A report from the U.S Census Bureau indicates that home sales rose by 17% in June 2020 from May and 13% in 2020 from 2019. In 2021, those numbers increased across the board with continuous increases of 20% and up quarter after quarter. These reports are a sign that real estate trends continue to show over and over just how valuable investing in real estate can be.
That said, it’s a perfect time to buy real estate if you can. It will of course take a skilled real estate agent and some patience, but if you’re committed to the process, there is a spot for you in this market. That leads to me the real diamond in real estate—vacation rental properties. Aka, income-generating homes that will continue to appreciate in value and build your long-term wealth without much need from you (if structured correctly).
I purchased my first vacation home in early 2021. I spent quite a bit of time searching for the nicest home in the best area for the price I could afford. That means amenities, size, finishes, costs for updates, proximity to the airport, and local attractions. When searching for the right home, it’s important to take all of this into account so you don’t end up with a home that drains your bank account or is not a highly sought-after area due to location or amenities. Believe me, it all matters!
The first home we purchased in Peoria, AZ checked all of the boxes we were looking for in a good vacation home rental—spacious, enough room for couples, families, or even groups. It has a pool, jacuzzi, outdoor entertaining space and is close to a ton of local attractions. We decided to remodel the bathroom, replace all the tile flooring, and repaint the interior which took us about 5 months to complete. We also needed to replace the A/C & pool pump, but all of these upgrades were definitely worth the time and investment. Within 2 weeks of listing our home, we were booked solid for 3-1/2 months and generated nearly 5 times its monthly expenses! We hired a local property manager to take care of maintenance, turnover, and handling any on-site needs of the property. (This was huge in allowing me to be hands-off from thousands of miles away and I would highly recommend this route.)
It went so well, that within months I was back on the prowl for another rental and even more motivated than ever to grow our short-term rental portfolio! Arizona is a highly sought-after tourist destination, and it was beneficial to have the rentals close enough in proximity for my ease when traveling down to check on them. I opted to purchase another home in Glendale—just 5 minutes from our Peoria home, a neighboring city to Phoenix but not as expensive as purchasing in Scottsdale.
This property took about 4 months to locate from start to finish. It took support from our local real estate broker who was willing to do FaceTime calls, virtual property tours and be the eyes and ears on the ground for us. We finally found it and are currently about 6 weeks into updating it. With waiting to find the right home, it means only having to update paint, lighting, add a pool heater, and of course, furnish the home. It will be ready within a couple of weeks and listed on Airbnb. We will also have our own property website to push out on social media or to book directly outside of Airbnb. We expect it should generate about $165,000 in passive rental income per year.
Digging into what it takes to find the right rental property.
As I mentioned, it is essential to find the perfect home, which calls for deep market research. Here are some of the specific things to consider when evaluating a home.
- How Much to Spend: If you’re just getting started with your vacation rental portfolio, keep it modest and try to put as little down as you can. Cash is king in my opinion and money is pretty cheap right now to borrow. Most lenders will require a 15%-20%+ down payment.
- Where to Buy: Search for real estate in a solid neighborhood, close to local amenities and attractions where property prices have increased over the years, but still have room to grow.
- What to Buy: Personally, I prefer single-family homes over condos, but condos can be an attractive alternative if the price point fits into your budget better. Just be wary of HOA restrictions. This is also something you need to consider on single-family homes that are located within an HOA.
- Property Management Fees: A property management company’s fees may vary according to location. Find out how much other owners in your area pay or if you are local and have the time, determine if managing the property yourself makes sense.
- Taxes: Property tax on a second home is higher as you don’t qualify for a homestead exemption. It may complicate matters and make it harder for you to keep up with a mortgage on a rental income.
- Potential Rental Rates: AirBnB has set amounts for you to determine your nightly rental rates, however, in my experience, they can oftentimes be too low. Speak with a local property management company to determine your nightly rates or commit to learning the trends of your area. This can make or break your rental income.
How to Invest in Real Estate
1. Research, research, research!
Thorough research into the local rental property guidelines should be the first thing you do before thinking of investing in real estate. As different states have varying housing laws, look into the following:
- Regulations governing the landlord-tenant relationship
- Laws against housing discrimination
- Rules regarding the eviction process
- The ability for short-term rentals in your desired community
2. Select a property and do the Math
My second home took longer to find, and it was more complicated than I initially anticipated. It wasn’t easy to select an affordable property in a place I could charge enough rent to cover the mortgage, while only needing minimal updates. You’ll also need to take into account the cost of utilities, especially if you have a pool that you are heating or purchasing in a warm climate that needs A/C most of the year. We devised a spreadsheet to help us determine our overall costs which include some of the following:
- Monthly mortgage payment
- Property taxes
- Maintenance and upkeep
- Property management fees
3. Buy the right insurance
If like me, you plan on renting out your second home, you’ll need to buy vacation rental insurance, which is entirely different from landlord insurance coverage. In some states, vacation rental policies are such that you can pay per use with added homeowner insurance benefits. Airbnb also has included insurance for your home if your guests book through their platform. There are also other outside insurance carriers just for short-term rental properties.
4. Formulate a property management plan
If you’re up for managing check-ins and checkouts, cleaning and flipping the home between rentals, and handling the bookings, you can certainly manage the property yourself. If you want to be more hands-off (like me), then do your research and find a qualified and experienced property manager that can handle all of the nitty-gritty details for you. There is of course a cost to this, but time equals money, and freeing up your time might be more valuable than the cost (and headache)!
Ready to learn more about investing in real estate? Let’s connect to talk about your options!