This week I want to talk to you about vacation rentals. Investing in vacation rentals are a good way to increase your capital and create a strong return with leveraged income. When my wife and I first began to look at different geographic locations in search of vacation properties, we mainly focused on low to moderate-income properties. I discovered low-priced areas that were in high demand and kept an eye out for changes in the market’s behavior. When I noticed the supply beginning to decrease and the price starting to increase, this immediately caught my attention. I acted on what the market was telling me and purchased a property for about 17 percent below the tax assessed value and made a $100,000 profit 12 months later. Like I say time and time again, real estate is simple, but it isn’t easy. So, if you’re someone who has some extra cash at your fingertips, I suggest you consider investing in a vacation property.
profit big buying vacation Rentals
Advantages of Owning Vacation Rentals:
Vacation properties purchased as “short-term” rentals have many benefits for the property owner. If I’m only renting my property during the high vacation season for a few months of the year, I can spend the remaining months at my second home for no out of pocket costs. In other words, while the renters are paying the property down, I’m watching the appreciation rate increase and enjoying the use of my second home. It’s a positive and rewarding system for both the renter and the buyer.
Facts You Should Know Before Buying:
Having a basic factual understanding of vacation properties can help you when it comes time to make the big investment. You should know that on average, vacation properties appreciate twice as fast as other single-family homes. This means that not only will a vacation property make money in the short-term from renters, it will also generate money overtime and sell at a higher price in the future. This is beneficial to note because there will be around 3.6 million second homes purchased in the next decade as a result of 76 million Baby Boomers and their children. Out of these 3.6 million second homes purchased, around 60 percent will be used for recreational use while around 40 percent will be used as investment properties. In a lot of cases, buyers will pay more for their second home than they did for their first.
The single most important step to buying a vacation home is researching the location beforehand. Go ahead and contact a real estate agent in the particular area you are scouting and ask for more information on what the supply has been like. Whether you’re looking to buy a vacation property on the ocean or in somewhere in the mountains, you always need to pay attention to how the supply is fluctuating. I suggest staying away from new and heavy construction areas, you need to target areas that have had a brief decrease in supply. The areas you want to focus on should be untouched by the frenzy of buyers.
Before you can begin to write contracts and purchase properties, you need to acquire financing. This part can seem intimidating at first, however, I encourage you to obtain a pre-approval letter that will allow you to receive a loan from a lender. This way you will have more peace of mind before you begin. On your loan application, you should classify the property as a second home, not an investment property. This will allow you to get better terms on your loan. I encourage you to also know your credit score before you begin. This can be done by purchasing a credit report. It’s also important to have seasoned funds because the lender will want to know what is in your bank account. ,
Ask Yourself The Big Questions:
Buying a vacation property is a big commitment, so I recommend you take the necessary steps to prepare yourself. First, start by asking yourself a few questions to determine what you’re looking for and why. Question number one should be, “what are my reasons for wanting a second home?” This is the question my wife and I asked ourselves several times before purchasing. We made a list of what we expected out of our second home and ended up with a quiet place that is close to our home. It’s a great place where we can take our grandchildren!
Another question you need to ask yourself is, “How does this property fit into my personal and financial portfolio?” Becky and I were able to choose a second home that worked for us because prior to buying, we researched locations and homes that fit our personal needs.
The final question is, “What is my price range and what kind of loan would best meet my needs?” I personally like the 10-year interest only plan, however, you should choose a payment plan that best fits your needs. I also advise buyers to purchase a property at $0.80 on the dollar, that way you save more money in the long-run. In addition to asking yourself questions, don’t be afraid to ask your real estate agent plenty of questions too!
You’ll be on your way to picking out the perfect home!
Do you have any questions about investing in vacation rentals? Ask me a question in the comment section below. My 2019 Real Estate Workshop the weekend of October 11-13th in Denver, Colorado is completely sold out, however, I will be having another real estate event in the spring of 2020! To keep up with all of the WealthBuilders events throughout the year, visit our events page.