Vacation Rental Property Investing Mistakes To Avoid
By Paul Esajian on October 18, 2018
A good vacation can stick in your memory bank for eternity. Regardless if you have been going to the same place for years or if you recently tried somewhere new, vacations generate plenty of emotions and memories. A common emotion on vacation is to extend the stay for as long as possible. As an investor you need to be able to separate your personal feelings for an area from your business. You may personally love everything about your vacation community, but it doesn’t always translate to a good investment. Before blinding diving into a purchase you may regret you should take a step back and treat it like any other purchase you would make. If the numbers don’t work or the market is in flux it will be a burden on your portfolio for years to come. Here are five common vacation rental property purchase mistakes you need to avoid.
- Buying on emotion. When on vacation you typically don’t have the same stresses that you do in your every day life. Regardless if you are on a beach or tucked away in a ski resort life is always a little better on vacation. It is easy to fall in love with your vacation spot when you don’t have to work or drive your children all over town. It is important to recognize that the emotions you have on vacation may not be there as a property owner. Even if you are in the best location running a property still has all the baggage of a traditional rental property. There are going to be unexpected maintenance requests, issues with tenants and problems with the property. The luster of the area will quickly fade away shortly after you take ownership. Vacation areas are a release and a way to live carefree for a few days. Those same emotions do not come with the property.
- Not running numbers. There is often a big disparity between what you pay for your rental property and the actually bottom line with ownership. At it’s core a vacation rental is similar to a traditional rental, but there are several items that make it unique. It is easy to be fooled by what you pay during peak rental season. However, depending on the area the peak may quickly fall off a cliff after. During non-peak season you may struggle keeping your rental occupied, altering the bottom line for the property. There are also a handful of additional expenses that traditional rentals don’t have to deal with. You are on the hook for every utility with the property, you have to pay to have the property furnished, there are weekly cleaning tabs and numerous additional expenses that must be accounted for. A good deal on the surface may turn out to be more trouble than it’s worth. Always know and understand all the numbers associated with the property before considering an offer.
- Not researching area. There is more to a vacation market than meets the eye. It is easy to gauge demand based on the one week a year you are at the property. Things are often booming in peak season but may not be very hot the rest of the year. Vacation areas are often unique markets with their own set of rules and guidelines. They may have restrictions on rental policies and licensing approvals. If the market is small enough just one sale can reset the comparables for the area. Like any other purchase you need to do your homework on your investment. Instead of looking at rent rolls and list prices, look for any sales in the past 90 days. Most vacation spots have local newspapers that often provide a wealth of information. Call any real estate agent prominently listed and ask questions about the market. See how long homes have taken to sell and where the market is trending. See if vacation peaks have been rising or declining. The more you know about your market the easy it is to make a decision.
- Rushing to close. There are many situations in real estate where time is of the essence. However, not every deal is a rush to close. You may be told that there are three other parties interested in the property and you must act quickly. Even if this is the case you still need to do your homework. Rushing to close only to find out that there are warts with the property can set you and your business back financially greatly. As much as you may love the property you still need to follow your systems and due diligence routine. You may have to act quickly but you should never feel pressured or rushed to move forward without feeling comfortable.
- Lack of a long-term plan. What do you plan on doing with the property? Simply stating that you will use the house a few weeks a year and rent it the other weeks is not a long-term plan. On every property you need to have a 1, 3, 5 and 10-year vision. Things may change over time, but you need to have a baseline when you purchase. Without a plan you will make hasty decisions that often don’t make great financial sense. Putting work in a rental that you are going to sell in a year may come back to haunt you. Whatever your goal is with the property you need to map it out before you make an offer.
A vacation rental should be treated just like any other property. There are some definite differences, but the goals and numbers should be the same.