Although buying properties to rent out on a short-term basis can be lucrative, investing in the right area is essential. While primary cities like San Diego and Miami have traditionally been popular among investors, their availability has decreased as their popularity grew. This article explores the importance of location for vacation rental properties and provides insights into the factors to consider before making an investment. Additionally, it highlights the vacation rental market conditions and the impact of COVID-19 on the industry. Finally, it presents the best short-term rental markets for 2023.
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The Importance of Location for Vacation Rental Properties
The location of your vacation rental property plays a vital role in its performance. While primary cities may offer high returns, the availability of investment opportunities has decreased over time. This has led investors to consider alternative cities or less popular markets that share similar earning potential. It is essential to strike a balance between personal use and financial gains when choosing a location. Some investors prefer properties that they can also use for vacations or lend to family and friends, while others prioritize generating rental income.
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Factors to Consider Before Buying a Vacation Rental Property
When investing in a vacation rental property, several factors warrant careful consideration:
- Rental Income: Consider the potential rental income in the market. While some markets may yield a steady stream of rental income, others may not be conducive to consistent cash flow. If generating cash flow is your primary motivation, it is worth exploring the top vacation rental markets or traditional rental properties.
- Appreciation: Property appreciation is an important factor to consider. Research markets that have shown long-term potential for property value appreciation, as this can contribute to building equity over time.
- Expenses: Account for both routine and unplanned expenses associated with the property. Over-projecting your expense budget and creating cash reserves for unexpected incidents are prudent practices.
- Taxes: Understand the tax implications, including local, state, and federal property taxes, as well as taxes on rental income. Explore potential tax write-offs available for vacation rental property businesses.
- Risk: Recognize the risks associated with owning a vacation rental property, such as adverse weather events or financial losses due to market crashes. While all investments carry some level of risk, it is essential to be aware of potential downsides and plan accordingly.
- Insurance: Mitigate risk by obtaining suitable insurance coverage. In addition to standard homeowner's and liability insurance, consider additional policies to protect against specific natural disasters or emergencies.
- Legality: Ensure that owning a vacation rental property in a particular location is legal. Double-check local zoning laws and any applicable homeowner association rules to avoid potential legal issues.
- Property Management: Decide whether to hire a property management company to handle various tasks, including tenant turnover, cleaning, maintenance, and marketing. While it adds an extra expense, professional property management can ease the burden, especially if you don't reside in the same area as your property.
- Marketing: Develop a marketing strategy for your rental property. List it on multiple platforms, review similar properties, and consider the impact of factors like photography, keywords, and seasonal discounts to maximize visibility and competitiveness.
- Partnerships: Consider entering into a partnership with a close friend or relative to increase your investment options. To ensure everyone's safety, it's important to have well-defined contracts and possibly even form a legal entity like an LLC.
Vacation Rental Market Conditions
There have been major shifts in the vacation rental market in the past few years. AirDNA reports that the short-term rental industry experienced a strong recovery in 2021, with numbers even higher than in 2019. Future years should see this pattern persist. Investors in short-term rentals are benefiting from rising daily rates and fewer available properties in many highly competitive markets.
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Impact of COVID-19 on Vacation Rentals
The vacation rental industry was severely impacted by the COVID-19 pandemic. The industry came to a temporary halt as a result of travel restrictions and closures. However, as soon as regulations were relaxed, tourists rescheduled their trips, driving up demand and rental rates. There was a shift toward driving to destinations in 2020, which increased the demand for real estate in close proximity to cities and suburbs. Despite the return to normalcy, vacation rentals located within a two to three-hour drive of major cities are likely to remain popular with guests.
The Top Destinations for Vacation Rentals
The best places to rent a vacation home depend on a number of market factors. The following markets were predicted to be among the best in 2022 based on an analysis by Mashvisor and data released by Airbnb:
- Berkeley, New Jersey: With an Airbnb cash-on-cash return of 9.2%, a daily rate of $283, and an occupancy rate of 59%, Berkeley offers strong rental income potential. The median property price is $243,475, making it an attractive market for investors.
- Englewood, Colorado: Englewood boasts an Airbnb cash-on-cash return of 8.2% and a high daily rate of $124. The market has an occupancy rate of 59% and offers a median property price of $459,000.
- Levittown, Pennsylvania: Levittown stands out with an impressive Airbnb occupancy rate of 78% and a cash-on-cash return of 8%. The market offers a daily rate of $104 and a median property price of $292,897.
- Covington, Georgia: With an Airbnb cash-on-cash return of 7.3% and a daily rate of $164, Covington provides a solid rental income potential. The market has an occupancy rate of 61% and a median property price of $266,353.
- Abilene, Texas: Abilene offers an Airbnb cash-on-cash return of 7.1%, a daily rate of $172, and an occupancy rate of 67%. The median property price is $275,725, making it an attractive market for investors.
- McGaheysville, Virginia: McGaheysville stands out with a high daily rate of $322 and an Airbnb rental income of $4,870. The market boasts an occupancy rate of 58.62% and offers a median property price of $458,229.
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Best Short-Term Rental Markets 2023
Looking at 2023, the top new markets for short-term rentals are predicted to be concentrated in Ohio. These emerging markets, based on data from Airbnb, include:
- Reading, OH: Reading offers an Airbnb cash-on-cash return of 9.2% and a daily rate of $100. With an occupancy rate of 57% and a median property price of $234,520, it presents attractive investment opportunities.
- Forest Hills Boro, PA: Forest Hills Boro boasts an Airbnb cash-on-cash return of 7.24% and a daily rate of $123. The market has an occupancy rate of 63% and a median property price of $219,800.
- Delhi Charter Township, OH: With an Airbnb cash-on-cash return of 7.12% and a daily rate of $120, Delhi Charter Township offers a solid investment potential. The market has an occupancy rate of 50% and a median property price of $225,453.
- Port Allen, LA: Port Allen presents an Airbnb cash-on-cash return of 7.06% and a daily rate of $133. With an occupancy rate of 54% and a median property price of $241,438, it is an attractive emerging market.
- Pleasantville, NJ: Pleasantville offers an Airbnb cash-on-cash return of 6.96% and a high daily rate of $327. The market has an occupancy rate of 41% and a median property price of $210,226.
- North College Hill, OH: With an Airbnb cash-on-cash return of 6.95% and a daily rate of $102, North College Hill presents a promising investment opportunity. The market has an occupancy rate of 57% and a median property price of $184,264.
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Finding The Best Short Term Rental Markets
Investing in short-term rental properties can be a rewarding venture, but it requires careful consideration of various factors. Location plays a crucial role in determining the success and profitability of an investment. By considering factors such as rental income, appreciation, expenses, taxes, risk, insurance, legality, property management, marketing, and partnerships, investors can make informed decisions. The vacation rental market experienced fluctuations due to COVID-19, but it has shown resilience and rebounded quickly. The best vacation rental markets of 2022 offered attractive returns, while the predicted top markets for 2023 are concentrated in Ohio. However, it is essential for investors to conduct thorough research and due diligence to maximize their chances of success in the short-term rental market.