New to Real Estate Investing? Consider a Vacation Rental--But Read These Tips First

When seeking to grow your income, investing in real estate is a proven viable option.?And if you do want to invest in real estate, consider a vacation rental (vis-a-vis Airbnb) because this type of property is among the most profitable. But, before you purchase, you will need to know the steps to ensure your investment will be feasible and lucrative. The following tips can help you get started.

?Financing Your Investment

?If you are a first-time homeowner, in addition to being a first-time real estate investor, you may have considered using VA or FHA loan options to finance your purchase. These loans offer lower down payments and less stringent credit requirements than conventional mortgages.?But VA and FHA loans cannot be used to finance vacation rentals unless the property will also be your primary residence. Therefore, if you purchase a single-family home strictly as a vacation rental, a standard conventional home loan may be your only option.

?However, if you decide to purchase a multi-unit property as a vacation home, you can use a VA or FHA loan—if you live in one of the units.?You may rent the additional units to travelers, and still be within legal regulations. Still, it is also important to realize that if this purchase is your second home, you will be required to make a down payment as high as 25 percent even when using VA or FHA financing.

Before you start your vacation rental business, you should consider establishing a corporate entity such as a Limited Liability Company (LLC) to purchase the property.?Experienced and successful investors often establish corporate entities to purchase real estate instead of themselves because corporate structures protect their personal assets, and provide operational flexibility and tax advantages. If you’re wondering how to establish a LLC, there are multiple online services that can help with preparing the forms in a few simple steps. ?You will also need an IRS Employer Identification Number (EIN), which is used like a social security number, and you will have to register your entity with the local governing authority where your property is located.???

Choose the Right City

?Before you start looking at individual properties, you should narrow your investment to a particular location. Look to purchase in areas that attract tourists. ?Review cities that have been profitable for companies like Airbnb.

Think about what would be interesting to travelers, as well as what would be feasible for you. If you are hiring a property manager to tend to the property’s upkeep, your proximity to the property might not be a concern. But if you are planning to manage the property yourself, a location closer to your home might be a necessity.

Understand The Process

?US Lending Company notes that receiving a loan for an investment property is a major financial commitment, so you need to be sure the property you purchase is a sound financial investment. Consequently, do your research (due diligence).?Establish a budget; know your target market; make sure your credit and finances are in order.

?Look for a vacation home in cities you already know well.?You will have a better understanding about the city’s transportation, museums, entertainment, and other tourist attractions.?Review the city’s demographics, urban planning and economic development data.?Look for economic trends that are favorable for rentals (new development, population and income growth, etc.).?Also seek out places you know are becoming hotspots for tourists, or neighborhoods near large or popular universities. These locations can be lucrative for short-term rental investors because they attract a large number of travelers needing lodging.?In addition to considering the attraction for renters, it is also important to ensure the property is located where you too would enjoy vacationing.

?Stay Informed on Rental Rules and Regulations

Many areas are strengthening regulations governing short-term rental properties. In addition to government fees, renters may also face restrictions regarding the types of homes that can be rented to travelers, the maximum number of days the property can be rented, and accommodations that must be provided for people with disabilities.??You should review a city’s codes and regulations before renting, and reconsider purchasing if city laws may severely restrict your profitability.?With research, you can determine the areas that are short-term rental-friendly and those that are not.

Rental property owners also need to stay updated on tax law changes that could impact their profits. Current laws may be favorable in the areas you choose, but laws can change from year-to-year.?So, do your homework.

?Conclusion

?Owning a vacation rental can boost your income provided you follow prudent steps to increase your chances of success.?Be sure you know the risks before making an informed decision to purchase. Understand rental property is a “hands-on” investment in which income and expenses must be closely managed—by you or your property manager—to be profitable.?And, if you decide to invest in the Washington, DC, and Maryland markets, call Michel Daley Realty at 202-544-4445.?We promise to provide experienced, personable and professional service to make your purchase process as easy as possible. ?--- Authors: ?Alice Robertson / Michel Daley