Ever wonder how to find a successful vacation rental? It’s possible, but searching for a vacation rental that pays for itself does take a healthy amount of due diligence. Once you have the tools ready and available, it is really a fun process and a great experience. Before you start making any offers or signing any documents, consider these eight tips to effectively hunt for a vacation rental. You will gain exclusive insight into my strategies to find potential properties to invest in and find your next or first vacation rental that pays for itself!
1) Use top-down market approach
For you first timers, begin by looking at vacation homes within two to three hours driving distance of your main home. After that, select a couple of preferred regions to focus on. For instance, I live in the Sacramento/Northern California area, which makes me fortunate enough to have the Lake Tahoe and San Francisco/Northern California Coastal region within a few hours drive. After you have selected the region you want to focus on, you will want to narrow your focus again on even smaller sub-regions (e.g. South Lake Tahoe, Monterey Bay, etc.).
2) Pick an area YOU would enjoy
Obviously you want to focus on somewhere you actually want to vacation! Since we are going for a “vacation home for free strategy,” you don’t necessarily need to go to the area that is going to generate the largest investment returns – focus on an area you and your family actually enjoy spending your time at.
For instance, Lake Tahoe is a major vacation destination for travelers all over the world and it makes great sense from a rental return perspective, but at the same time many people do not like the large crowds, high costs and traffic that comes with such popular destinations. Many NorCal (Northern California) investors look to quieter regions like Lake Almanor or smaller, surrounding alpine lakes that do not rent as much but can still pay for themselves in the end because the price to entry is lower.
3) Sign up for real estate alerts
This is a simple tip, but a vital one. I recommend that you go to all of the major real estate websites and sign up for new listing alerts for the sub-region that you are interested in. Some platforms I recommend are Zillow, Redfin, Realtor and Trulia. You will also want to search for a local broker and sign up for alerts with them as well. Local brokers have the advantage of MLS entry faster than the big boys. The searching phase is where the excitement builds. Something great is about to happen. You get to look at homes and see their potential. You start to see trends in price points and market conditions, and become more comfortable with the possibility of actually owning a vacation home!
4) Create an investment model and try Clik2Flip
This is the step where your investment really comes into play. You MUST generate some type of investment model or calculator to begin screening the properties you will see in your alerts. I have recently created an awesome real estate investment calculator called Clik2Flip. It’s a mobile app that allows you to geolocate or plug in any address and receive instant high level return metrics for short term rentals (vacation rentals). Give it a try here and let me know what you think!
You can also just use something similar to what you see below which is a simplified version of my more complex investment model. You can access a copy here if you want to give it a try.
As you find properties you like, you can enter inputs to determine what the net cash flows will be each year. Some investors will do a full pro-forma for the next 10 years to account for increases in costs. However, I generally do not use a 5-10 year pro-forma because I feel like those models speculate too much, and I would simply adjust my ADP (average daily price) to meet any operational cost increases from a high level perspective.
5) Gather Data
Now that you have an investment calculator to plug your numbers into, you need to do some research and gather the data about your vacation rental opportunities. The largest effort in your numbers search are your ADP (average daily price) and occupancy rate (number of days per year you will get that rate). These two numbers will generate your GOI (gross operating income) and it is VERY important to get a number as realistic as possible! Clik2Flip has partnered with a fantastic vacation rental data provider called Everbooked for it’s ADR/Occupancy rate data.
As you can see in the image, you will also need to gather operation costs so go online or make some calls to find out what cable, internet, water, electricity and more will cost you in the area you are scouting. Once you have your numbers in your investment calculator, you can easily adjust a few key inputs to see what the returns and/or cash flow is each year and start narrowing down real vacation rental candidates!
6) Find Competitor Rates
Data points vary by booking company, but in general, you can use the following steps to compare vacation rentals.
- Use the mapping feature in whatever tool you are using to limit your search to within a mile of the property you are assessing.
- Begin researching each rental with the same amount of bedrooms and bathrooms, but not necessarily how many it can sleep.
- You can control how many the vacation rental can sleep but cannot easily control how many bedrooms and baths it has.
- Next, look for a home with the same level of quality of guest experience that the home you have identified offers (or what you plan to turn it into).
- Consider other features such as hot tubs, beach or cabin themes, modern or updated appliances, and other amenities.
- Review and input your vacation rental comps into your model. You can use these comps to research more in-depth or expand your search radius and continue to refine the numbers in your investment model calculator.
- Put in a safety factor of at least 5-10% in your ADR and Occupancy Rate numbers to start. You want your investment model to cover your cash flow worst case scenario, not best case.
7) Understand a total renovation is not necessary
Once you find your home and are ready to make the investment, recognize that a total renovation of the property is not required to make a property work. Also, consider the possibility of purchasing a turn-key option that you can begin to market and rent out immediately. Guests want a fresh-looking, clean home in their destination and may be willing to overlook some outdated hardware for an affordable rental in the region they enjoy.
8) Contact a Current Owner
Reaching out to another local owner is a reliable strategy to learn more about your subject property and region. When I entered the vacation rental market, no one told me this. I just tried it and it worked out wonderfully! When I’m really interested in a property or area, I will send an extremely polite and well-versed contact request through VRBO/HomeAway to the owner of a similar and nearby property. Here is an actual inquiry I recently sent about a vacation rental of interest:
Hi Susan, apologies for the inquiry but I’m looking to possibly purchase a similar unit at the complex to be a VR. We have another in South Lake but looking for a place to enjoy in North Shore and Ridgeway seems great! If you had the time or interest, I would love to get your insights on how your rental is going thus far as you have great reviews and seem to care about your property and guests much like I try to do for our cabin. If not, I totally understand also. Thanks!
You know what? Susan called me immediately! She was so helpful and so informative about many of the questions I had regarding the complex – her gross income each year and loads of other great information that only a VR owner in that complex could give me! I have done this several times now, and it is always a great experience. To this day, only one vacation rental owner failed to respond.
Finding a vacation rental that not only pays for itself but provides you and your family with a place to enjoy can be tough to find. Going through the vetting process and scouting for the right property requires a lot of research. However, the more time investment you make in learning about your vacation rental possibilities and the region, the greater the chances are that you will make the right decision on the best home to purchase.
Personally, I enjoy the process – it is like being a forensic investigator. While my goal is not to solve a crime (although sometimes you come across homes where that might be the case), it is to solve the mystery of whether or not that property is going to cash flow and fulfill my vacation rental dreams!