Vacation rental investment properties have been on the rise in the last few years. Since the pandemic, demand for vacation homes and nearby get-aways have increased as international and domestic flight travel plans were grounded.
With low mortgage rates and the flexibility of remote work, it’s a perfect moment to join others in the pursuit of owning more than one home. It’s also a great investment opportunity as the demand for vacation rentals soared last summer. Nearby towns and cities are more appealing than hopping on a plane during the pandemic, and road trips are gaining momentum.
Before you can unwind in your new family vacation home, you’ll need to do some work. Even experienced homebuyers or real estate investors need to consider how another city or state’s buying process may vary, so you’ll need to lean on local professionals’ expertise. Here are some tips to help you find the right real estate agent, title agent, and home inspector to make your second home purchase a success.
Second Homes in Vacation Towns Are On-Trend
For eight consecutive months, demand for second homes saw a growth rate of 80% or higher. That’s a higher growth rate than the market for primary residences.
Redfin also reported a 19% rise, year-over-year, in the price of homes in seasonal towns. These towns were defined by a higher than 30% rate of homes being for seasonal or recreational use. Redfin’s top neighborhoods of 2021 point to this trend as vacation towns see big influxes of demand for real estate.
Families who typically travel abroad on extended vacations are redirecting their savings into long-term and COVID-friendly options – a second home.
Research Market Profitability and Popularity
Whether you’re buying a second home for pleasure, investment, or both, you’ll want to avoid any unpleasant property surprises by researching and understanding the vacation spot’s market.
Before reaching out to a real estate agent, take a little time to:
- Decide on the best area
- Research that area’s regulations on short-term and long-term rentals
- Browse listings in that market to get an idea of what’s available
- Set a feasible budget based on wants and needs
- Understand the math behind rental potential
Picking the right place
You might think the big cities are the place to invest in as they are likely to bring in consistent bookings no matter the season, but this hasn’t been the case as of late. According to AirDNA, data has shown that vacation rental bookings in rural areas are growing during the pandemic faster than in urban markets.
For most families, the biggest items on their vacation wish list include:
- Havens outside of the big cities with plenty of space
- A driving distance of four hours or less
- Move-in ready homes suitable for a multi-week or multi-month stay
Some cities have strict rules on renting out a property short-term and even have outright bans on Airbnb and other services that simplify renting out a property for additional income. Other popular areas for vacationing, like Florida and Arizona, are inundated with homeowners associations that carry restrictions on short-term rentals.
Setting a budget for a vacation home
Competition between locals and out-of-towners is pushing the sale price closer to the list price in highly desirable areas. Beyond the sticker shock of the current list pricing, some other expenses to consider include:
- Maintenance and upkeep
- Property taxes
- Homeowner’s insurance
- Ongoing bills like utilities, cable, trash collection, etc.
One way to help offset the new expenses is to rent out the property when your family doesn’t plan to use it. Once you’ve tallied the costs, determining the potential income will take a little more work. Visit online vacation rental sites like VRBO, HomeAway, and Airbnb to get an idea of the cost of similar homes in the area. A local real estate agent can also help you better understand the high, mid, and low seasons and budget for seasonal fluctuations.
Find Local Real Estate Agents and Title Professionals
Once you’ve settled on a market, you’ll need to find the right professionals to safeguard your investment. The local professionals will understand regional and state-specific nuances that otherwise might be missed, so use their knowledge to your advantage.
Start With Your Real Estate Agent
Start with your network and see if anyone has purchased a home in the same market as you. If so, they might know a good agent to use.
If that fails, start searching online and check the agent’s website, social media, and more to use your best judgment. An active presence online doesn’t always signify experience, but reading their bio can offer useful insight.
Some real estate agents will want a buyer to have a pre-approval letter before beginning the house hunt. Getting this letter demonstrates to a real estate agent that you’re a serious buyer and will help you attract a higher caliber of professionals. It will also help you stick to the right price range.
After you’ve done some research, narrow your choices down to three candidates and interview them. Find someone who makes you feel comfortable, matches your preferred communication methods (texts or phone calls), accommodates your availability, and demonstrates they understand your budget and needs.
Ask Your Title Agent about a Municipal Lien Search
Title insurance is one of the many closing costs associated with a home purchase, but many buyers don’t know much about the professionals conducting these important property searches.
Usually, your real estate agent will be the one to refer a title company. If you’re paying for the title search, you can decide to work with whichever company you prefer. A knowledgeable title agent can help you navigate the title search process and create a policy that will protect your interests as an owner. The search includes property taxes, liens, and other encumbrances that affect your rights to own and use the property as you see fit. Much of the work they do is resolving title defects behind the scenes.
Beyond the standard title search, a municipal lien search will show unrecorded debts that could become a lien held against the property, so don’t neglect to request this as part of your contract with the seller. Any unpaid debts or unrecorded liens uncovered in the municipal lien search can be written into your title commitment.
Not every state is the same – Florida, a huge vacation rental market, allows local municipalities to lien on a property that has overdue utility bills or code violations. These overdue balances can reach thousands of dollars before they are ever recorded by the local municipality and become the new owner’s responsibility, so conducting this search is crucial.
Pennsylvania requires that a dye test on the water that enters the sewer system must be performed before a property can be sold or transferred in ownership. The best way to uncover this technicality? By working with a title agent that knows this process well.
Interested in learning more? Our upcoming webinar will take a deeper dive into uncovering unrecorded liens in every real estate transaction. Click here to register.
Beware of HOAs
Homeowners’ associations may also present some barriers to using the home as you wish. While HOAs are uncommon in some states, many well-known places for vacation rentals like Florida, Texas, Arizona, and California have many HOAs. In addition to the title search and municipal lien search, the estoppel report or HOA resale package will provide you with important information on whether you can rent the property short-term.
Don’t Skip the Home Inspection
A home inspection is also necessary if you’re buying in a new place, as the inspectors will help you understand the home’s structure and its long-term maintenance based on their training related to such matters. It’s possible to let the home inspector do their work and send you the final report with photos, detailed notes, and recommendations, but it’s better to be there in person to ask questions about the home as they go along.
If you’re unable to attend the inspection in person, ask your real estate agent if they can record the process on video or live stream it for you.
The Washington Post interviewed several regretful people who sped through the purchase of a home, skipping home inspections, and more so that they wouldn’t be outbid. After making their big purchase, one homeowner discovered significant issues in the home’s roof related to an infestation of a local species of bird, which ended up costing thousands of dollars.
Experienced locals understand the uniqueness of the environment, the nuances of construction standards, and how to mitigate issues before they arise – not to mention they are often licensed in their respective states and understand specifics of the state’s properties. Had that homeowner gone through with an inspection, they might have learned about this problematic bird.
Doing your research, working with locals, and checking off all the boxes in the due diligence process is a winning model for ownership of more than one home. As we approach the upcoming vacation season, now is the time to think about the investment possibilities and get started on the research.