Financing & Fundraising For Vacation Rental Businesses

Financing & Fundraising For Vacation Rental Businesses

Whether you want to own your own retirement vacation home one day or you want to start a vacation rental business as the market gains traction, you're at the right spot! There is no doubt the vacation rental industry is booming. Let's examine some of the key elements and resources to help you get started on how to finance and fund your vacation rental business.

Top 10 Ideas For Vacation Rental Fundraising

  1. Personal investment
  2. Family Investment
  3. Mortgages
  4. Private Lenders
  5. Crowdfunding
  6. Angel Investor
  7. Venture Capital
  8. Seller Financing
  9. Real Estate Investment Trusts
  10. Bank loans

Investment In Vacation Rentals: Is It Right For You?

A vacation rental property investment can be among the most profitable and safe investments you can make. Owning and operating rental properties can boost your wealth by increasing its appreciation over time, giving you a monthly income stream and tax advantages. Investing in rental properties is an opportunity for all ages and all levels of experience. Statista highlights the tremendous growth of the market with powerful 2021 vacation rental statistics:

  • Vacation Rental revenue is projected to reach US$15,338m in 2021.
  • The revenue growth rate (CAGR 2021-2025) is forecast to be 7.00%, resulting in a market volume of US$20,105m by 2025.
  • The number of users is expected to reach 62.8m by 2025 in the Vacation Rentals segment.
  • User penetration is 15.3% in 2021 and is expected to hit 18.3% by 2025.
  • The average revenue per user (ARPU) is expected to amount to US$299.96.
  • In the Vacation Rentals segment, 79% of total revenue will be generated through online sales by 2025.
  • In global comparison, most revenue will be generated in the United States (US$15,338m in 2021).

Finding The Perfect Property For Your Vacation Rental

Finding a vacation rental requires you to find the right location, which can be a challenge. Consider partnering with a realtor in the area where you are looking if you don't already have one. It is also important for you to perform a geographical competitive analysis comparing the various markets you are considering.

A few other factors to consider:

  • Convenience and accessibility
  • Occupancy rates
  • Current supply and demand in the area
  • Average revenue for rentals in the area
  • Crime rate

Investing In Vacation Rentals: Some Basic Principles

The revenue from a short-term rental property is theoretically higher than that from an alternative long-term rental property, but let's look at the running costs. Is the estimated income sufficient to return a profit or repay a loan? Consider the following variables when determining the full potential of a vacation rental investment:

  • Revenue prospects
  • Costs (maintenance, insurance, fees, etc.
  • Taxes (local or national property taxes, taxes on income, second home tax etc.)
  • Property Management Fees (20%-30% commission)
  • Local Legislation

When you decide whether to invest, you'll also need to calculate your ROI (return on your vacation rental investment).

What You Need To Know About Vacation Rental Financing

In order to invest effectively, you need to have a clearly defined investment thesis (what and why you want to invest), and a clear understanding of what your own investment objectives are. The answer to this question depends mainly on your goals for investing in the vacation rental market.

  • Many investors buy vacation rentals in areas they like so they can use them for their personal use. For them, the primary goal is proximity to a mortgage, flexibility, and the possibility of using rental income to offset its cost.
  • Alternatively, some investors aim to maximize their annual cash flow and cash-on-cash returns. Their primary consideration is the revenue potential of the property, not their personal affinity for the location.

The first step to figuring out where to look for investment opportunities is to understand these factors.

This article is a must-read for anyone trying to get started or who has already identified potential vacation rental opportunities but is unsure how to proceed.

Overview Of Vacation Rental Financing

It's time to conduct your due diligence once you've established your investing concept. Real estate investment is one of the most important financial investments you'll ever make. Millions of dollars may be on the line, so be sure you know exactly what you're getting into.

  1. There is no right or wrong answer here, it's all based on individual preferences and tolerances. Some investors are perfectly fine making large investments with a great deal of upside and risk, whereas others are not. Your key to success is knowing who you are and what your tolerance for risk is.
  2. You need to clearly understand the vacation rental markets in which you are investing in, and the key metrics of the business. For example,
  3. What are the Average Daily Rates?
  4. What are occupancy percentages?
  5. Cost of rentals in the area?
  6. How will seasonality affect monthly and annual revenue?
  7. It is important to stay on top of those key metrics once you have invested in real estate so you can see how things are changing. Property is an investment that requires attention, and the metrics that initially attracted investors may shift over time, so it is imperative to stay current.

Whether you have the funds or not, it’s important to determine the right time to invest in a vacation rental property. You can use the following factors to evaluate the potential return on your investment. 10 Ideas for Financing & Fundraising for Your Vacation Rental Business

10 Ideas For Financing & Fundraising For Your Vacation Rental Business

You have several options for finding funding for your vacation rental investment. Here are a few to consider.

1. Personal investment

A business owner's first investor should always be themselves, either with their own cash or with collateral. By making this commitment, you show investors and bankers that you are committed to the project for a long period.

2. Family Investment

It is money that is loaned by a spouse, a parent, a family member, or a friend. This is called "patient capital" by investors and bankers since the money is repaid as your business profits grow.

It is important to understand the following before borrowing money from family or friends:

  • There is rarely a lot of capital to be found among families and friends
  • There is a possibility that they would like equity in your company
  • You should never compromise your business relationship with your family or friends

3. Mortgages

A mortgage is the most common type of loan to purchase a home. It allows you to borrow money and pay it off over a set period of time. It is important to find a bank or lender who will finance a short-term rental property (not everyone does), and to compare offers: get as many estimates as possible and negotiate the interest rates.

4. Private Lenders

A private lender is an individual or company that represents individuals who trade their capital for interest rates. Purchasing a second home is an excellent opportunity to take advantage of them. While private lenders may have different requirements, they tend to move faster than banks and traditional institutions.

5. Crowdfunding

Otherwise Known as raising money from the “crowd” online, crowdfunding is a fairly new practice for raising small amounts of capital from numerous individuals. Popular real estate crowdfunding sites include Fundrise, Kickstarter, Seedrs, Crowdstreet to name a few.

There are different types of property crowdfunding.

  1. An investment property is what you buy if you want to rent it out. The property is rented out, and the rental income minus fees is split between each investor. The investment is classified as long-term. Ideally, it should generate a steady income stream as well as some capital growth.
  2. Investments in property developments, such as building student or housing flats, are common. You and the other investors each receive a share of the profits once the project is completed. It is a much riskier, short-term investment.

Before investing in property crowdfunding, ensure that you know what type of investment you are making. Inexperienced investors may find it difficult to understand the variety of investment models provided by some crowdfunding websites.

6. Angel Investor

Angel investors are typically wealthy individuals or retired company executives, who invest in business startups for equity in the company. Leaders in their respective fields, they also contribute their knowledge of technical and management disciplines and their experience and network of contacts. Entrepreneurs receive investments between $25,000 and $100,000 from angel investors during the initial stages of their business. Institutional venture capitalists prefer to invest in companies with a $1 million or larger valuation. The tradeoff for their risk is that they may supervise the company's management practices. Often, this involves securing a seat on the board and assuring transparency. Angels prefer to remain under the radar. For more information about angels, you can contact specialized organizations or search for angels on websites.

7. Venture Capital

Professional investors provide venture capital to small businesses and startups for equity in the company. The difference between Venture Capitalists and Angel Investors is that they use investors' money rather than their own. The purpose of venture capital is to provide funds to help companies carry out high-risk but promising projects. Essentially, you are selling some of your equity or ownership of your business. Therefore, Venture Capital firms or individuals look for businesses with high returns and profit. Besides healthy returns on their investments, venture capitalists may also benefit from the sale of shares in the business. Remember, it is important to find investors with relevant business experience and knowledge.

8. Seller Financing

As the name suggests, seller financing is a real estate financing option where the person who is selling the property finances the purchase rather than a bank providing the mortgage. You may find this option convenient in certain situations (for example, if you have a low credit score). The parties involved should consider hiring professional risk mitigators in order to avoid risks.

9. Real Estate Investment Trusts

Real Estate Investment Trusts (REITs) are companies that allow individual investors to buy shares and receive income from real-estate portfolios. You can invest in a REIT or if you’re looking to fund your rental purchase, they also provide mortgages and loans.

10. Bank Loans

The most common source of funding for small and medium-sized businesses is bank loans. There are many advantages that banks offer, whether it's personalization or tailored repayment. Finding a bank that matches your unique needs is a good idea. Banks typically look for companies with excellent credit and a track record of success. You will need a business plan to support your investment as well. Entrepreneurs are often required to provide a personal guarantee when obtaining a start-up loan.

Consider Your Pros And Cons Of Investing In Vacation Rentals:

There are several advantages to owning a vacation rental property.. Here are a few of the benefits of vacation rental investments:

Pros

Passive Income A vacation rental investment has the primary benefit of generating more income. The average Airbnb host earns $900 per month. You can multiply the income from vacation rental investments exponentially if you invest in the most populated regions.

Further reading : How to Start a Vacation Rental Property Management Business 8 Tips to Growing your Airbnb Revenue, Nightly Rate, and Occupancy

A Personal Getaway Owning a vacation rental property allows you to experience the ultimate getaway whenever you want. Whether you have a birthday party, a family reunion, or any other special event, you can use the property. Invest in a place you enjoy visiting frequently. The convenience speaks for itself.

Tax Write-Offs The renting of a property for more than two weeks is considered a business. This is extremely useful for tax. While you must pay taxes on the income it brings in, it also lets you write off many of the expenses for maintaining, repairing, and improving the property. You can even write off hosting fees charged by Airbnb and VRBO. These write-offs include but are not limited to cleaning, supplies, insurance premiums, mortgage interest, and property management fees.

Ensure Finances & Retirement Home Investing in vacation rentals is great for ensuring you have future expenses for healthcare, future travel plans, emergency, etc. Or, if everything goes to plan, you can keep it as a retirement home. Either way, investing in vacation rentals can be a reliable asset for the future.

Cons

Here are some of the drawbacks of vacation rental investments:

Property Management: While owning your own vacation rental is convenient and luxurious, you will also need to manage it if you wish to rent it out. Vacation rental properties can be the most involved investment you will make. Almost year-round, if your property becomes more popular, it is your responsibility to clean, stock, and maintain the property for all new guests.

Further reading : Vacation Rental Cleaning: Tips & Tricks Building Your Vacation Rental Team Hiring Qualified Handymen

Finding Guests: Finding renters can be a difficult task, especially for new investors. Marketing is a key part of profiting from your vacation investment. You will have to provide comfortable and attractive furnishings while also appealing to your targeted audience. Special promotions and discounts can help your property take off in slower seasons.

Pro Tip : List your property on multiple OTAs to maximize your visibility, as well as on social media platforms and through your own direct booking site.

Restrictions & Regulations: Short-term vacation rentals are sometimes subject to several restrictions and regulations from cities and homeowner associations. Once you have a sense of where you would like to invest, make sure to consult local rental policies. Related article : What Is Airbnb Rental Arbitrage? Florida Airbnb Laws & Taxes | Guide to Vacation Rental Rules

Monthly Payments & Expenses: Investing in vacation rentals may also affect your income if you don't manage them carefully. One reason is that you will have an additional mortgage payment. There are also maintenance, repair, and utility expenses that accompany home ownership. It is important to have your finances in order to avoid additional stress from managing another home. Bookkeeping & Accounting | Keeping on Top of It

Extra Financing: Your vacation rental investment will require you to pay more for its financing. Investing in properties has an interest rate that is higher than a normal mortgage. Therefore, you'll pay more in interest and monthly payments during the loan's life. Usually, lenders will also require a larger down payment, usually around 25% more.

Why Hostaway Should Be Your Vacation Rental Software?

Hostaway is the fastest-growing vacation rental software for professional property managers in the world, and the most sought-after property management system in the vacation rental market. At Hostaway, we make it easy for you to get more out of your business while spending less time on tedious manual tasks. Find out how we can make your vacation rental a booming success with our continual insight into how best to run your business anywhere in the world. For a free demo, click here.

The Bottom Line

Financing vacation rentals is not difficult, since there are many ways to secure the funds needed to keep your business going and earn income. To summarize, identifying your investment goals, learning your market, selecting the right funding, and evaluating the metrics necessary to measure success are all critical to investing with confidence and benefiting from the vacation rental market.

Ready to find out how Hostaway can transform your business?