Why Should You Invest in Vacation Rentals: A Comprehensive Guide to Luxury Real Estate
When deciding on the right real estate investments, don't pass up an opportunity from the luxury vacation rental industry.
Why should you invest in vacation rentals?
This sector enjoys total revenue increases every year, with the domestic market expecting to reach $20 billion by the year 2025. Worldwide, this industry is surging past the $100 billion mark, reiterating the demand for U.S. vacation rentals from tourists.
Currently, there are approximately 62 million vacation home renters in the U.S. alone. About 9 million homeowners own second homes, as well; the rental industry also presents a lucrative opportunity for owners who've inherited luxury properties and estates.
Scottsdale, in particular, offers both investors and short-term renters the benefits of an in-demand location with amenities to match. From great weather year-round to cultural epicenters, Scottsdale attracts city tourists, business professionals, and investors alike.
If you own luxury property in Arizona or want to scale your luxury rental property portfolio, start with this comprehensive guide.
Why Should You Invest In Vacation Rentals For Appreciation?
Appreciation rate analysis can help you understand the value of your rental and its possibilities for the future. A high-quality rental property can help the vacation rental appreciate even more in value.
This rate also speaks to the importance of purchasing luxury rental real estate in the right location.
Property upgrades, neighborhood amenities, and surrounding property values contribute positively to appreciation value. Remember this fact if you're considering selling your real estate portfolio in the future.
As appreciation rates rise, so do your net worth and equity.
Remember to follow market rate fluctuations and the local economy to predict future values. Investing in the right upgrades will also increase the value (and appreciation rate) of your property.
Why Every Investor Needs Solid Goals
The first step any investor should take is to define their goals for investing. This stage will lead you to the right investment strategies.
Assume you're starting with a clean slate and you want to buy your first luxury vacation rental.
Ask yourself the following questions:
What are your goals for vacation rental income?
Who is your ideal rental tenant?
What services do you need to achieve your income goals?
How much capital do you need?
What are your financing options for real estate?
What would be your expenses for the property?
Think of this step as a business plan. You would need to present an informed plan if you're applying for loans from a bank. You would also need a detailed plan if you're planning on partnering with a person or group to achieve your goals.
It helps to discuss your goals with a real estate professional. An initial consultation with a luxury rental investment company can help you clarify your goals, from setting quarterly revenue goals to portfolio scaling.
Outline all of your needs before your first consultation. A real estate agent specializing in luxury properties will help you select a property with the highest income potential. They'll also oversee any necessary construction to ensure the highest market value.
Strategizing For Short and Long-term Goals
Even a solo investor can benefit from creating a detailed business plan for investing. This part is crucial if you want to make a full-time career out of investing. You can also file paperwork for an LLC or another incorporation model as your portfolio grows.
Next, clarify both short and long-term goals for your luxury rental property. For example, the eventual selling of the property would be a long-term goal. Thus, you would need to strategize steps to getting there.
The last point reiterates the importance of increasing property values.
Thus, you would need to add a property maintenance protocol to your short-term rental, including periodic upgrades. Studies show that renters prefer kitchen and bathroom remodeling above all other remodeling upgrades. Think about the tenant profile you're marketing to when deciding on these upgrades; we'll expound on this point later.
Upgrades also include curb appeal improvements like fresh landscaping, driveway construction, exterior painting, sidewalk repair, and porch design; you should also invest in backyard landscaping as needed. Since you're marketing to vacationers, consider installing a luxury pool, jacuzzi, sauna, and pergola; Scottsdale is known for its hot summers, thus, a refreshing pool is often expected of guests paying for luxury short-term rentals.
At this stage, you'll likely need a property manager to step in to oversee all maintenance and upgrade projects.
Ideally, you should start working with a property management company from the beginning. As soon as you purchase your first luxury rental, a property manager can fill your vacancy so that you can start generating vacation rental income quickly; this is an example of a short-term goal.
You'll need consistent rental income to show to potential buyers who want to retain the short-term rental model.
Other short-term goals for vacation rentals include:
Streamlining rental transactions
Short-term property marketing
Tenant procurement
Repairs and upgrades
Property maintenance
A property management company can handle the above tasks and more. Talk to a property manager about your goals and include associated expenses in your real estate business plan. Steady vacation rental income will pay for these necessities, and the right pricing strategy will ensure higher profits.
Nailing the Right Pricing Strategy
Smart pricing strategies are necessary for achieving both short and long-term goals. However, you must market your luxury vacation rental with the right listing price. Renters often filter their vacation rental searches by price.
First, research the going market rate for luxury vacation rentals in the Scottsdale area where the rental is located. Keep an eye out for any market changes; this determines when you're in a renters market versus a landlord market.
Research any luxury rental prices in your area. You can find this information on short-term rental listing sites.
When researching these prices, take note of the following data:
Property type
Square footage of the rental
number of bedrooms
number of bathrooms
Kitchen size, layout, and amenities
Parking space (driveway, garage, and curb)
Amenities also include proximity to local Scottsdale dining; there's plenty of nightlife in the city, including award-winning bars and bistros. Walking distance (or short drives) to grocery stores, boutiques, and movie theaters is another plus. The city is also packed with museums, recreation, and events.
A pool remodel can also increase the value (and rental price) of your luxury property. You may want to install a new deck to allow for more outdoor entertaining.
If you're renting out a property with three or more bedrooms, expect large families and parties who want to entertain; a fully-equipped outdoor kitchen can also increase the price of your property while peaking interest in potential renters.
Peak Versus Shoulder Seasons
Since you're marketing short-term rentals, you must understand Scottsdale's peak vacation season windows. During this window, you can increase prices if the market allows it.
Remember, Scottsdale is known for its high summer temperatures. Thus, the city is most popular for visitors from fall to spring; November through February are the busiest vacation months in Scottsdale. Many visitors from colder states enjoy getting away to Scottsdale for a warm winter away from the snow.
Off-season windows are the hottest months in Scottsdale. The peak season slows down in Spring, but shoulder seasons pick up during summer. Your shoulder season strategy should reflect demand for the area; thus, you should price your luxury rentals lower to maintain consistent rental income.
Scottsdale still sees summer tourism, but it's noticeably lower because of higher temperatures. During this time, visitors are typically drawn to the area for events, festivals, and business reasons. Put together a calendar of events to increase your chances of consistent shoulder season bookings.
You can always offer discounts and coupons through partners to attract more guests during shoulder seasons.
The Tax Benefits of Investing In Property
Tax benefits for rental units are similar to primary residences.
For example, if you bought your property with a mortgage, you're entitled to associated tax deductions. Since you also have to pay property taxes on luxury vacation rentals, you would also qualify for any deductions associated with such tax obligations.
You can also receive tax reductions after claiming your rental income. Insurance payments are also eligible for tax breaks, including premiums.
However, it's important to note that how you rent out your property has an impact on your tax deduction eligibility. If you want to receive deductions, you must rent out the property for a certain number of days before you can claim. Thus, it's important to fill those vacancies as much as possible.
You must understand vacation rental tax codes if you want to generate income from this space and grow your real estate portfolio moving forward. Thus, you'll need an experienced certified public accountant (CPA) who understands these tax codes inside and out. Tax codes are also defined by the state, so you'll need a solid understanding of Arizona's real estate laws and tax codes.
The above points also echo the importance of working with a real estate agent, firm, or property management company from the beginning. Boutique management firms are another good option for luxury vacation rentals; they offer a full-service suite that includes rental property accounting.
Strategies For Rent Collection
The above discussion reiterates the importance of a well-designed rent collection system. You must continue to generate vacation rental income to stay afloat.
Remember, you're responsible for the following expenses:
Real estate taxes (and property taxes)
Associated rental property taxes
Mortgage payments and other financial loans
Operating expenses
Operating expenses include an umbrella of necessary services.
These tasks include:
Application processing
Tenant procurement services
Background checks
Property marketing strategies
Property maintenance
Accounting services
You're also responsible for any associated property management fees if you work with a dedicated service. You'll soon realize the necessity of this investment given the magnitude of tasks required to operate a luxury vacation rental portfolio.
Your property management company will handle all aspects of rent collection; this task falls under the property accounting umbrella. You'll be grateful for a sound rent collection strategy once tax season rolls around.
You also don't have to worry about paper checks getting lost in the mail, sent to the wrong landlord address, or lingering on someone's desk. While you should still accept paper checks to accommodate all tenant preferences, today's rent collection is streamlined through digital platforms.
This is another reason to handle rent collection through a property manager. Property management companies provide online tenant portals that allow tenants to pay their rent online using an accepted form of digital payment; they can pay with debit, credit, account numbers, and other paperless methods.
Digital rent collection is much easier to track than traditional methods. Plus, all parties have a digital "paper trail" for their accounting and tax files.
As a landlord, you don't have to worry about setting up an online portal. An experienced property marketing professional can set up a website and payment portal for you complete with card processing features. Rent payment transactions and notices may also be sent to tenants' email addresses.
Steady and reliable cash flow is imperative for paying expenses on time, staying in compliance with the state, and financing your portfolio.
Financing Your Luxury Rental Property (and Portfolio)
Leveraging the right rent collection systems leads right to the next point.
You must have a smart financing strategy from the beginning. Before embarking on this journey, ensure you're in good credit standing; you may have to take some time to raise your credit score if needed.
Next, look into financing options, especially real estate loans. There are traditional mortgage loans; the better your credit, the lower your interest rates. You may also enjoy no payments for the first few months, allowing you even more time to fine-tune your rental property strategy.
There are also various types of rental property loans.
When applying for these loans, you may notice higher interest rates with larger down payment requirements. Look for amortized loans that maintain the same monthly loan payment; this will help you generate and maintain rental income more easily.
The reason why you'll find higher rates amongst these loans is because lenders view rental property as a higher-risk investment than a traditional primary residence. It helps to have a rental real estate business plan with clear goals, budgets, and forecasts to show to financial institutions.
As far as interest rates are concerned, you can claim them as a tax deduction. The larger down payment amount actually lowers the loan-to-value (LTV) ratio; this lowers the mortgage debt obligation, increasing cash flow to your portfolio.
Rental property loan institutions look at debt-to-income (DTI) ratios when approving applications. Generally, the maximum DTI percentage is 36%. Always track these requirements as terms are subject to change.
These loans serve as a good reminder about cash reserves. You should have enough funds in your reserve to pay for the first six months of your rental property loan payments.
Make sure you're looking at the right property types when applying for loans. Single-family, condominiums, townhomes, and multifamily homes are eligible for loans. As a luxury rental property investor, you have a good opportunity here with luxury condo and multifamily home financing.
Next, choose a financial lending institution.
Conventional Loans
The first institution that comes to mind is your local bank.
Here, you'll find conventional-type loans. These loans are also called conforming loans. You can also receive these types of loans through mortgage brokers.
These loans require you to have higher credit scores. However, if you apply through the Federal Housing Administration, you'll find that FHA-backed loans have slightly lower credit score requirements.
Current rental property income can help you pay the required down payment amounts for these loans.
Investors often seek FHA loans when financing new multifamily homes or the construction of new multifamily properties. You can also use FHA-backed loans to renovate properties in your real estate portfolio.
Portfolio and Private Loans
As you move forward in your investing, look more into the benefits of portfolio loans.
These loans can be specially customized to fit your investing needs. You may even qualify for a discount on multiple loans. Look into this loan type if you own multiple properties or want to purchase multiple rental properties at once.
Another option for financing multiple luxury rental properties is the blanket loan type. You can finance multiple properties under one loan. Similar to portfolio loans, blanket loans may also be customized to the investor's needs, so you'll need to find the right lender.
These loans may be crossed-collateralized, as well. This means a rental property may serve as collateral to pay for a new rental property. You may also refinance your rental portfolio with a customized blanket loan.
As you become a more experienced investor, you may want to look into the benefits of private loans. These loans are unique because they're provided by other real estate investors. Together, investors and other relevant business professionals pool their resources to provide loans to rental property investors.
Luxury rental property investors enjoy the benefits of having a lender who truly knows the industry inside and out. Thus, you're more likely to receive a better-customized loan designed to optimize cash flow.
Depending on the growth of your portfolio, some investor lenders may even accept a small equity in your business (including future properties) in exchange for lower interest rates and service fees.
Seller financing is another option.
Instead of dealing with a financial institution, you're dealing directly with the seller. The seller acts as the lender within this model. Sellers also have the liberty of customizing payment terms; for example, if your portfolio is generating a decent amount of rental income, a seller may be willing to accept monthly payments until the loan is cleared.
When tax season nears, you'll find that seller financing is a good alternative to filing 1031 tax-deferred exchange. You can spread your capital gains tax payments throughout the lifespan of the loan.
Home Equity
If you need an alternative to financing a down payment, you can apply for a home equity line of credit, also known as HELOC loan. This loan type allows you to convert funds from another rental property into a down payment for a future purchase.
The HELOC strategy is a type of "waterfall" technique that experienced real estate investors use to leverage cash flow and equity build-up from their portfolios for future properties.
As an investor, you can pull from your HELOC line any time for resources. It also gives you the freedom to pay loans via monthly payments.
Measuring the Performance Of Your Vacation Rentals
A high-performing luxury rental portfolio puts you in a better position for lower interest rates, lower fees, more discounts, and desirable payment terms.
Therefore, you need financial metrics that help you forecast the future of your portfolio. Metrics allow you to analyze cash flow from multiple angles. Reporting this work shows you're a lower lending risk to financial institutions and private lenders.
This process is also called due diligence.
Start tracking your capitalization rate; this metric is known as a cap rate. It lets you compare a property's NOI, which is "net operating income," to the property's listing pricing to gauge future returns on the property. You can also compare the ROI metric to the property's appraised value to assess forecasts.
You'll notice that cap rates vary depending on the market. Thus, you should only apply this metric calculation to analyze properties within the same market.
Next is the cash-on-cash metric. This calculation measures any pre-taxed cash returned as a profit against the cash amount invested into a property. You would also factor in your mortgage debt service amount while cap rates exclude this number.
Loan-to-value metrics are extremely important to any luxury rental property investor. Your LTV ratio is the result of measuring your mortgage loan amount to the rental property value. Make sure your LTV ratio stays within the 75% range.
Next is the debt service coverage ratio. This metric analyzes the NOI available for a mortgage loan payment against the overall mortgage debt owed.
This ratio reveals the remaining cash on hand after all property expenses and mortgage loans have been paid on a vacation rental.
The Ideal Tenant For Luxury Vacation Rentals
Excellent financial performance metrics speak to the importance of a sound tenant procurement strategy. It's one of the most important investment strategies. Responsible short-term rental tenants yield big return-on-investment ROI numbers.
You should build your entire property marketing strategy around attracting the ideal tenant.
Thus, you must start this process with an ideal tenant profile. This profile is constructed from a list of demographics; you can even give your "tenant" a unique name, with their own job, place of residence, and goals for visiting Scottsdale.
Go back to your original goals for your investing. Pin-point the right pricing strategy that aligns with these goals and develop an "ideal tenant" profile to help you achieve your original objectives.
For example, if you want to attract tenants who can easily (and gladly) pay $1,000 to $3,000 a night for a luxurious short-term rental, you must target the right demographic profile in your marketing campaign. Therefore, you would include a high six-figure income to a seven-figure income individual in your ideal tenant profile.
Next, research likely occupations for this individual. They may work in the tech sector, health industry, law, real estate development, or another high-salary industry.
Your next step is to perform market research to hone in on this target's wants, needs, and expectations for luxury rentals. If you're trying to attract out-of-state individuals to Scottsdale, what amenities or experiences would they expect or seek out?
Does this person have kids? Are they looking for a luxurious family getaway in the desert? Are they looking to vacation alone, bring a partner, or book a getaway with top-earning friends?
Digital Marketing For Luxury Vacation Rentals
Consider the above points when crafting content marketing strategies to attract these targets. Top 10 lists of luxurious things to do in Scottdale is just one example; you could create a "listicle" with the city's best spas, nightlife venues, restaurants, and theaters.
People on vacation want an experience. They want to relax in Scottsdale or maybe go on a little adventure. Your rental (and marketing strategy) must reflect these demands.
Unlike hotels, vacation rentals let guests stay for even longer, giving them a chance to create a home away from home. Guests may stay for a month or more; is the property equipped, decorated, and upgraded to facilitate a short-term stay?
Marketing a luxury vacation rental successfully is a big task. You'll soon discover the value of an experienced property manager who knows how to reach the ideal tenant through digital strategy, traditional marketing methods, and lease management.
Digital strategy includes:
Posting listings on short-term rental sites
Social media marketing (Instagram, Facebook, etc.)
Email marketing
Website design and marketing
Google search advertising
3D real estate tours on YouTube
It's important to think about how your ideal tenant searches for luxury vacation rentals.
You also have to capture prospective renters who aren't currently looking for short-term rentals and give them a reason to book. This process is also called the buyer's (or renter's) journey; it encourages marketers to attract ideal tenants at any stage.
Digital strategy is necessary for attracting interested demographics and those with a high potential for interest.
Traditional Real Estate Marketing
As your ideal tenant moves toward the decision-making stage, you'll need a traditional marketing strategy ready.
These marketing strategies include:
Vacation rental staging
Real estate rental photos
Rental viewings
Digital and traditional marketing go hand-in-hand.
For example, you can't produce an online video tour without excellent home staging; this means you also need great on-site property maintenance. A property manager will oversee all necessary repairs and upgrades.
The Application Process
You don't want to lose your ideal tenant to a confusing, cumbersome application process. This part is also part of the marketing process.
Make sure your rental application is easily accessible in digital format. Again, this is where a property manager comes in. They're skilled in creating applications that fit the ideal tenant profile.
Applications should reveal a clearer picture of the prospective tenant's ability to pay, past rental behavior, and occupation. You should also accept security deposits appropriate for a luxury space.
Luxury Vacation Rental Lease Management
The last point leads right into the value of excellent lease management. This can make or break your rental property income. You don't want guests breaking their leases, leaving the property with no income but expenses to pay.
Never write a lease on your own. Work with a property manager or another real estate professional with legal contacts. These contracts should be developed and reviewed by a real estate lawyer experienced in the rental property space.
The contract should outline the terms of the short-term lease, including the monthly (or daily) rent amount, maintenance protocols, payment protocols, and rules for behavior. Since you're renting furnished accommodations, you may need a clause about property damage; any damages would come out of the guest's security deposit.
You also need legal clauses about breaking a lease. If you want to avoid any potential (and costly) legal fees, consider including an arbitration clause. All contract clauses must reflect the vacation rental laws of Arizona; thus, a lawyer is essential.
If you want to capture recurring tenants, consider lease negotiation tactics. Depending on the case, you can offer discounts, extra amenities, or other perks to your best guests.
Staging the Home For Viewings
A property manager will also depersonalize the space, removing any family photos or identifying items so that leads can better imagine themselves in the rental. This is important for facilitating an experience through traditional marketing.
Home staging is necessary for rental viewings. A property manager may also use another traditional method, scent marketing, to encourage ideal tenants to book on the spot.
Digital and traditional techniques also come together to create enticing property listings for short-term rental sites.
Once you've repaired, upgraded, and staged your luxury rental, your next step is to take photos of the property. Take plenty of high-quality photos that showcase interiors and exteriors in the best light.
Think about what your ideal tenant wants to see in a rental listing.
They're visiting Scottsdale on vacation, the weather is pretty warm year-round. If they're visiting during summer shoulder seasons, they can definitely expect high temperatures. You should highlight that new backyard pool in the rental listings. Take both day and nighttime shots to illustrate more potential experiences.
Don't miss an opportunity to market the potential of outdoor entertaining.
Your luxury rental may require the following upgrades:
New pool and porch decks
Outdoor furniture
Backyard kitchen and grill
Outdoor lighting
Lighted pathways
Pergolas
Waterfalls and fountains
Pool lights
Outdoor furniture brings up an important point about guest expectations. Since you're promoting a luxury rental, guests expect furnished accommodations. This is an important expense and marketing asset.
Invest in the following furnishings and upgrades:
Fresh linens and bedding
New flooring and rugs
Wall treatments
Wall art and decor
All furnished rooms
Fully-equipped kitchen
New showers and bathroom upgrades
TVs and home entertainment
In-home movie theater
Feature the above amenities in your rental listings to entice ideal tenant profiles to inquire. The accommodations must reflect the listing price.
You may also include welcome baskets for guests complete with sunglasses, sunscreen, bottled water, snacks, and fitness gadgets. The last item brings up another important point. You may want to include a home gym in your luxury rental for the wellness-motivated tenant.
Other Ways to Generate Vacation Rental Income
There are other ways to market luxury vacation rentals.
Unlike other short-term rentals, you can promote your luxury rental as a wellness or business retreat, appealing to corporate clients. With enough on-site amenities, you can facilitate corporate retreat experiences complete with platforms for event speakers, catering accommodations, live entertainment, and large group activities.
In these cases, you will need another way to market your rental online. You're essentially marketing it as a venue. You would need to partner with a company that promotes vacation rentals as retreat venues.
This route may require additional business licensing. Clear everything with a real estate professional first before moving ahead.
Weddings are another selling point. Talk to a real estate professional about marketing your luxury rental as a wedding or wedding reception venue. Scottsdale is the perfect location for desert weddings in fall or winter.
Have a Dependable Property Maintenance Strategy
With so many income-generating possibilities for luxury rentals, you need a reliable property maintenance solution to match.
You must invest in a full-service suite that responds promptly to service requests. This means your guests need access to either an online maintenance request portal or a direct phone number. You also need a protocol in place for emergency maintenance situations.
A dedicated property manager is always on hand to respond to guests' inquiries and emergencies.
One of the roles of a property manager is to forge strong networks with local plumbers, roofers, general contractors, HVAC technicians, and electricians to facilitate repairs, installs, and upgrades quickly and safely.
Property managers may also work with interior decorators to furnish your rental for optimal vacation experiences. Since you're renting a luxury property, you'll also need a pool maintenance contact, landscape designer, and lighting installation expert. An outdoor kitchen contractor is also necessary for any routine maintenance or upgrades.
Remember to include a home cleaning service in your property maintenance strategy. Your property manager will network with a top-rated cleaning service to conduct regular cleaning, disinfecting, organizing, and trash removal. This adds to the luxury accommodation experience.
If your guests prefer eco-friendly conditions, you can work with a cleaning company that only uses environmentally friendly products.
This is an important point to remember when marketing your vacation rental. Scottsdale is an ideal location for solar panels and other solar-powered technology. Solar panels noticeably reduce energy costs; plus, you may get tax breaks from your city for installing them.
Luxury Vacation Rental Portfolio Management
The above investment strategies help to grow and scale a lucrative luxury rental portfolio. You can't do this without sound portfolio management.
Portfolio management strategizes with the points above to manage a portfolio that generates consistent income.
This process also includes selling off rental properties when necessary. This situation would arise if metrics reveal that a particular property would yield a higher profit from a sale than from rental income over time. This point echoes the importance of pricing strategy in portfolio management.
As you add more properties to your portfolio, you'll need more robust property management services.
A team of property managers will be responsible for maintaining properties during (and in between) vacancies. Every rental property investor needs a good strategy for transitioning guests out of the rental and introducing new guests. You don't want to prolong this process since time is money but you don't want to sacrifice quality property maintenance.
Always set the highest standards for your luxury rentals. This means investing in higher-quality services. Invest in the latest kitchen upgrades like state-of-the-art refrigerators, ovens, ice cream makers, and other high-end kitchen appliances.
A luxurious bathroom is a major draw for prospective guests who want to relax on their Scottsdale vacation. Invest in high-end tubs, shower doors, vanities, and windows. Consider installing saunas and jacuzzis in bathrooms to facilitate spa days "at home."
Consult a luxury real estate professional for advice on installing the latest upgrades to your rental portfolio. These decisions will also increase the property appraisal value which will increase listing prices should you decide to sell.
How can a realtor help an investor like you?
If you want to sell your portfolio or select properties, a real estate professional can help you maximize profit by selling your rentals to the right buyer for the highest price. Similar to attracting rental guests, realtors use targeted strategies to capture and convert rental property buyers.
Discover the Benefits of Vacation Rentals For Income Generation
Why should you invest in vacation rentals?
The luxury travel market isn't slowing down. Contribute to Scottsdale's own tourist market by renting out luxurious vacation rentals to visitors from around the world.
Remember to start strong with professionally informed investment strategies. Consult the advice of Scottsdale's top real estate professionals and bring on an experienced property management team to oversee the success of your luxury rental portfolio.
The team at Luxury Cashflow is passionate about creating strategies designed to sell large-scale properties and generate rental income quickly and consistently. Since the inception of the company, Luxury Cashflow has helped its clients acquire over $40 million in real estate assets.
Book now to discover the possibilities of a luxury real estate portfolio.