Challenges and Strategy of investing in Vacation Rental Homes

Vacation rentals homes are private accommodations that are rented out on a short-term basis. Usually they are fully furnished villas, houses, apartments, or cottages, with the kitchen, amenities, and outdoor space. Vacation rentals are seen as alternatives to traditional hotel stays, giving travellers more privacy, space, and often the feeling of a local lifestyle.

Owning a Vacation rental home (Holiday home) trend has gained momentum in India since outbreak of COVID-19. Work from Anywhere (WFA) promoted remote work culture. Therefore, vacation homes or holiday homes are now highly demanded by people. The second reason for rise of Vacation Homes is thriving economy and availability of high disposable income. Currently, there is a dearth of investment options in market especially outside of stock market. Vacation Home is a good investment bet for many target audience.  

Short-term rentals can be an attractive investment on account of the potential for greater cash flow. But they also bring new challenges for investors compared to traditional long-term rental properties. Short-term rental market has also grown more competitive, therefore it is important to do homework and develop a strategy before diving in.

In this blog, we will understand strategy and challenges associated with buying a Vacation rental home.

Strategy of investing in Vacation Rental Homes:

One needs look into following parameters when evaluating a vacation home investments.

1.      Ticket Size (Budget) & Financing

It is important to decide the budget for buying a vacation home. Along with budget, one needs to decide the financing as well. It can be fully self- financed (equity), partial equity and loan or pooling different people to invest into a vacation home (shared ownership).   

It is advisable to create a realistic budget while investing in vacation homes, consider all the costs associated with maintaining the properties along with acquiring them. Property management and marketing expenses should also be included while analyzing your actual total budget. Try and set aside a contingency fund to handle any unexpected challenges that might pop up.

Holiday homes are solely considered investment properties or investments that generate stable income through rentals. We advise not spending more than 12% of your net worth on vacation home expenses.

2.      Location selection

While selecting the location for your vacation rental homes, it is important to understand & assess: steady tourist flow, cultural heritage, nature attraction and, vibrant city life.  

Firstly, the location needs to have a steady tourist stream all around the year. This reinforces constant flow of booking, greater occupancy rates, good rentals and resale potential.

Cultural heritage of a property and location is important. The locations that tend to draw in a vast range of diverse visitors are generally ones with cultural, scenic attractions and a rich history. Regions having famous landmarks, or historical buildings attracts more tourists.

Natural wonders are also another attraction to tourists. Regions with stunning landscapes nearby like beaches, mountains, or national parks are often the places that appeal to tourists. Such tourists or travelers are often looking for the experiences of water sports, wildlife encounters, or hiking. It is suggested to invest in a vacation rental home located near such attraction.

Also, a vibrant city life also attracts many tourists. Locations proximity to a bustling market or city center, with a wide variety of shopping, dining, or entertainment options can attract more tourists.

3.      Regulations & local laws

It is important to do research on regulatory and legal aspects of the vacation rentals in the selected location thoroughly, get used to the local laws, permit requirements and zoning regulations. Some locations have strict rules regarding short-term rental properties, including specific license needs or occupancy limitations. Making sure to comply with such legal obligations will help you save yourself from legal disputes.

4.      Property Management

Deciding whether to hire a property management company or managing vacation rental property all by oneself is an important decision in this business. Managing vacation rental oneself allows for potentially higher profits and more control on paper but it also requires more time and effort, including guest enquiries, marketing, bookings, maintenance, and quest communications. On the other hand, onboarding a good property management company or outsourcing property management, will help you with expertise and convenience at a certain cost. Make sure to be careful while weighing the pros and cons based on your experience, availability, and the required levels of involvement.

5.      Marketing & Guest Experience

It is very important to invest in effective marketing strategies and prioritize your guest experience to maximize the potential of your vacation rental property. Also ensure to make your listing enticing with high quality photos or virtual property tours, 3D images, engaging descriptions along with clear price details. It is suggested to serve your guests with exceptional cleanliness, thoughtful amenities and extra provisions, as well as quick and helpful communication. Verbal recommendations and positive reviews and feedback will ensure more repeated guests and attract more bookings.

Challenges associated with investing in Vacation Rental Homes:

Investing in vacation rentals might see extremely lucrative but they come with their own sets of possible challenges, seasonal changes, unforeseen maintenance problems and shifting traveling trends can affect your rental income flows and occupancy rates. Following are the key challenges associated with investments in Vacation Rental Homes:  

1.      Maintenance Costs 

Before investing in Vacation Rental Homes, one needs to be mindful of the regular maintenance expenses that you would incur after buying vacation home. As these vacations homes are designed magnificently and equipped with all the luxurious amenities, their maintenance and upkeep are quite challenging. However, with regular maintenance, it assures you that the potential returns on the property will be at a good percentage.

Higher per-night rates mean short-term rental properties tend to generate more cash flow than long-term rentals, but the extra revenue comes with additional costs. Unlike typical long-term rentals, short-term rental units must be furnished.

Short-term rentals also tend to require more hands-on management. Units must be cleaned and prepped for a new guest after each stay, and you’ll need to field bookings and questions from guests. Property managers specializing in short-term rentals can take over those tasks, but they also tend to charge higher fees than long-term rental managers.

Added expenses when investing in a short-term rental property: 

·         Furnishings 

·         Higher property management fees, or more hands-on time 

·         Cleaning service

·         Service fees, for listing platforms 

·         Cost of utilities

·         Basic supplies for guest use 

2.      Natural Calamities

Vacation homes are usually located in hills, beaches and with other naturally beautiful views. Even though the views are beautiful from such vacation homes, they may put you in unfortunate situations like natural calamities. Based on the geographical location of your vacation home, you may have to face floods, hurricanes, landslides, etc. Therefore, one needs to choose location wisely, as dealing with such natural disasters can be expensive.

3.      Social Obligations & Personal Emotional Connect

Having a vacation home comes with social obligations including serving to family and friends when they visit the property. This has impact on potential revenue capacity of the property.

Sometimes, it is observed when it is time to sell a vacation property, things are on the other end of the spectrum. Even if something you own makes the most financial sense for you and your legacy, it may be difficult to part with it, like other assets with sentimental significance.

Conclusion

Vacation rental homes is a great ‘investment cum lifestyle’ product. However, as discussed above investors needs to be careful of investing in this product. To mitigate risks successfully, it is suggested to diversify target market, keep updated on trends, maintain contingency funds, and establish a whole network of reliable contractors for maintaining your vacation rentals efficiently.