Insider’s Guide to Buying Vacation Rentals

This blog was written for Tripping.com by Volo.

The process of purchasing a home is the biggest step to starting your vacation rental business. It is also the most daunting. That being said, I’ve partnered with one of Sotheby’s top agents to help answer frequently asked questions for those potential investors.

Nancy Tallman sells vacation properties in my hometown Park City, UT so I’m very well acquainted with her strategies and work. In fact, she helped me find my first rental in Park City. Being that she is based locally, local examples will be used, but the principles apply anywhere.

First things first, any good agent will want a clear understanding of your goals. So when a client tells Nancy they are interested in purchasing a vacation rental property, she asks a lot of questions to ensure no stone is left unturned and that the client finds the best home for their situation.

Regardless of the your personal goals, all successful vacation rental properties share these same characteristics.

1. Best location.

We’ve previously covered tips for choosing the best location, which focused on local elements; local landscape, the surroundings, and understanding if nearby businesses and homes are complimentary to your intended experience.

Nancy actually helped me navigate some of these topics (i.e. the water main situation at my Park City rental), so I knew she’d have additional input on choosing the best location:

Best, like beauty, is in the eye of the beholder, so again, it’s important for the agent to understand your goals. Do you plan to spend any time in the rental property? Is this a property you hope to live in one day? If the answer is “yes” to either or both of these questions, then your lifestyle and personal taste come into consideration.

If the property is going to be rented 100% of the time, then you are looking at a pure economic decision. Economic decisions are always a dance between the price and income the property is expected to generate.

From experience, the exact location may not be the strongest indicator of return on investment. For example, the rental differential on a ski in/ski out property may not be sufficient to justify the higher purchase price. An older condominium project with a low price and HOA dues could have hidden costs if there is deferred maintenance and planned owner assessments.

Take time to understand your intent (and financial needs) for the vacation home, so your chosen real estate strategist can better work for you.

2. Expected Appreciation

In Park City, just like in any other town, the location will drive the appreciation. Appreciation is based on supply and demand. There is always going to be a limited supply of properties in walking distance to Historic Main Street, the ski slopes, and other amenities. There is also strong demand for new construction, which has seen strong appreciation even when located further from amenities.

The “average” annual appreciation in the USA is about 3%. In hot neighborhoods, we have seen 10-20% annual appreciation in the past couple of years. For some investors, cash on cash return is more important than appreciation. It depends on your individual goals.

3. Positive Economic Signals

As a property investor, you should look at unemployment, job creation, population migration, economic stability, housing prices and rental yields when deciding where to buy. An unfortunate negative example of the above factors moving in the wrong direction is Atlantic City, New Jersey, where casinos are closing and people are losing jobs.

On the other hand, Park City for example, has all of these factors moving in the right direction. Park City is just 30 minutes from Salt Lake City, which has one of the strongest economies in the USA, and is one of Park City’s major feeder markets for resort real estate. Vail Resorts recently took over two of Park City’s three ski resorts and has promised to make a “significant” capital investment in both resorts this year. The Sundance Film Festival also inked a long-term agreement with Park City, which means we can expect the world famous film festival to continue to draw vacationers to Park City for years to come.

Driving maximum profit starts with a detailed understanding of your home’s location as well as the economy, as we described in planning for vacation rental success. Ideally, it is best to purchase an investment property when the economic indicators first turn in the right direction to purchase before prices have been driven upwards.

4.Reasonable Vacation Rental Costs

Costs can vary significantly from home to home or condo. It’s easy to detail fixed costs, such as the mortgage, property taxes, HOA dues and utilities as the previous owner can typically provide records for the past year(s). However, the cost of maintaining and managing the vacation property will vary; if the property is part of an HOA, some or all of the utilities and maintenance may be covered.

The costs unique to owning a vacation rental can be more difficult to figure out. They may include marketing, furnishing, property management, listing site subscriptions and website development costs.

It’s really important to have your real estate strategist help you determine the property specific costs. A good agent has worked with many types of properties and buyers and can easily dig into the details (HOA logistics, for example). After all, you don’t know what you don’t know so it can be hard to ask!

5.Expected Profits

The expected income and expenses of owning a property will determine the profit. For some clients, spending Christmas with their family in their vacation property will be more important than the income they are giving up.

Even a property with a negative cash flow can be profitable when considering tax savings for depreciation and the property’s appreciation. On the other hand, if cash flow is important, vacation rental properties have the potential to generate tremendous income relative to their cost if they are managed like a business with a high level of customer care and an outstanding presentation.

This post was written by Kris Getzie

Kris Getzie Hospitality Consultant

Planning For Vacation Rental Success

This blog was written for Tripping.com by Volo.

Many first-time vacation rental owners come to me about six months into their venture, stressed that they aren’t on track for their only two goals: 100% occupancy and $50k+ in booking revenue.

While developing goals during your venture is good, I can’t stress how important it is to create a strategic map before you purchase your new home. If you can’t afford risk, you can’t afford having unrealistic performance expectations and you certainly can’t afford to make things up as you go along.

So what is a strategic plan? It’s a set of goals and framework that guides your decisions with an end vision in mind. You will constantly make decisions; like dealing with short-term guest complaints to long-term property additions. The plan prevents you from drifting, or worse, copying everything your competitors are doing.

Where Is Your Vacation Rental Business?

Vacation rental success starts with knowing exactly where you are with a detailed understanding of your home, the market, and industry. Start by researching a series of questions:

Your Vacation Home

  • How does it compare to other similar vacation rentals?
  • Do I have an intimate understanding of all aspects of the home, BEFORE closing?
  • Does it need to be renovated? If so, how much will this cost?
  • What are my setup costs (furnishing, linens, listing site fees and so on)?
  • Who are my customers? Can I divide them into key segments?

Your Vacation Rental Market

  • Do I have a lot of competitors, or only a few?
  • Is overall demand increasing or decreasing?
  • What are the barriers to entry?
  • What drives the market? Price, quality or both?

The Vacation Rental Industry

  • Key trends: Are vacation rentals being squeezed out?
  • How are guest needs and habits changing?
  • What is the general economic outlook?

These few questions aren’t comprehensive but are often overwhelming to newbies as research isn’t everyone’s favorite thing (hence my job as a consultant). But please do put in a valiant effort to understand your current situation as the effectiveness of future decisions depend on the accuracy of these answers.

Once your information is gathered, it’s time to interpret it with a good old fashioned SWOT analysis (taking you back to college, Strengths, Weaknesses, Opportunities and Threats). Understanding your strengths and weaknesses essentially helps you answer “where am I?” based primarily on facts, rather than opinions, which is ineffective.

Where Do You Want To Go?

The purpose of a strategic plan is to make you more goal-oriented, so you will need to define your goals next. Many owners stop at the desire to achieve “excellence” or 100% occupancy.

Be more specific when answering “Where do I want to go?”, so you can begin to work backwards with a clear path. Put it in words. Literally, just start writing down your thoughts as they come and organize it later. Hotels, or any business for that matter, often have their goals framed up in vision and mission statements.

They can be a powerful driving force; the vision describes where you want to be and the mission how you will operate while you get there, inclusive of your homes unique and authentic culture/experience. You don’t even have to create formal statements, just create memorable phrases that are realistic, challenging and then actually use them.

How Will You Get There?

Any goal, vision or mission is pointless unless you can make it happen (where most newbies become overwhelmed).

Your strategy will generally define the route you will take. For example, one goal might be to achieve a 40% repeat customer base within your first three year’s operating. Your strategy would then involve actionable steps to get there; understanding guest expectations for your experience, how you will exceed said expectations to drive retention, and how you will measure their satisfaction, for example.

Whatever goals and corresponding strategies you come up with, it’s important to realize you will probably not get there within three months. This plan, preferably created BEFORE you buy the home so you start with eyes wide open, breaks it down into small manageable pieces that can be tweaked as the market and your business develops.

No amount of knowledge (even if you come from the hotel industry) or hard work can compensate for a lack of direction. Effort and excellence are not the same thing. After you’ve dialed your plan, make sure you check back in to measure your progress!

This post was written by Kris Getzie

Kris Getzie Hospitality Consultant

Three Vital Tips to Protect Your Vacation Rental Profits

This post was written by Volo for Tripping.com

Now that you’ve opened your vacation home, hired your help and are maximizing occupancy, it’s important to know how to protect your vacation rental profits.

Having managed $100M+ businesses at one point in life, I can tell you that the backbone of fiscal control is managing information. Unfortunately, clear bookkeeping is the easiest for newbies to overlook, which can really hurt your chances of managing (and controlling) the business. Quickbooks, a must-have for any vacation rental business, makes it easy to record every transaction, and even create budgets, so you won’t be open to inaccurate data, waste, and poor decision-making. But above and beyond Quickbooks, follow these three steps to help protect your assets and increase your vacation rental profits.

1. Budget to Protect Vacation Rental Profits

The single best method to increase your bottom line is by way of a thoughtful budget. In corporate settings, it’s not uncommon to pad the budget to give room for error. A good leadership team, or you in this case, should flesh out the padding so you see the actual state and potential of your business.

To do so, create your budget line by line. Take each line back to zero; don’t apply a factor (inflation or otherwise) to last year’s figures, however tempting. As by doing such, you are accepting inefficiencies of the prior year(s).

A Practical Example

Let’s use “Guest Supplies” as an example budget line. To create this, you investigate every item that goes into this category. Let’s just say there’s one item, shampoo, for the sake of this example.

First understand your operating standard. Will you provide fresh shampoo bottles daily, or just one (per shower) upon arrival to get your guests started? If you operate a luxury home and adhere to the standard of providing fresh shampoo bottles daily, examine the size and cost per bottle. Does it make sense to reduce the size of the bottle, and thus the cost, while maintaining your level of service?

Assuming you move forward with the existing bottles of shampoo, simply multiply the cost with the number of forecasted nights booked and the number of showers in your home.

Now that you have an idea of what the shampoo costs should be, compare it to the previous year. Is there a large difference? This exercise will probably make you reconsider how your goods are bought, stored, and controlled.

2. Be Smart About Your Vacation Rental Inventory

Never buy too much at once, keeping your stocks as low as possible. Not only does this preserve interest-bearing cash, but your inventory is much easier to control.

If your supplier offers you a 20% discount to buy 100 cases of shampoo bottles at the start of your season, for one or two properties, proceed carefully. Shampoo sitting in a closet will not earn you any money and they will be hard to keep an eye on. Your kids might decide to give them out to friends, or your cleaning staff might feel the need to pocket a few every visit.

If your stocks are low (and delivered “just in time”), it’s much easier to recognize when items have gone astray and subsequently take action to protect your profits.

3. Liquidity is Crucial to Your Vacation Rental Business

Remember the 2009 recession? In case you’ve forgotten, in the prosperous years prior to the recession, people and companies freely spent all of their income to acquire more, and not necessarily pay off, existing debt and assets.

In terms of vacation rentals, I knew many owners who bought into the temptation of rising property values and used all of their equity to purchase additional vacation rentals. Bookings were used to pay mortgages, not to build savings or pay off the existing debt. They over-leveraged themselves. My point? Cash is king. You can have all the illiquid assets in the world, but if you don’t have cash when your credit and/or bookings decrease (the economy is cyclical), you won’t be able to buy groceries, let alone keep your investments.

If you are achieving high occupancy and are ready to expand, go for it! But pay attention to your bank balance and I suggest not tapping into more than 50% of the value of your existing home(s). This may be conservative… but at least it will always be your home.

This post was written by Kris Getzie

Kris Getzie Hospitality Consultant

Can Vacation Rentals and Hotels Work Together?

This post was written by Volo for Tripping.

Lately I’ve been hearing buzz about hotel brands entering the vacation rental market. Vacation rental owners and hoteliers alike understand that we have an attractive market; but leaders in both industries are often quick to point out the stark differences and disregard each other as competitors.

I’ve personally seen and achieved a lot of success in business through aberrant partnerships and I often ponder how such a partnership might benefit our growing industry. Take Target’s designer collaborations, for example (with the likes of Nieman Marcus and Jason Wu). Each collaborator understands what the other partner offers, how they are different, and how they can benefit each other. The goal is not to become the other.

Vacation rentals are distinguished by their unique brands and authentic experiences. What they lack is industry-wide guest service standards and independent brand awareness.

Even with great efforts to overcome these challenges by industry stalwarts, it is impossible for every owner/manager to create a brand presence that precedes them, as hotels do, simply due to the marketing expenses and execution time. It is particularly hard for new vacation rental owners. Often working families, they don’t have time to read every new post on LinkedIn and follow vacation rental blogs, let alone build and manage an independent website to build their brand.

But they do have a vision. Most have created a high quality experience with amazing guest service and are taking one step at a time towards running their business as a full-time career.

One Way Vacation Rentals and Hotels Could Partner

A recent trend I’ve been noticing across a host of different vacation rental sites is the use of stamps of approval. A stamp of approval can certainly add some credibility but do guests really know what these mean and how it may add to the vacation rental standard and experience?

Guests know hotel brands and their standards (by way of millions spent each year in advertising), the biggest area of uncertainty for vacation rentals guests.

According to Oracle, 86% of customers will pay more for a better experience. If newbies (or vacation rentals in general) were able to get a “brand stamp of approval” from a relevant boutique hotel, would they see an increase in conversion, retention, and rates based on the perception of a more dialed experience?

At the same time could hotels also benefit by driving much needed patronage to their ancillary revenue centers (restaurants, spas, shops and activity spots) through recommendations from partnered vacation home owner(s)?

There are many logistics not addressed herein. Hotels, for one, would need to understand that vacation homes are independently run and a source of ancillary revenue. Independent homes would have to meet and adhere to select standards set by the hotel (that would not diminish their uniqueness, of course).

Is this topic off in left field or reasonable enough to test the possibilities? I’d love to hear your thoughts!

This post was written by Kris Getzie

Kris Getzie Hospitality Consultant

Choosing the Best Vacation Rental Location

This post was written by Volo for Tripping.

There are many reasons why people choose to purchase vacation homes. Sometimes it’s for the love of an area and pure personal enjoyment. Other times it’s purely for cash flow. If you are somewhere in-between or are looking to run your home as a full-time business, the location of your vacation rental is one of the most important decision you will make.

While it can be possible to turn a vacation home in the middle of nowhere into a successful business venture, I do not advise the risk if you cannot afford uncertainty. Choose a location you love, but be cognizant of its ability to attract tourist.

Tripping.com’s Top City Destinations

San Francisco, CA

New York, NY

Seattle, WA

New Orleans, LA

Chicago, IL

Tripping.com’s Top Beach Destinations

San Diego, CA

Destin, FL

Key West, FL

Gulf Shores, AL

Honolulu, HI

Top Tips For Choosing a Vacation Rental Location

For most, location seems basic and research often ends after selecting a particular city or a general neighborhood. Don’t stop there. Just because your condo boarders Central Park, doesn’t mean it’s on the right end. So what’s an out of towner to do?

1. Go for a walk and take in the surroundings

Don’t hire a cab or rent a car, walk. Walk in all directions around your property for blocks. What do you see? Look at the quality (and type) of shops, businesses, homes. Will they complement your business? Do you feel safe on your walk? Take another walk at a different time of day, including the night. A beautiful beach can look completely different when the tide is out. It can also be quiet and pristine on a Wednesday but packed with locals on Saturday (which may or may not be great for your intended experience).

I once stayed in a vacation rental right next to train tracks where trains passed by every thirty minutes. While some noise levels, particularly in urban locations, are inevitable it’s important to understand what is around you. This may sound ridiculous but not too long ago I stayed in a property that was located about 500 yards from a sewage treatment facility. I was sick to my stomach a few hours everyday when the wind blew wrong.

2. Study the local landscape

If you are buying a home or land in an area you aren’t intimately familiar with, take extra time to study the details of the land and area. You don’t want to show up on a pristine day, only to find out later that during your peak season strong winds blow large tides onto your beach and make swimming a hazard.

The same holds true for erosion. Understand what happens to your property when the extreme elements (rain, cold, heat, whatever) are in full effect. Will your property flood? Do you have exposed water mains that could freeze and burst?

My Personal Experience

When I bought my vacation rental in Park City, Utah, I noticed the neighbor had recently excavated and laid a new driveway, which had already cracked. Park City happens to be the high desert, so this was a big red flag. Sure enough, the water main was exposed and had a history of bursting. In my purchase negotiations, I had them move the water main from the side of the home to the front where it now connects with city water (all underground). The project was estimated to cost $15k, but really cost over $20k due to the depth of the city water connection. A fee I’m glad I didn’t have to pay!

luxury pool

3. Be aware of the elements

If you are planning on having a pool, you will need to create a space with consistent sunshine. If a building permanently blocks this opportunity, your rates might be substantially lower than you would have thought. Too much sun, or high temperatures, can also be problematic and reduce travel to your hopeful location for long periods of time. Lastly, understand how the elements will impact the design of your property and maximize what is naturally bestowed upon you if you are building.

4. Never be pressured into buying

Don’t let anyone rush you! I don’t care if an all cash offer is supposedly looming, if you are not allowed time to research your investment, walk away. This is when the biggest mistakes are made. Likewise, if something doesn’t feel right, even if everything else by examination seems perfect, trust your gut and move on.

This post was written by Kris Getzie

Kris Getzie Hospitality Consultant

Protecting Against Vacation Rental Damage

This post was written by Volo for Tripping.

In my experience, one of the biggest concerns for new vacation rental owners is having their home trashed by careless guests. Vacation rental damage, however big or small, is something all owners have to deal with but there are ways to provide extra protection for your property.

My clients who are looking to get into the vacation rental business are usually looking to increase household income and/or gain life balance (by way of working fewer corporate hours), so the concern is understandable. Help alleviate the stress of dealing with vacation rental damage and save both time and money with these four tips.

Top Ways To Minimize Vacation Rental Damage

1. Screen Your Vacation Rental Guests

Screening is the first line of defense in protecting your home. I always try to speak to potential guests before they book; to get a feel for what type of people they are and the nature of their vacation.

If you hate the phone more than I do, or just cannot arrange a time to speak, try to engage in a couple of emails, at a minimum, instead. Pay attention to any red flags or inconsistencies. Trust your instincts and don’t be afraid to turn inquiries away.

Keep in mind that screening isn’t foolproof and it’s important that you have some type of insurance or deposit in place should damages, or the need for deeper cleaning, occur.

2. Take a Deposit For Your Vacation Rental

Upfront deposits, typically a flat fee or a percentage of the total booking amount, are common. They are nice because you have the cash on-hand should something go awry, but can also be a hassle due to extra steps involved; collecting, deducting and returning.

Vacation Rental Deposit Tips

– Guests don’t like large sums of cash sitting in limbo for upwards of 6+ months.

– Don’t spend the deposit if you are on a tight budget; some clients choose to put it aside in a business savings account, along with tax money.

– Some states may require you to make a claim against a guests deposit within a set duration of time, typically 14 days.

3. Consider Vacation Rental Insurance

For a low, non-refundable, fee CSA Travel protection can provide an insurance policy as an alternative to taking a deposit. For those listing their homes on booking sites or using management software, it’s typically one click of a button in your account to add a policy requirement for all of your guests.

Although it’s super cheap and easy to implement, all damages may not be covered- like pet damage. Make sure you read the fine print of your insurance provider carefully.

All my properties are dog friendly. To mitigate any risk, I collect a $150 non-refundable pet deposit (which covers additional cleaning as I like my properties spotless) and ask for a credit card number to process through rental management software, Braintree, or any other payment system you prefer, should damages occur.

4. Build a List of Repeat Guests

Building a vault of repeat guests is probably the single most effective way to minimize the potential of damages. Take note of the many ways to create an exceptional experience and start growing your guest base. You will have rapport and will know how they will treat your home.

But even so, mishaps will happen. Always use your discretion when asking for fees. If charging them is causing you more anxiety than just covering the expense yourself, let it go. On the converse, if the damage is costly, talk through the solutions and repair costs openly.

My rule of thumb is that if the damage is fairly inexpensive, and was obviously an accident or non-malicious, I acknowledge the problem to the guest and offer to cover the expense. In my experience guests are usually very impressed with the level of hospitality and often demand to pay for the damage anyway.

This post was written by Kris Getzie

Kris Getzie Hospitality Consultant

Financing a Vacation Rental: A How To Guide

This post was written by Volo for Tripping.

From sorting through types of mortgages, lender practices and down payment requirements, financing a vacation rental can be very confusing.

Before you even head down that road, I suggest that you really think through the reasons for and the location of your desired income property. Will you have enough time to enjoy your new vacation home, setup the business and manage it? It’s very rewarding, but also a lot of work that begins with financing your vacation rental.

Consider all of the expenses that come with financing a vacation rental. Taxes, association fees, business licenses, lawn care, snow removal and garbage collection, among unexpected expenses, can add up. If you don’t achieve full occupancy, can you afford to pay these expenses out of pocket? If you have decided yes, I’ve got this, you will need to understand your income, debt, credit score and down payment requirements if an all cash purchase isn’t in your cards.

Important Steps to Financing A Vacation Rental

1. Know your debt-to-income ratio: In other words, understand the ratio of what you owe versus what you earn. To calculate your debt-to-income (DTI), add your total amount of debt payments per month (not including utilities) to your estimated investment home mortgage. Divide that number by your monthly gross income (before tax income). Voila, you have your DTI. To qualify, lenders generally want your DTI below 40%.

2. Know Your Credit Score: Strong credit scores are required to obtain a loan for an income property, even more so than for a first home. Exact requirements may vary by loan size and down payment, but expect 725 to be around the minimum when financing a vacation rental.

3. Know What Your Down Payment Will Need To Be: You are going to need a down payment to buy a vacation rental. No question about it. Amy Sharpless-Cairn, a lending goddess, was kind enough to give me an overview of down payment requirements. She’s originated over $165M in loans over the past six years and really knows her stuff.

Modern kitchen

In a nutshell, the requirements are really confusing. I suggest that you reach out to someone in your area to understand the specifics of the mortgage you would need. There are conforming, non-conforming, high balance non-conforming and jumbo loans which may have balance restrictions and require anywhere from 20-35%+ down. That amount can increase if you are not a resident in the state/country you are purchasing, depending on the lender.

Condos Vs Homes When Financing a Vacation Rental

Condos tend to be a popular choice among new vacation rental owners. However, they can sometimes be a little more difficult to finance. You may also have occupancy ratio’s to adhere to. For example, your condo of choice may have to be owner occupied, say 52% of the time, depending on the type of condo it is and the loan you fit. The condo type can be warrantable, non-warrantable or a condotel. Some of which can require larger down payments and significantly shorter mortgage length options.

A safe down payment estimate is 20-40% of the loan value, which can be a hefty amount. To find the cash, some people obtain a line of credit on their first home, tap into a 401k, borrow from their parents or sell their souls. A good mortgage lender is a must when financing a vacation rental, helping you to navigate your situation and avoid taking on too much debt.

This post was written by Kris Getzie

Kris Getzie Hospitality Consultant