How to Buy a Positive Cash Flow Vacation Rental Home

positive cash flow vacation rental

By The Mashvisor Team

The key to succeeding in your Airbnb investment is to generate positive cash flow. The higher the cash flow from your vacation rental home is, the more returns you will enjoy.

Earning a positive cash flow from your vacation rental home isn’t a given. You must invest in the right property to start with. Besides, there are other steps you need to follow to achieve better returns from your Airbnb investment. In today’s article, we’ll be looking at these steps.

Invest in the Right Location

Before you even start looking for a profitable investment property, you need to find the ideal location for a vacation rental investment. Location is one of the core pillars of real estate investing. Your location is important since it’s the only constant thing with your investment. You can change your property’s features and amenities, but not your location. This is why you need to pay special attention to this step.

Every location has a varying Airbnb occupancy rate, daily rate, monthly income, and property expenses. All these affect your cash flow. You want to invest in an area where the income potential is high enough to allow you to sort the monthly expenses and still have a good profit.

Don’t forget to check the location’s short-term rental laws and regulations. Since vacation rentals started becoming increasingly popular, many local and state governments stepped in to regulate the sector. Some banned the trade outright, while others introduced strict regulations and dire consequences for investors who failed to adhere to them.

Check with your local authorities to confirm what you’re required to comply with. In most cases, you’ll have to obtain an operating license and pay special taxes for the trade. Ensure the regulations are friendly for investors. Your goal should be to avoid running into legal trouble in the future.

Carry Out a Comprehensive Market Analysis

Once you’ve gone through the previous step well, you might end up with two or three potential investment locations. It’s now time to gain a deeper insight into each location and closely analyze the markets and demands.

With traditional rentals, rental demand may not be a major concern. Vacation rentals are a whole different ball game. You must check the location’s occupancy rate data. A high occupancy rate means the demand for vacation rentals is enough to make your investment profitable.

You can ask yourself these questions to guide you through the vacation rental market analysis:

  • Would you like to stay in this area during a vacation yourself?
  • Are there any tourist attractions close?
  • Is the location affected by seasonality?
  • Is the vacation rental demand enough to be considered sustainable?

In addition to these considerations, you need to look at what property types are in demand in the local market. You can do this by looking at rental comps data. This data will give you an insight into what property types perform well in your market. Rental comps also help you identify a rental price range to calculate the potential cash flow.

Calculate the Expected Cash Flow

Generally, cash flow is simply the difference between your rental income and Airbnb expenses. If the cash flow is zero or negative, then the investment doesn’t make financial sense.

The best way to determine whether the short-term rental investment makes financial sense is by calculating the potential cash flow before investing in the property. You want to have an idea of how much cash flow you should expect should you invest in the vacation home.

From the definition of cash flow, the calculations may look simple from the onset. However, the calculations may become complicated depending on the number of properties in consideration. The goal of carrying out a property cash flow analysis is to eliminate any properties that don’t meet your cash flow expectations.

So, what is a good cash flow?

It depends. No one-size-fits-all answer or magic number represents the ideal return on investment. You should establish what a good cash flow means to you based on your investment and financial goals. Nevertheless, ensure that your cash flow is positive, which means that you are making more than what you are spending on the property.

Choose a Dynamic Pricing Strategy

A common mistake made by vacation rental home investors, especially newbies, is setting one nightly rate for all seasons. You don’t have to charge the same rate all year round. Unlike traditional rentals, the best thing about short-term rentals is that they offer you flexibility in pricing.

Your vacation home prices should account for factors such as seasons, major events, occupancy rates, competitor prices, hotel prices, and weekends. You can review and update your prices accordingly based on these factors.

For example, you can adjust your rates upwards during the peak season when the rental market is hot and demand is high. Similarly, lower the rates once the market cools down so that you can attract guests who may not be sure about booking your property.

You can also charge a lower rate than your competitors when starting. This is to increase your bookings. You can then slowly push up the rates once you’ve built a good reputation.

Keep in mind that the goal of a dynamic pricing strategy is to stay competitive in the market and enjoy a high occupancy rate. You can also use rental comps to see what your competitors are charging.

Arrange Your Operations

One main aspect of vacation rental properties that many investors neglect or forget about is property management. Property management tasks include replying to calls and inquiries, handling bookings and guest requests, ensuring guests enjoy their stay, and scheduling maintenance and cleaning after check-out, among many others. As you can see, these tasks can take up a lot of your time and money.

Hiring a professional property management agency can help you boost your cash flow. This is an added expense since you’ll have to pay them a percentage of the rental income, say 10%. However, this investment is worth it since the company is in charge of maintaining a good occupancy rate and setting the best pricing strategy. This is also a perfect way to join the passive income real estate community. 

The other way allowing you to stay in control and not drain your margins is to use Airbnb automation tools. You may automate up to 70% of routine tasks, enjoy instant and human-error-free synchronization between channels, and answer your guests’ requests even when you sleep.

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Final Thoughts

Buying a vacation rental property is one way to earn passive income and build your wealth. However, earning a positive cash flow isn’t guaranteed. You must ensure you invest in the right location, conduct an in-depth market analysis, and work with a strategic pricing plan. Also, you optimize your daily operations to keep the occupancy rate high.

 

Mashvisor is an industry-leading source of residential real estate data and analytics in the US market. They help investors find profitable Airbnb and long-term rental properties quickly and confidently. They’ve turned 3 months of real estate research and analysis into 15 minutes.

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