved in the form of tax write-offs that apply specifically to vacation rental property businesses.
- Risk: Owning even the most lucrative beach investment properties can be subject to risks, such as adverse weather or financial loss from a market crash. Although any type of investment is subject to risk, vacation rental owners should remain mindful of these potential downsides that can turn an investment strategy upside down.
- Insurance: One of the best ways to plan for risk is by taking out an insurance policy that best fits your circumstances. Aside from homeowner’s and liability insurance, it is important to consider if you need to take out additional policies to help protect you from specific natural disasters or emergencies.
- Legality: The best place to own a vacation rental is a location where the property can be rented out to guests legally. Before investing, be sure to double-check local zoning laws, as well as any homeowner association rules as applicable.
- Property management: Deliberating on whether or not to hire a property management company is a big decision for any type of rental property. Working with a property manager will be an added expense, but doing so can make your life much easier. Property managers can accomplish a range of tasks, from handling tenant turnover and overseeing cleaning and maintenance services to marketing your listing. Also, allowing a professional to handle these tasks can provide ease of mind, especially if you do not live in the same area as your property.
- Marketing: Whether you decide to work with a property manager or not, it’s important to think about how you will market your property. Often, the best strategy is to list your home on multiple listing sites and consistently review similar properties. This will let you know if your rental price and amenities are competitive in your rental market. Consider the impact of good photography, keywords, and even seasonal discounts as you market the listing.
- Partnerships: Working with a partner, including friends or family members, can often open up a lot of opportunities in real estate investing. However, if you want to acquire a vacation investment property with a partner, treat the venture just as you would in business. This includes forming an LLC or another type of entity, as well as having a lawyer create clear contracts.
Vacation Rental Market Conditions
Vacation rental market conditions have fluctuated quite dramatically in recent years. According to data from AirDNA, 2021 short-term rentals made a rebound from the year before — even topping 2019 numbers. The year ahead is expected to follow the same upward trend. On average, there are higher daily rates and fewer listings in many highly competitive markets. These conditions are highly favorable for investors looking to make the most of short-term rentals in the year ahead.
Impact Of COVID-19 On Vacation Rentals
COVID-19 had a detrimental impact on the world in March 2020, and the vacation rental market was no exception. Any form of travel came to a sudden halt, and almost all of the best places to buy vacation rental properties were either closed or had to implement severe restrictions. As these restrictions slowly began to lift across the world, vacationers rebooked their trips at an alarming rate. Many of the initial declines in the best vacation rental markets happened during March and April but soon began to boom again in May, June, and July. It is clear that as life returns to normal, the most profitable vacation rental locations will rebound quickly in terms of rental rates and occupancy.
Travel in 2020 was changed as vacationers shifted toward driving rather than flying to their locations. As a result, significant increases for vacation rental properties began in areas closer to suburbs and urban areas. The best places to buy a vacation rental property in 2020 were proven to be these close-by, drive-to destinations. Even after the pandemic, properties around 2-3 hours away from metropolitan areas will be popular among travelers.
Best Vacation Rental Markets 2022
The qualifications used to determine the best places to buy vacation rental property are, at the very least, subjective. If for nothing else, people choose to vacation in many different parts of the world for many different reasons. What one person may deem the perfect vacation rental, another may completely disregard. However, a few market factors can help investors take a more objective approach to determining the best vacation rental markets. This includes looking at statistics on property price, average rental income, occupancy rates, and cash on cash returns.
According to an analysis by Mashvisor, data released from Airbnb is also crucial in determining the potential success of a vacation rental market—as it remains one of the most popular platforms for short term rentals. All things considered, the following markets are predicted to be among the best vacation rental markets of 2022:
- Berkeley, New Jersey
- Englewood, Colorado
- Levittown, Pennsylvania
- Covington, Georgia
- Abilene, Texas
- McGaheysville, Virginia
Berkeley, New Jersey
- Airbnb Cash on Cash Return: 9.2%
- Airbnb Daily Rate: $283
- Airbnb Occupancy Rate: 59%
- Airbnb Rental Income: $4,479
- Median Property Price: $243,475
- Average Price per Square Foot: $190
- Average Days on Market: 61
- Traditional Cash on Cash Return: 3.2%
- Traditional Rental Income: $1,376
- Price to Rent Ratio: 15
Englewood, Colorado
- Airbnb Cash on Cash Return: 8.2%
- Airbnb Daily Rate: $124
- Airbnb Occupancy Rate: 59%
- Airbnb Rental Income: $5,263
- Median Property Price: $459,000
- Average Price per Square Foot: $396
- Average Days on Market: 99
- Traditional Cash on Cash Return: 2.7%
- Traditional Rental Income: $1,853
- Price to Rent Ratio: 21
Levittown, Pennsylvania
- Airbnb Cash on Cash Return: 8%
- Airbnb Daily Rate: $104
- Airbnb Occupancy Rate: 78%
- Airbnb Rental Income: $3,987
- Median Property Price: $292,897
- Average Price per Square Foot: $218
- Average Days on Market: 30
- Traditional Cash on Cash Return: 3.4%
- Traditional Rental Income: $1,660
- Price to Rent Ratio: 15
Covington, Georgia
- Airbnb Cash on Cash Return: 7.3%
- Airbnb Daily Rate: $164
- Airbnb Occupancy Rate: 61%
- Airbnb Rental Income: $2,619
- Median Property Price: $266,353
- Average Price per Square Foot: $1,789
- Average Days on Market: 79
- Traditional Cash on Cash Return: 4%
- Traditional Rental Income: $1,386
- Price to Rent Ratio: 16
Abilene, Texas
- Airbnb Cash on Cash Return: 7.1%
- Airbnb Daily Rate: $172
- Airbnb Occupancy Rate: 67%
- Airbnb Rental Income: $2,845
- Median Property Price: $275,725
- Average Price per Square Foot: $130
- Traditional Cash on Cash Return: 3%
- Traditional Rental Income: $1,364
- Price to Rent Ratio: 17
McGaheysville, Virginia
- Airbnb Daily Rate: $322
- Airbnb Rental Income: $4,870
- Airbnb Cap Rate: 7.64%
- Median Property Price: $458,229
- Median Square Footage: 2,533
- Occupancy Rate: 58.62%
- Traditional Rental Income: $1,360
- Traditional Cap Rate: 1.45%
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Best Short Term Rental Markets 2023
Also using data released from AirBnB, the below list reveals the markets that are predicted to be best for short-term rentals in 2023. Although the results were scattered across the U.S. in 2022, in 2023 the top new markets are concentrated in Ohio:
- Reading, OH
- Forest Hills Boro, PA
- Delhi Charter Township, OH
- Port Allen, LA
- Pleasantville, NJ
- North College Hill, OH
- Richmond Heights, OH
- Kenmore, NY
- Portsmouth, VA
- Silverton, OH
Reading, OH
- Airbnb Cash on Cash Return: 9.2%
- Airbnb Daily Rate: $100
- Airbnb Occupancy Rate: 57%
- Airbnb Rental Income: $2,865
- Median Property Price: $234,520
- Average Days on Market: 51
- Average Cap Rate: 7.58%
Forest Hills Boro, PA
- Airbnb Cash on Cash Return: 7.24%
- Airbnb Daily Rate: $123
- Airbnb Occupancy Rate: 63%
- Airbnb Rental Income: $2,828
- Median Property Price: $219,800
- Average Days on Market: 53
- Average Cap Rate: 7.52%
Delhi Charter Township, OH
- Airbnb Cash on Cash Return: 7.12%
- Airbnb Daily Rate: $120
- Airbnb Occupancy Rate: 50%
- Airbnb Rental Income: $2,760
- Median Property Price: $225,453
- Average Days on Market: 34
- Average Cap Rate: 7.39%
Port Allen, LA
- Airbnb Cash on Cash Return: 7.06%
- Airbnb Daily Rate: $133
- Airbnb Occupancy Rate: 54%
- Airbnb Rental Income: $2,630
- Median Property Price: $241,438
- Average Days on Market: 39
- Average Cap Rate: 7.30%
Pleasantville, NJ
- Airbnb Cash on Cash Return: 6.96%
- Airbnb Daily Rate: $327
- Airbnb Occupancy Rate: 41%
- Airbnb Rental Income: $2,721
- Median Property Price: $210,226
- Average Days on Market: 101
- Average Cap Rate: 7.25%
North College Hill, OH
- Airbnb Cash on Cash Return: 6.95%
- Airbnb Daily Rate: $102
- Airbnb Occupancy Rate: 57%
- Airbnb Rental Income: $2,231
- Median Property Price: $184,264
- Average Days on Market: 24
- Average Cap Rate: 7.29%
Richmond Heights, OH
- Airbnb Cash on Cash Return: 6.95%
- Airbnb Daily Rate: $121
- Airbnb Occupancy Rate: 56%
- Airbnb Rental Income: $2,867
- Median Property Price: $233,757
- Average Days on Market: 88
- Average Cap Rate: 7.21%
Kenmore, NY
- Airbnb Cash on Cash Return: 6.76%
- Airbnb Daily Rate: $133
- Airbnb Occupancy Rate: 59%
- Airbnb Rental Income: $2,706
- Median Property Price: $205,573
- Average Days on Market: 84
- Average Cap Rate: 7.04%
Portsmouth, VA
- Airbnb Cash on Cash Return: 6.70%
- Airbnb Daily Rate: $144
- Airbnb Occupancy Rate: 60%
- Airbnb Rental Income: $2,839
- Median Property Price: $290,034
- Average Days on Market: 45
- Average Cap Rate: 6.93%
Silverton, OH
- Airbnb Cash on Cash Return: 6.60%
- Airbnb Daily Rate: $123
- Airbnb Occupancy Rate: 60%
- Airbnb Rental Income: $2,850
- Median Property Price: $244,560
- Average Days on Market: 82
- Average Cap Rate: 6.83%
Summary
While a great vacation rental investment market does not guarantee success, the best places to buy vacation rental property continue to generate positive signals for investors. Those who understand the benefits of a vacation rental property should at the very least consider the factors mentioned above. A lot goes into determining a bustling real estate market, and while you may not find your perfect investment in one of the cities above perhaps the market factors open your eyes to a similarly positioned area.
Are you considering purchasing an investment property? Be sure to bookmark this page for an annual update on the best vacation rental property markets and tips.
Ready to start taking advantage of the current opportunities in the real estate market?
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