WHAT IS A VACATION RENTAL?
A Vacation Rental is fully furnished property, such as a house or condo, that is designed for traveler’s to rent while on vacation. Vacation Rentals are typically expected to provide all the furniture, appliances and amenities of today’s typical lifestyle and any extra luxuries are better yet! All the comforts of home, but away. Guests rent the property by the day, or week, or even month while they are on vacation.
Many people choose vacation rentals over hotels for a variety of reasons:
HOME SWEET HOME
With a vacation rental, you often have your own kitchen, living room, and other amenities that feel more comfortable than a sterile hotel room.
WHEN IN ROME...
You can do as the Romans do with a vacation rental! Homes are oftentimes located in neighborhoods or away from the tourist areas, making your stay feel more authentic to the area. Likewise, if you prefer to feel the heartbeat of the action, you can usually find a vacation rental close to the action!
DO NOT DISTURB
Hotels are a place where guests from all over congregate, and can sometimes feel a bit congested. A vacation rental property provides a serenity and privacy that hotels simply cannot.
BETTER FOR THE BUDGET
Vacation rentals usually offer more bang for the buck! Prices are usually comparable at the very least, and oftentimes even more affordable than hotels and resorts.
INVEST IN A VACATION RENTAL PROPERTY
The Rise in Vacation Rentals
For decades, hotels were the destination spot of choice. The location itself didn’t make much difference - when you booked a trip, wherever you booked a trip, you reserved a hotel right alongside it.
This, however, is a trend that is about to change.
Increase in Vacation Rental Properties
When Airbnb launched in 2008 (under its original namesake Airbedandbreakfast.com its two founders could hardly predict the rapid growth of its success (1). In less than 10 years, Airbnb has grown to become a $30 billion company. And although VRBO has a more modest revenue, it is still estimated to be upwards of $10 million annually. This speaks to the growing popularity of Vacation Rentals (2). In fact, researchers predict that by 2020, Vacation Rentals will overtake the hotel market, far surpassing in revenue and popularity (3).
...by 2020, vacation rentals will take over
the hotel market
Increase in Vacations
Studies show that in recent years, more people are traveling- and more frequently at that! One third of American families take at least one vacation each year. Seventy percent of those families will take two or more vacations this year. 2017 travelers were higher in number than in 2016 and the frequency of the trips those travelers took in 2017 was 13% higher than in 2016 (4).
In short, not only are Vacation Rentals on the rise, but the number of Americans taking vacations is also growing. More people taking more vacations…sounds like there could be an opportunity somewhere with this! With all this in mind, it is no wonder why more and more investors are obtaining loans from First Western Federal Savings Bank to purchase their own Vacation Rental!
Benefits of Owning a Vacation Rental
The trends are showing that investing in a Vacation Rental property with leverage can be a solid financial decision. Yet there is no mistaking the fact that owning a Vacation Rental is a lot of work. In order to reap the benefits, you need to have an excellent, well-kept, clean and organized property with an incredible local feature that makes staying in your property all the more enticing. When all these things come together, there are some incredible benefits that can be enjoyed- take a look!
Added Income
With a property to rent, you’ll have the opportunity to make additional revenue. This can not only help towards paying down any leverage you use to purchase it, but it can also help supplement your income as well. If you were to charge $80/night (after taxes) at your Vacation Rental property, and averaged 8 nights a month, your property would generate $640 per month or $7680 per year. If you intend to stay in your Vacation Rental a few times each year, this is simply just additional income to you. But, if you were going to have a Vacation Rental truly as an investment, you would probably be able to get a higher occupancy, and in most places and a higher rate. Assuming you could get 20 nights per month at $200/night, your property could generate $48,000 gross annually. Yes, there are some operating costs that come out of that, but still this would be a pretty desirable property to most investors.
Asset Diversification
Real estate offers a diversification to your financial assets that is not subject to the volatility of the stock and bond markets. Vacation Rental property is an asset that you can not only see, touch, and feel like other investment property, but you can also enjoy, relax, and make memories all while generating cashflow and appreciating in value over time.
Future Security
When purchasing investment property with leverage, whether it is a Vacation Rental or a typical Long-term Rental, the rents generally pay for all operating costs and the loan payment. So, essentially, you purchase the property with only needing to put a fraction of the cost down from your own funds and your tenants pay for the remainder and pay the on-going expenses. Once the property is owned free and clear, the rents keep coming in each month, no matter where your life takes you. Consider it like your own self-funded pension.
How Does It Work?
First Western Federal Savings Bank makes applying for a loan easy! Once you determine whether you are going to purchase the property using your personal funds, or with your self-directed retirement funds, then remember these three simple things:
Have the right kind of property in mind.
In order for First Western Federal Savings Bank to make a loan, the property must be in the bounds of the United States (Alaska and Hawaii included). The property must have a minimum value of at least $80,000 and needs to be for investment purposes only. You cannot consider it your personal residence and it is best the build date is after 1940.
Have enough money.
To purchase a Vacation Rental property, you need to be able to put at least 50% down in order to qualify for the loan. In the event you are purchasing the property in your self-directed IRA or 401k, then you will also be required to have some reserves available.
Cash flow is critical.
The whole rationale behind rental property is cash flow. If a property doesn’t cash flow, it is not a great investment. Yeah, there is always opportunity for appreciation, but our belief is that appreciation should be considered a bonus at the sale of the property, not the reason for purchasing the property. There are several metrics for measuring cash flow but at First Western Federal Savings Bank, we use Debt Service Coverage Ratio and require the ratio to be 1.25 or higher to qualify for loan.
BUILD YOUR FINANCIAL FUTURE TODAY
A VACATION RENTAL IS AN EXCITING PROSPECT
For your future visitors, it means a time of relaxation and exploration, a way to disconnect while also encouraging curiosity. For you, it means an opportunity to make your financial goals become a reality. First Western Federal Savings Bank understands Vacation Rentals and specializes in investment property loans. We are ready to assist you in the process of acquiring your own Vacation Rental.
Investing in the real estate market with the intention of turning it into a Vacation Rental is a financial opportunity that can present significant benefits. You’ll be staying in line with current real estate investment and lifestyle trends, you’ll be building your financial portfolio, and when you work with First Western Federal Savings Bank, you will have the expertise and support of a trusted lender with decades of experience as a friend and resource.