The idea of investing in a vacation rental property sounds enticing for many, and looking into the best places to buy vacation rental property is the best place to start. Earning equity in a property while someone else pays off the mortgage mixed with taking advantage of incredible tax deductions sounds great, right?
You can’t just buy a holiday rental house, however, and hope it generates returns; there are a variety of items you have to remember beforehand, not the least of which involves a great venue.
The location where you buy your next investment property for rental holidays will have a significant impact on its results. Primary cities like San Diego and Miami have proven to be great spots for savvy investors, for the exact reasons you’d assume. But their return on investment is not without a big caveat: availability. Primary cities have proven so lucrative for investments in holiday rentals that opportunities in these markets have declined as their popularity increases. That means it’s time for investors to consider alternative towns, or those less common but still share a similar earning potential.
According to the National Association Realtors (NAR), investment house sales fell 4.5 percent year-over-year, a figure that has gradually risen for the past seven years. Investment purchases reversed course after declining for four straight years, despite a smaller share of distressed properties coming onto the market, according to Lawrence Yun, chief economist at NAR.
Instead, growing home prices and high rental demand seem to give more individual investors confidence that buying real estate property would diversify their portfolios and produce extra income if they want to rent out the home.
Read on to learn just what to look for when picking the property right for investment.
10 things to remember before buying a holiday house
- Personal use: Personal use is one of the benefits that motivates individuals to purchase a property for the vacation investment. Many people love being able to visit the property for holiday purposes, and even being able to lend the property to friends and relatives. As the answer can affect your strategy, it is important to ask yourself whether the investment is more important to you personally or financially.
- Rental income: If you own property in one of the best rental vacation markets then rental income can be generated in a steady stream. Not all markets, however, will create a revenue stream that will regularly cover all expenses. If generating cash flow is your primary incentive to invest in a vacation rental investment property then choosing one of the top vacation rental markets or investing in a conventional rental property is worthwhile.
- Appreciation: Aside from the rental income, property appreciation is an important aspect to consider. While forecasts of the real estate market are primarily speculations, investors should bear in mind that many markets in conjunction with the current economic climate may have significant price swings. Investors who carry out careful research into markets conducive to long-term property appreciation will be best prepared to build equity over time.
- Expenses: Expenses can vary from regular incidentals like mortgages, fees and utilities to unplanned maintenance and emergencies. Such expenses are easy to add up, and can surpass your cash flow if you are not careful. Experienced investors also advise beginners to over-project their spending schedule, and build cash reserves for unplanned accidents.
- Taxes: Taxes are a dynamic instrument that, at the same time, can be used as both an advantage and a disadvantage. First, those who are considering investing in a vacation rental should ask themselves if they can afford local, state, and federal property taxes, as well as taxes levied on any rental income. However, some of this financial pressure can be eased in the form of tax write-offs specifically applicable to vacation rental property companies.
- Risk: It can be risky to own even the most lucrative beach investment properties, such as adverse weather or financial loss resulting from a market crash. Although any form of investment is subject to risk, owners of vacation rentals should remain aware of those possible downsides that can disrupt an investment strategy.
- Insurance: One of the easiest ways to manage risk ahead is to take out an insurance policy that suits the circumstances easiest. Apart from homeowner’s and liability insurance, it is important to know that you need to take out additional plans that will help protect you against different forms of natural disasters or emergencies.
- Legality: A spot where the property can be legally rented out to guests is the best place to buy a vacation rental. Before investing, be sure to double-check local zoning codes, as well as any applicable homeowner association regulations.
- Property management: Deliberating about whether or not to employ a property management company for some form of rental property is a major decision. It would be an extra cost to work with a property manager but doing so will make your life much easier. Property managers will conduct a variety of duties from managing the turnover of tenants to supervising cleaning and maintenance services to promoting the listing. Moreover, allowing a professional to handle these tasks can provide ease of mind, particularly if you are not living in the same area as your property.
- Partnerships: Partnering with a partner, including friends or family members, will also open up several real estate investment opportunities. However, if you wish to purchase a holiday investment property with a partner, be sure to treat the venture as you would in business. This involves establishing an LLC or other sort of organization, as well as developing specific contracts with a lawyer.
Now that you are aware of the most important things to remember before buying a holiday rental home, let ‘s dive into where exactly you should invest.
Best Rental Markets for Holidays 2020
At the very least, the criteria used to determine the best places to buy vacation rental property are subjective. If for nothing else, for many different reasons people prefer holidays in many different parts of the world. What one person may regard as the ideal vacation rental, another may ignore entirely. There are, however, a few industry variables that can help investors take a more pragmatic approach in assessing the best rental vacation markets. This involves looking at land price figures, average rental income, occupancy rates and cash on cash returns.
According to a recent report by Mashvisor, data released from Airbnb is also critical in evaluating a vacation rental market’s potential success — as it remains one of the most successful short term rental platforms. All things considered, it is predicted that the following markets are among the best holiday rental markets of 2020:
- Huntington, Vermont
- Tuscaloosa, Alabama
- Sevierville, Tennessee
- Buffalo, New York
- Gatlinburg, Tennessee
A small town in the Vermont mountains may not be what investors first imagine when they are looking for a holiday rental property, but the proof is in the numbers. Huntington, located south of Burlington, is known for its scenic views and hiking spots. Each year, many travelers move to Huntington to see the fall leaves change colors, or just get to go outside. See the metrics that make this city so attractive to real estate investors:
- Median value for money: $155,745
- Price/Square Foot: $79
- Airbnb Rental Revenue: $1,995
- Airbnb Occupancy Rate: 45.1%
- Cash on Cash Return Airbnb: 8.3 percent
- Cap Limit for Airbnb: 8.3 percent
- Profit from typical rentals: $1,024
- Traditional financial return on assets: 3.2 per cent
- Standard Cap Rate: 3.2%
Tuscaloosa is recognized by many for its sports, attributable to the University of Alabama in large part. The university is responsible for getting in a good number of visitors, but Tuscaloosa has a lot to give outside of football as well. The town has its own museums, unique restaurants, and historic sightseeing. Tourism has risen nearly 10 percent in recent years, according to a local report. This bodes well for real estate investors hoping to find a profitable short-term lease market. Check out the Tuscaloosa stats to help you decide for yourself whether this is the right town for your next investment:
- Median value for money: $328,238
- Price/Square Foot: $188
- Airbnb Rental Earnings: $3665
- Airbnb Occupancy Rate: 39.3%
- Cash on Cash Return Airbnb: 7.7 percent
- Airbnb Cap Rate: 7.7%
- Standard Rental Revenue: $915
- Modern cash return on financial: 0.6 percent
- Standard Cap Rate: 0.6%
Sevierville’s population is just about 16,000; but that’s precociously why every year it draws so many visitors. Thanks to its proximity to the Great Smoky Mountains tourists flock to the area each year. For thrill seekers, Sevierville offers various outdoor activities including canoeing, horseback riding and more. Real estate investors wishing to learn more about this Tennessee city should read in the following numbers:
- Median value for money: $385,527
- Price/Square Foot: $180
- Airbnb Rental Revenue: $3,521
- Airbnb Occupancy Rate: 72.8 per cent
- Cash on Cash Return Airbnb: 7.7 per cent
- Airbnb Cap Rate: 7.7%
- Traditional Rental Income: $1,300
- Standard cash return on cash: 1.4 per cent
- Standard cap rate: 1.4%
Buffalo, New York
Thanks to Niagara Falls, Buffalo is a growing tourist attraction taking in more than 15 million tourists every year. There are also numerous restaurants, museums and historic tourist attractions in this city that keep visitors coming back for more. Buffalo, as New York’s second-largest city, is perfect for real estate investors hoping to optimize affordability and occupancy. This holiday rental hot spot boasts the following metrics for investors with a wide range of waterfront properties to offer:
- Price of Median property: $186,125
- Price/Square Foot: 101
- Airbnb Rental Revenue: $2,282
- Occupancy rate for airbnb: 58.7 percent
- Cash on Cash Return Airbnb: 7.6 percent
- Airbnb Cap Rate: 7.6%
- Standard Wage Rental: $1,018
- Standard cash return on cash: 1.8 percent
- Standard Cap Rate: 1.8%
It is the second rental market based in Tennessee, and the Great Smoky Mountains in particular are sought-after. Tennessee takes in more than 11 million visitors annually – info for those who are unfamiliar with the southern states. Gatlinburg is best known for its outdoor events, and the theme park of country singer Dolly Parton: Dollywood. The views over the mountains are perfect for tourists too. Review these numbers before searching for your next vacation rental and you might just be looking at Gatlinburg property:
- Median value for money: $393,935
- Price/Square Foot: $204
- Rental profits for Airbnb: $3,800
- Occupancy rate for airbnb: 70.1 percent
- Cash on Cash Return Airbnb: 7.5 percent
- Cap Airbnb Rate: 7.5 percent
- Standard Profit Rental: $1,642
- Standard cash on cash return on investment: 2 percent
- Standard Cap Rate: 2%
Best Vacation Rental Markets 2019
- Dubuque, Iowa
- Portsmouth, Virginia
- Bainbridge Island, Washington
Real estate markets are continually evolving, much like the metrics that we use to measure them. Nonetheless, we established the holiday rental markets with the most promise in 2019 with the aid of Mashvisor and Rented.com. Keep in mind that these markets were chosen based on data from the previous year, and before selecting any market it should be carefully analyzed by the investor. That said, the following three locations were among the highest performing holiday rental markets of 2019.
Located along the Mississippi River, Dubuque is well known for its vibrant harbor and close proximity to numerous higher education institutions. Perhaps even more importantly the three states of Iowa, Illinois and Wisconsin are close by. Bordering these states, Dubuque has become a common destination for those who are looking to visit all of these areas. Holiday rental property owners, on the other hand, prefer the place for a number of entirely different reasons:
- Price of Median property: $138,600
- Income to Airbnb Rental: $3,050
- Cash on Cash Return Airbnb: 10.2 percent
- Cap Rate Airbnb: 10.2 percent
- Airbnb Occupancy Rate: 45.8%
- Standard Income Rental: $1,100
- Traditional Cash On Cash Return: 3.1 percent
- Standard Cap Rate: 3.1%
Located near downtown Norfolk, Virginia Beach and Colonial Williamsburg, Portsmouth has become a popular location for those wanting to visit Virginia’s best places on offer. Not only that, but Portsmouth awards tourists with over three centuries of historic neighbourhoods, the famed Seawall, spectacular views and some of the best restaurants in the region; it’s no wonder that the city has become a renowned holiday destination. On the other hand, as for the following factors, real estate investors like Portsmouth:
- Price of Median property: $189,600
- Rental profits at Airbnb: $2,750
- Cash on Cash Return Airbnb: 9.6 percent
- Cap limit for Airbnb: 9.6 percent
- Airbnb occupancy rate: 63.0 percent
- Traditional Rental Income: $1,190
- Traditional cash on cash return: 2.4 percent
- Standard Cap Rate: 2.4%
Bainbridge Island, Washington
Located across from Seattle’s Puget Sound, Bainbridge Island has become a popular destination for travelers who enjoy both big city business and the secluded outdoors. Bainbridge Island is only a short ferry ride to downtown Seattle, where tourists can either take in all the Emerald City has to offer, or relax on a secluded “beachfront” home. Meanwhile, holiday rental investors can enjoy the basics of a popular city without having to live in the middle of a major metropolis. Here’s what investors can say of their own rental properties:
- Price of Median Property: $387,000
- Airbnb Rental Earnings: $5,020
- Cash on Cash Return Airbnb: 9.3 percent
- Cap limit for Airbnb: 9.3 percent
- Airbnb Occupancy Rate: 53.9%
- Standard Profit Rental: $1,960
- Standard currency return on assets: 2.3 percent
- Traditional Cap Rate: 2.3%
Best Vacation Rental Markets
- Memphis, Tennessee
- Panama City Beach, Florida
- Tulsa, Oklahoma
- Chicago, Illinois
- Napa, California
Napa, California can come as a bit of a surprise for the list of the best places to buy vacation rental property. To many developers, high property price tags may be a barrier to entry, making the market inaccessible. Nevertheless, California’s recent wildfires have created a supply shortage, while demand for tourism for Napa and its beautiful wineries remains strong year-round.
The “Windy City” reflects a recent phenomenon in the growing popularity of non-traditional holiday destinations. While Chicago’s homeownership costs are relatively high, experts agree that this aspect is outweighed by the opportunity for short-term vacation rental. On average, Chicago properties enjoy an 8 percent gross rental yield, a 62 percent occupancy rate, and a year-over-year increase in property value.
Tulsa, Oklahoma may not inspire holiday images but is rapidly gaining recognition as one of the most “livable” cities in the U.S., such as Forbes, Relocate America and BusinessWeek. Holiday property owners currently enjoy an average rental yield of 9.1 percent, while property prices rose a remarkable 7.7 percent in only the past year.
Panama City Beach, Florida
Currently Panama City Beach serves as the leader for 2018’s best beach investment properties. Bordering the Gulf of Mexico, this resort town in Florida boasts miles of white-sand beaches with smooth, calm waters. As one of the nation’s most popular spring break destinations, Panama City Beach provides on average property owners a high rental yield of 13.5 percent, as well as an remarkable 11.5 percent rise in property values over the last year.
Memphis, Tennessee, topped the list among the best places to buy vacation rental property in 2018. The “Home of the Blues” and “Birthplace of Rock’n’Roll” are proving to be an enticing destination for property buyers, with a low median home price of $125,000 and home prices increasing at a rate of 10.9 percent annually. The average monthly rental rate for traditional passive income properties in Memphis is $890, yet the average monthly rental income generated by vacation rental properties is $2.080. Based on these figures, this tourist destination currently offers a 20 percent average gross rental yield, setting itself apart from its competitors.
Although a great vacation rental investment market does not guarantee success, investors continue to receive strong signals from the best places to buy vacation rental properties. All who appreciate the benefits of a vacation rental property will at the very least consider the above factors. Much goes into deciding a busy real estate market, and while you might not find your perfect investment in one of the above cities maybe the market factors open your eyes to a similarly placed city.