Buying a vacation rental property is two dreams come true in one. You get a passive income stream and a house on the beach — or in the mountains, the country, a trendy city or some other place worth vacationing.
Vacation rentals are the highest-yielding asset class in real estate. According to Men’s Health, they generate 160% more revenue than traditional long-term rentals, so why not buy one?
The first “why not,” of course, is money. Buying and furnishing a vacation rental requires a lot of capital, both up front and ongoing — and investors forgo all of the financial breaks that come with borrowing for a primary residence.
The second consideration is that passive income earned from vacation rentals isn’t passive at all. Property management, in general, is complex and exacting — and short-term renters are notoriously difficult and unpredictable.
Buy Into a Vacation Rental Portfolio
One way to get in on the action is to join a real estate investment group whose portfolio focuses on vacation rentals. One such opportunity is the North Carolina Beach Rental Portfolio listed on Republic through Plat Capital Fund I.
The company is acquiring and monetizing single-family vacation rentals on the coast of North Carolina, a tourist hotspot where a beach rental typically costs $400,000 to $650,000. If you were buying, you’d need a minimum of $80,000 for a 20% down payment alone.
This opportunity, however, lets investors buy in with as little as $250, with the maximum investment capped at $75,000.
The fund aims to buy properties with the most desirable amenities — pools, volleyball courts, etc. — in the hottest tourist spots with the highest potential for capital appreciation. The fund shoots for an initial rate of return (IRR) of 12% to 18%.
As an investor, you don’t have to deal with the hassles of landlording — an experienced management team handles the day-to-day operations.
The tradeoff is high fees.
The management team takes 10% of gross revenues, 20% of annual rental income and 50% of the profit when the portfolio sells the property. Republic charges a 6% fee plus 2% of equity to raise capital on its platform.
Invest in Vacation Rentals Like Stocks
A different startup called Here lets investors buy partial shares of vacation rentals, just as some brokerages allow their users to purchase partial shares of stock.
Investors use the Here app to browse available properties that fit their criteria and strategy. When they find one they like and determine how much to invest, they sign electronically and Here does the rest. You just collect your net monthly income plus your share of any appreciation the property enjoys.
Your money buys fractional stakes representing an indirect ownership interest in the property you choose. Unlike owning a physical property, which is highly illiquid, Here offers investors the opportunity to sell their shares on a secondary market should they decide to exit the venture.
But just like the portfolio option, you have to pay to play.
Here takes a quarterly asset management fee of 0.25% on the total asset value of the property, but the real hit is the management fee — 25% of the gross revenue generated over the lifetime of the property’s operation.
Airbnb Rental Arbitrage
Rental arbitrage — often called Airbnb flipping — is the process of renting a property at a lower long-term rate and then subletting it to vacationers at higher short-term rates on sites like Airbnb, Homeaway and VRBO.
For example, if you rent a home for $2,000 a month and sublet it on Airbnb for $150 per night, you’d pay your rent with $100 to spare in the first two weeks and the rest of the month is profit, presuming full occupancy.
But full occupancy is a reckless presumption to make when you owe rent every month no matter what — and vacancies are just one pitfall to consider. Many localities have enacted aggressive laws against subletting and the lease agreement with the property owner can get complicated quickly. That’s if you can find a landlord who’s willing — and you’re responsible for property damage.
Do the Legwork
Lack of capital is the most significant barrier to buying a vacation home; the second is all of the legwork that goes into doing it right. Most people don’t have the time, resources, know-how or energy to make a successful rental property run smoothly; but, according to the vacation rental software company iGMS, you can make money doing it for them.
- Property manager/Airbnb co-host: Handle administrative tasks such as listing the property on multiple rental sites, sharing daily schedules, automating reviews, confirming bookings, communicating with guests, restocking and inspecting the rental and writing guest reviews. Expect to earn 10% to 20% of the booking fee.
- Start a cleaning service: Even most hands-on owners farm out cleaning to trusted services. The average cleaner earns about $25 an hour.
- Airbnb Experience: If you have a hobby, skill or talent, you can offer your services through Airbnb Experience, which guests can sign up for when they book rentals. Whether you teach surfing, lead guided hikes or offer a cooking class, you can earn $25 to $150 per guest.
- Marketing: If you’re skilled at SEO, social media marketing, web design, copywriting or photography, you can tailor your talent to suit the needs of Airbnb hosts. The good ones earn a full-time living in the high five figures.
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