1. Determine the budget: Unless you’re purchasing with cash or have an unlimited budget, you’ll need to pick a budget based on the amount of rental income you’ll receive. Ideally most vacation rentals should be self-sustainable (i.e. pay for themselves). This means you’ll need your mortgage/taxes/interest, utilities and management fees to be lower than the amount of monthly rental income you’ll receive. How much rental income will you receive? Follow steps 2 through 4 to get a better understanding of what you can expect.
2. Location, location, location: Pick an area that has consistent entertainment and attractions. Properties nearby sports stadiums, concert venues, ski resorts, big cities and lakes/oceans will generally be a safe bet.
   •  WATCHOUT: Legislation is changing daily on vacation rental regulations in most states. Make sure that you know the local laws before purchasing a property.
3. Management: Do you want to be the main point of contact for questions from potential renters, for cleaning and turnover service and emergency hot tub issues at midnight? Or, would you prefer someone else to handle these tasks? Management fees can cost up to 20%, but will take the headache and guesswork out of owning a vacation rental. If you don’t live in the area you’re buying make sure there’s reliable management, cleaning and maintenance services available.. 
4. Potential Rental Income: Go to Airbnb and Homeaway/VRBO to see what nightly rates are in the area you’d like to purchase. Look at the amenities of homes with the highest ratings. Check the calendar to see how many nights are rented out monthly. From there, multiply the number of nights rented by the nightly rental price to determine a ballpark estimate for rental income. Make sure to account for seasonality if necessary. Will this cover your monthly rental expenses (mortgage, utilities, management)? If not, can you afford some out of pocket each month? At this point, you might need to adjust the budget, location, or your expectation before purchasing a property.
5. Work with a local expert: It’s great to engage a Realtor early in the process when you’re thinking of making any real estate investment. They can help you find the best communities with no HOA or vacation rental friendly HOAs that fit your budget. Remember though, it’s your responsibility to complete due diligence and financial analysis for owning and operating a vacation rental. Finding a trusted real estate advisor can be tricky if it’s outside your hometown so feel free to ask me for a referral to someone in my network you can trust. 

I have coached many friends and clients on how to do the research and analysis before buying an investment property. Thinking of buying an income property? I have an easy little spreadsheet that helps me take the guesswork out of deciding if a property will meet my expectations. Email me if you’d like a copy.

Lindsay Fricks, Helping you, your family and friends Live and Love in Arizona!