Vacation Rental Investment: How To Analyze A Short Term Rental Market

Let’s be frank: gaining equity in a property while vacationers pay off the mortgage is an enticing real estate investment opportunity. Over the last decade, the vacation rental industry has witnessed a boom in capital from both amateur investors and large, established real estate corporations.

The principal obstacle standing between eager investors and considerable returns is a comprehensive understanding of the short-term rental marketplace. Without accounting for location, seasonality, regulations, taxes, and all the key performance indicators, an investment could easily fizzle out. Here at AllTheRooms Analytics, our team of data scientists, analysts, and industry experts have compiled a rundown of the most important considerations. Here’s how to analyze a short-term rental market.

Thinking about investing in a vacation rental property?

If you’re considering investing in a property in order to put in on the short-term rental market, you want to make sure that your decision is backed by the correct analysis.

  • Get occupancy rates, ADR, RevPAR, supply, demand and gross revenues for the markets you are considering
  • Access to historical data so that you can be confident in your analysis
  • Tools to help you calculate capitalization rates and net cash-on-cash returns

How To Analyze A Short Term Rental Market

Find the Perfect Location

Location, location, location. Because short-term rentals are highly dependent upon proximity to attractions, the age-old mantra arguably holds more truth in the vacation rental space than it does in traditional real estate. Finding the perfect location for a new vacation rental home is paramount, and the process can be quite involved.

First, conduct a geographic competitive analysis that compares each market you’re considering. According to the most recent trend reports, beach locations are showing no sign of slowing down, however, a thorough geographic analysis should go beyond weather. Consider variables such as occupancy rates, RevPAR, ADR, supply, demand, and gross revenue for specific neighborhoods and cities. Using tools with visual heat maps make the process more streamlined and user-friendly.

Prospective investors should even consider non-industry-specific metrics like employment rate. Destinations that rank well in terms of the variables that define traditional real estate markets — school systems, employment rates, and proximity to certain amenities — often rank well for vacation rentals as well.

While real estate investors may be tempted to buy a vacation rental near their hometown or in large urban areas, data reports often show surprising, unexpected locations yielding the highest return on investment.

For example, in California, AllTheRooms data shows Sonoma, Salona Beach, Aptos, and Dana Point — cities with each less than 500 total Airbnb listings — are all among the top 10 in terms of revenue earned per available room. Additionally, on a country-wide scale, states like Delaware, South Carolina, Maine, and Wyoming all outperform California, New York, and Florida in terms of revenue per available room.

Cross-Reference Vacation Rental Data with Housing Market Data

Taken in a vacuum, vacation rental data only tells half the story. The next step is coupling the information with research on the least-expensive housing markets. Finding the sweet spot between low mortgage (or leasing) rates and high returns on investment is the name of the game.

Tools like Zillow and Homelight’s Home Value Estimator are helpful in determining home values and finding the best areas for buying vacation rental properties.

Zero-in on Property-Level Details

When preparing to buy a property, keep in mind that not all vacation rentals are made alike. Just because an overall market may be generally profitable, some property types could be far more successful than others.

In order to gauge how a six-bedroom house with plush amenities stacks up against a more modest two-bedroom apartment in the same location, it’s important to evaluate on a granular level. AllTheRooms’ Property Level Details Report is useful for anyone looking to understand the unique characteristics of individual properties, minimum and maximum daily rates, and other key indicators.

Understand Market-Specific Regulations

It’s no secret that the vacation rental landscape has become a bit messy with oversight and regulations. With cities like Amsterdam, Paris, Barcelona, and Santa Monica implementing varying degrees of crack-downs, regulations are one of the most important things to consider when investing in vacation rentals.

While there may be more revenue potential in one location, regulations may significantly impact its productivity. For example, San Francisco — Airbnb’s home city — has a limit on the number of nights property owners can rent out their entire house (90 nights). Places like Charleston, South Carolina have restrictions relating to the age and historical significance of a home, as well as whether or not the owner must be living on the premises.

Consider the Specific Tax Codes

Just like hotels, vacation rental owners are required to pay sales and occupancy taxes. Naturally, as rental properties become more and more popular, government agencies are becoming more strict in their enforcement of these policies.

Real estate investors should study property tax laws that vary widely by city, state, and county. However, some of this financial pressure can be relieved by certain tax write-offs that apply specifically to short-term rental hosts. For example, hosts earning passive income (income an investor earns from activities in which they are not directly involved) are able to deduct the interest paid on vacation rental mortgage come tax day.

Conduct an Event Impact Analysis

Another one of the most important considerations in regards to vacation rental investment is how a potential property can be affected by seasonality and events. Today, some of the most lucrative markets in the United States are highly dependent on intermittent seasonality and the lure of popular events.

Should investors aim for a market with more sustained occupancy rates, or for one that makes its money over a handful of weekends? AllTheRooms’ Event Analysis Reports take the headache out of answering this question. Our unique detailed analytics reports allow clients to discover how everything from sports tournaments to convention center events affect variables like supply, demand, and the profitability of any given market.

Event Impact Analysis also includes events like natural disasters that negatively impact certain markets. Investing in vulnerable areas like the fire-prone central valley of California or the tornado-prone Midwest poses a certain degree of potential risk. Plus, there are the insurance costs associated with these regions to be considered as well.

Calculate Expenses and Projected Revenues

Investing in a short-term rental property poses far more costs than one reserved for long-term rentals. There are inflated expenses related to upkeep, maintenance, furnishing, property management (especially if you plan to hire a property management software or representative), plus utilities and WiFi.

Lastly, and perhaps most importantly, real estate investors need to project revenues for long term periods. Using AllTheRooms’ projected bookings tool, real estate clients are able to accurately gauge month-by-month earnings for a six-month time period, including everything from occupancy rates to RevPAR, supply, and demand.

With careful research and a line of data analytics tools at your disposal, real estate investors can be prepared to make smart, sound decisions before launching into the vacation rental marketplace.