My Updated Strategy for Vacation Rental Investments
In one of the first posts on this sight, I laid out the criteria I use for assessing a vacation rental investment. In short the criteria is: is it legal, is there demand, and is the property differentiated.
Those pretty good generic criteria for evaluating any market or property in the world. But as I’m thinking about scaling our own investing, I realized I’m getting a little bit more specific in my particular strategy. My own strategy is limited by my capital and knowledge plus the current landscape of the Coronavirus pandemic.
As such, here’s my particular strategy at the moment.
I’m looking for homes that cost around $250K and can rent for about $200 a night and have a pretty decent occupancy rate. When the mortgage is the only a $1,000 a month you have a lot of breathing room and also potential margin if you can generate $5K in monthly revenue. You also only need about $50-60K in upfront capital to buy a property so the return on capital can be quite high. Needless to say these are pretty rare, but they exist.
Homes should be driving distance from a major metro. At the moment people aren’t getting on planes so at the moment I’m not looking for those kinds of locations. After the Coronavirus people will get on planes again, but they’ll still drive to cool locations. At a later date, I may revisit this criteria but I think over time a portfolio should be mostly drive-to destinations.
Customer understanding. Additionally I should have a pretty good understanding of who the customer segment is and why they are traveling and what they want. For example, a really hot market is Gatlinburg, TN but I don’t really know much about it because its so far away and I don’t know much about what the target customer wants. But if I understand the customer segment, I can help turn the property into something very successful.
Those are probably the three major strategy updates to my criteria at the moment, driven by my own personal situation. If I see a home that fits those criteria, I should make every effort to buy it because they are very rare. The goal of buying one of these home is to turn it into the dominate property in its segment and market, which we’ve mostly achieved so far in our three properties. If I were running an investment fund rather than our own personal capital generated from reinvesting profits, I might target a different set of properties. For example I might target 3 bedroom 2 bath homes that sell for $1MM rather than cottages that sell for $250K.
Any how, defining the “strike zone” of properties you want to buy is helpful so that if a good property turns up, you know to pursue it.