When it comes to investing in real estate, it can seem that every person you talk to has differing opinions. But if there’s one thing everyone can agree on, it’s this: The property’s location should always be the number-one factor in your real estate investment decision. Buying a vacation rental property is a huge undertaking, and it’s crucial for your business that you get it right! In this article, we’ll cover exactly why location is so important, what makes a good location, and how to analyze the real estate market. Along with location, there are certain things to know before buying a vacation rental property which we’ve briefly covered in our blog.
What Makes Location So Important?
One of the things that makes location so important is that it’s constant. There are so many things that you can change about your vacation rental–the color of the exterior, the interior design, the landscaping–but one thing you can’t change is the location.
Supply and Demand
Another reason location is so important is that it has a direct relationship with supply and demand. Depending on where your property is located, it might be in high demand at all times, or there could be very few people looking for a place to stay in the area. If you’re near a tourist destination, for example, there’s going to be a lot more demand for your property than if you’re in a ghost town. Generally, when looking to buy a vacation rental property, you want to find an area that has low or reasonable supply and high demand.
Not only is location related to supply and demand, but it’s also related to the property’s desirability. This has to do with the access and proximity to various amenities, as well as public transportation and other public services. It also concerns the proximity of the property to local shops, stores, restaurants, cafes, and tourist attractions.
The location of your vacation rental property determines what the most effective marketing strategy will be. Depending on the location, you might list your site on different sites, target a different market, and use different strategies to do so.
Location is also correlated with profitability. Where your property is can determine how much you can charge your guests to stay there, as well as what your running costs will be. This can vary quite a bit depending on whether the area is more urban or rural, and how popular the area is.
Finally, location determines the appreciation of the property over time. This is important to keep in mind because if you want to resell the property in the future, you’ll want it to appreciate (increase in value) rather than depreciate.
What Makes a Good Location?
Next, we’ll get into what constitutes a “good” location for a vacation rental property.
- A low supply of vacation rental properties in the area, so that guests traveling to that particular city will be more likely to choose your property
- A high demand for rental properties so that there are many potential guests who could be interested in staying at your vacation rental
- Proximity to public services and amenities, which adds value and convenience for guests
- Access to shopping and entertainment, since most people who stay in vacation rentals are on vacation and want to enjoy themselves with these activities
- Safety, so that you and your guests can have peace of mind while they’re staying at your vacation rental property
- No legal issues, like a homeowners association regulation that doesn’t allow vacation rentals in the neighborhood
- A reasonable real estate price, so that you don’t have to spend an astronomical amount to purchase the property before starting your vacation rental business
- Low running costs, including the mortgage, utilities, and other monthly expenses
- Expected good appreciation in the future, which means you’ll be able to sell the property for a profit down the road
How to Analyze the Real Estate Market
Market analysis can be complex, but we’ll break it down in the following section. Although you can do real estate analysis on your own, it’s wise to work with an experienced realtor who can help you navigate all of the details.
Research Local Laws and Regulations
It’s essential to gain familiarity with local laws and regulations before purchasing a vacation rental property. This can help you avoid purchasing a property, only to find that you can’t legally use it as a vacation rental. Aside from official laws, you’ll also need to check whether there’s a local homeowners association. These associations are quite powerful, so you’ll definitely need to look into their rules and ensure you won’t be breaking any of them by running a vacation rental in the area.
Look at the Metrics
Start by researching the area’s median home price, cap rate, cash on cash return, and expected rental income.
Median Home Price
The median home price is the middle point of the real estate prices in the area. This isn’t the same as the average home price, which is calculated by adding up the prices of all the homes and dividing the total by the number of homes. Instead, the median price is the one that is right in the middle of the data set. Half of the rest of the properties cost more, and half of the rest of the properties cost less.
Generally, the cap rate refers to the ratio between the annual rental income from a real estate asset and its current market value.
Cash on Cash Return
The cash on cash return is the ratio between annual before-tax cash flow and the total amount of cash invested. It’s usually expressed as a percentage.
Expected Rental Income
The expected rental income is more self-explanatory; it refers to the amount of income you can expect to earn from a rental property in a year. It involves both the vacation rental costs and earnings.
Determine the Peak Season
Next, you’ll need to identify the peak season for the rental property and figure out the high and low season rhythm. There are many tools out there that can help you evaluate this type of data, like AirDNA. Knowing your peak season is crucial to determine how much you can earn from a vacation rental property. It’s also essential to your marketing strategy.
Check for Growth
Ideally, you want to choose a vacation rental property located in an area that has good economic growth. Look at how the local businesses are doing, and whether there have been any local business bankruptcies or rising unemployment rates. Population growth is also a notable factor because it shows that people are interested in the area. Meanwhile, construction is also a good sign of growth. Essentially, you want your vacation rental property to be located in an area that has proven prosperity and steady economic growth.
Convenience is key in appealing to potential vacation rental guests. They want to be close to various neighborhood amenities like grocery stores, parks, restaurants, cafes, and bars. If there are any tourist attractions nearby, they’d prefer to be closer to them rather than having to drive for an extended period of time. Nearby bus and train stations are essential as well. Walkability is also an aspect of convenience, since not all travelers have a car or rent a car during their stay. In general, the more walkable the area, the better.
Think About Your Target Market
What type of guest do you want to attract? If you want to appeal to large groups like bachelor/bachelorette parties, you’re going to be looking for something different than if you wanted to appeal to families. For instance, an area with amazing nightlife could be perfect for groups and couples, but it’s probably not ideal for families with children. It’s wise to either know your target market and the type of area they’d prefer to stay in before looking for a vacation rental property, or adjust your target market depending on the location of the vacation rental property you purchase.
Are you in the process of purchasing a vacation rental property? When considering location, keep the following information in mind.
- Location is the most important factor when looking for a vacation rental property.
- Location is important because it’s constant and can’t be changed, unlike other aspects of your vacation rental property. It’s also directly related to supply and demand, desirability, profitability, and appreciation over time. Plus, location has a huge influence on the ideal marketing strategy for your vacation rental.
- A good location has low supply and high demand, is close to public services and amenities, and has easy access to shopping and entertainment. It’s also safe, free of legal issues, has a reasonable price and low running costs, and is predicted to have good appreciation.
- There are many things to look at when analyzing the real estate market. You’ll need to research local laws and regulations, look at various metrics, determine the peak season, check for different types of growth in the area, ensure convenience, and consider your target market.