Vacation Rental properties and other short-term property rental platforms have taken over desirable rental markets throughout the United States. Yet, despite the vast potential of short-term rentals, lenders are still having trouble making loans on these properties.
But not JPM! We appreciate people trying to earn a little extra money to help pay the bills and create steady sources of monthly income. This exciting new way of supplementing income with Vacation Rental property is an important source of growth in this economy, and JPM is the premier lender in the Vacation Rental property market.
High end and vacation rentals are a great asset for anyone looking to save for retirement. Call JPM Financials today to learn more.
Financing the purchase of vacation real estate can be a challenge.
Lenders typically don’t like making large loans on investment properties. Fannie Mae’s cutoff is $417,000, and most other lenders max out at $624,000. While a would-be homebuyer’s first inclination might be to turn to a bank to make up the difference, most banks don’t like offering a secondary loan on top of a Fannie Mae loan.
Part of the problem is that banks have no reliable source of data for the vacancy rates on a particular piece of property. Also, appraisers and underwriters don’t use short term rental rates when looking at rental properties. This means that homes that are ideal candidates for short-term rental are essentially undervalued with regard to their potential to generate income, and your ability to pay the mortgage is underestimated.
Frankly, homebuyers are in something of a catch-22. If they label the second home as not being a source a profit, lenders factor in the cost of mortgage payments on the buyer’s primary home. The result is that few buyers can get their debt-to-income ratio below the target of 43% to 45% necessary to obtain a mortgage. But if they categorize the home as an investment, they’re completely ineligible for a second-home mortgage.
This is where hard money lenders like JPM Financials can help. We understand the real estate market, and we are confident that Vacation Rental properties are going to help drive the housing market in popular travel destinations, such as San Francisco, New York, Scottsdale, and Las Vegas. And as the short-term rental market becomes increasingly efficient and utilized, the value of desirable properties will continue to go up.
Real estate investors that target these markets and take advantage of online rental platforms will likely see a handsome profit, thanks to the ability to immediately generate revenue and offset mortgage costs.
How can you finance Vacation Rental property?
Vacation Rental properties aren’t just having an impact on how travelers find a place to stay—many people are choosing to invest in vacation properties, with the express intent of offering them as short term rentals during popular travel seasons.
We can say from our personal and professional experience that the numbers do add up. Last year in a survey of homeowners who rent out their homes on HomeAway.com, 70% of respondents said they could pay more than half their mortgage with rental income.
As long as the property is located either near a large body of water and/or in a popular tourist destination—such as Lake Tahoe or San Francisco—it’s very realistic for property owners to pay the entirety of their mortgage with rental revenue.
Owners often do find themselves debating whether long-term or short-term rentals are the best approach. Short-term rentals generally produce more revenue, but are also more expensive to operate than a traditional rental, due to the expense of cleaning, laundering, restocking toiletries, as well as the necessity of providing furnishings.
In the past, short-term rentals were simply too inefficient to justify the expense. You would have to advertise through a local newspaper or management company, which presented two problems: the advertisement represented yet another expense, and the limited geographic nature of the advertisement meant that you couldn’t reach tourists who planned on visiting the area. And of course, this limited reach made it difficult to obtain bookings with any consistency. Thus, long-term rental was the only realistic option.
But now, short-term rentals are exploding in popularity, for obvious reasons. For the price of a decent hotel room, travelers can now stay in a full-sized house with a kitchen, multiple bathrooms, outside areas, and more. Even properties that wouldn’t necessarily be thought of as appropriate for short-term rental are being converted for short-term use, and are performing well.
For instance, the owner of a fourplex in the Lake Tahoe area might be able to rent each unit out to locals for $1,000 per month, whereas with vacation rentals, each unit can fetch $150-$200 per night. Even factoring in cleaning costs and nights with no occupancy, net income after expenses for short-term rental can be 50% to 100% higher than what would be realized from long-term rental.
As a result, investment property buyers who in the past might have compromised with a smaller vacation home—or a home located in a less attractive area—can instead afford to splurge on incredibly attractive homes with larger mortgages, and still have the opportunity to enjoy staying in their property some of the year.
Where Should You Purchase a Vacation Rental Property?
If you are contemplating the purchase of a Vacation Rental property, location is a prime consideration. Demand is strongest in highly populated cities that attract plenty of tourists and are homes for major companies and universities. Rentals in these cities benefit from their ability to attract both business and recreational travelers and demand is especially high near convention centers, sports stadiums and major shopping districts.
At present, the top US Vacation Rental property markets are Los Angeles, New York City, San Francisco, San Diego, Miami and Austin, but there are also plenty of secondary cities supporting robust Vacation Rental property returns. The Mashvisor website provides Vacation Rental property occupancy rates and rental rates for many cities.
With Vacation Rental property occupancy rates estimated at 55%, Los Angeles is the country’s top Vacation Rental property market. The strength of the LA market reflects the city’s status as a top tourist destination. LA set a tourism record for its 6th consecutive year in 2016 with more than 47 million visitors. Tourists come to shop on Rodeo Drive, tour Beverly Hills and the Hollywood Walk of Fame, and visit Universal Studios and Disneyland.
Another consideration for Vacation Rental property owners is pricing short-term rentals. Vacation Rental properties compete directly with hotels, especially in larger cities, and almost always charge less while still making a respectable profit. In markets where hotel occupancy rates are high such as Los Angeles, San Francisco and New York City, Vacation Rental properties also have high occupancy rates and can price competitively. In high demand markets, price is less important than reviews in determining occupancy rates.
Guest reviews are the single most important factor affecting Vacation Rental property occupancy rates. In San Francisco, where occupancy rates average 44%, the number of guest reviews has a 27% impact on occupancy rates, according to Mashvisor. Each additional review resulted in a 0.3% increase in occupancy rates. In San Jose, the number of reviews had a 34% impact on occupancy rates, with each additional review boosting occupancy rates by 0.5%.
Given the importance of ratings, how can Vacation Rental property owners encourage guests to leave reviews? One approach is to post reviews of your guests as soon as the option becomes available. This increases the odds that guests will return the favor by writing reviews. Another strategy involves being pro-active in soliciting reviews. This begins with sending guests a thank-you note after checkout along with a request for a review, sending an additional reminder two weeks later, and following up with a final request before the review option expires (i.e. 30 days after checkout).
Setting up a Vacation Rental property requires time and attention to detail. Plan on allocating several hours per week for managing reservations, responding to inquiries and making sure the property is ready for guest arrivals. Services such as Pillow can help you manage the property and Rented.com can help you find a property manager. Owners can further reduce workload and expenses by selling weeks to a property management company. On-line businesses such as Guesty and Handy can be hired to provide cleaning services. Owners who work full-time or travel frequently may also want to invest in Lockitron, which can lock and unlock doors via a smart phone app. Lockitron also allows owners to add or delete guests or give guests access for a limited time.
The Pros of Renting Vacation Rental Property
The success of Vacation Rental property has many real estate investors considering the purchase of properties that can be listed as short-term rentals. A major appeal of Vacation Rental property models is commissions much lower than traditional rentals. Vacation Rental property typically charges property owners 3% commissions and guests 6-12% fees.
Another factor that makes the Vacation Rental property concept appealing is reduced risk for property owners. Guests are rated on the Vacation Rental property and properties typically suffer less wear and tear due to shorter-term stays. The principal attraction of the Vacation Rental property model, however, is opportunities for outsized returns. Cash returns often exceed 40%. According to Los Angeles Alliance for a New Economy (LAANE), a LA real estate investor earns more renting a property as a Vacation Rental property for 83 nights per year than could be earned on a traditional rental for an entire year.
The Cons of Owning a Vacation Rental Property
A major challenge to successful Vacation Rental properties is unhappy neighbors so plan to communicate regularly with your neighbors and make sure their privacy is respected. Choose guests carefully, designate parking areas and make sure guests understand HOA rules regarding pools, gyms and other shared amenities.
Unanticipated costs are another challenge. For example, many cities tax short-term rentals. This tax, known as the transient occupancy tax (TOT), varies by city. Los Angeles imposes a 14% transient occupancy tax based on the listing price for stays less than 30 nights.
The biggest obstacle for Vacation Rental property owners is regulations. Some cities impose minimum rental periods or set limits on the number of days per month or per year that the property can be rented. There are also city zoning ordinances that limit short-term rentals to specific neighborhoods, prohibit short-term rental homes near other short-term rentals, or limit the number of occupants.
For property owners located near major tourist areas, Vacation Rental property can provide an attractive return on investment with the added benefit of less risk and expense than a full-time rental. However, like any other real estate investment, success depends on careful planning, due diligence and effective execution.