Property has long been considered among the best long-term investments available. While it can fluctuate like any other growth opportunity, it remains consistently among the best ways to make your money work for you.
Some prefer to invest in their local area, while others hold broad portfolios where returns potentially matter more than specific locations. However, it can be worth considering luxury vacation rentals for those who are happy to provide active management throughout their portfolio.
It is a more hands-on investment opportunity than buying and renting out a family home for obvious reasons. However, suppose you have the time to spend on administration. In that case, you might discover a world of fantastic returns as people are inherently willing to spend far more on a week in paradise than they would on their regular accommodation.
If you’re considering an investment in luxury property, here are our top five considerations to make before taking the plunge.
1. Size or Quality – Or the Best of Both?
When investing in property, many people prefer to go as big as they can afford. While not always the case, a more considerable initial outlay leads to substantially higher returns. Unless you opt for a furnished property, the quality of accommodation, at least beyond the fixtures and fittings, is less pressing. Long-term renters often like to put their personal stamp on a property, and they can be relied upon to bring their vision of quality to life.
A vacation rental differs in several ways, not least that renters will arrive expecting everything they need to enjoy their trip away. It is essential that the property’s interior screams “luxury” from the photos alone.
Conversely, size doesn’t necessarily matter all that much. Even in the most luxurious areas, many vacationers consider their accommodation as somewhere to sleep and little more. A luxury apartment in Miami needs a certain degree of excellence to encourage people to make the trip. Still, these areas have far too much to offer to consider spending a vacation inside.
Ideally, you’ll seek to strike a balance, primarily when investing for the first time. Go too big, and you might eliminate part of the rental market that does not need all that space. Skimp on quality, and you may lose the part of the market willing to pay a premium for their accommodation.
Some rental investors prefer to keep their portfolio within an easy driving distance, often so that they can address matters within their properties personally. Others are happy to leave the additional work to suppliers and individuals and have more scope for holding investments far and wide.
That remains a consideration with luxury investment properties, but the priority is to find a property with a burgeoning vacation market. There are obvious candidates, such as New York, Orlando, and Las Vegas, but the concern for investors is that the vacation appeal is often priced in already. If part of the investment strategy involves significant, recurring returns compared to the initial outlay, this can be difficult.
Ideally, the best investment opportunities land somewhere that is likely to support filling the property to capacity all year round, without being in one of the nation’s travel hotspots.
If you do not require easy access to the property itself, it is worth investigating upcoming locations rather than established ones. Portland, Baltimore, and Greenville are not necessarily crown jewels of the tourism economy yet. Still, a gradual increase in demand can accelerate the overall value of the investment without paying an initial premium.
3. Evaluating the Numbers
A luxury vacation rental investment will have potential investors dreaming of idyllic locations, exotic drinks, and huge parties. Still, it is a mistake to consider an investment as anything but raw numbers if returns are the priority.
The same rules that apply when selecting a long-term occupation real estate investment also matter here. Is the rental income likely to cover the mortgage and upkeep? How likely is the property to increase in value over time compared to other areas?
Beginner investors, in particular, assume that there is little nuance to property investment; you buy somewhere, rent it out and take the profits. However, without a significant element of luck, this is rarely the case. Rental properties involve finding regular tenants, increased cleaning schedules, potentially frequent repairs, and more. A successful investment can pay off handsomely, but it requires due diligence, and this should start with pure numbers.
4. Age and Upkeep
The older a property, the cheaper it is likely to be, which is bound to attract investors. Lower costs mean less risk and potentially greater leverage on returns. However, a potential buyer seeking luxury accommodation to attract premium clientele needs to be clear on the minimum standards they expect.
The definition of “luxury” evolves, and premium renters often expect the latest and best of everything, at least to a point. What was top of the range ten years ago likely is not today, and what once marked out accommodation as luxurious might now prove detrimental in attracting the right residents.
Once again, the facts and figures must drive a decision. A lower initial investment due to age may require additional funding to bring it up to par for the desired target market. Conversely, investing heavily from the outset will all but guarantee a few years of luxury, but updates and overhauls will need to remain in mind. Ongoing costs for upkeep should form part of the initial plan. Properties, where residents come and go and are under no obligation to treat your investment like a home, can easily incur higher upkeep costs.
5. Self-Listing or a Property Manager
If you enjoy investing locally but do not currently reside in a vacation destination, you might need to leave your comfort zone to make an investment work.
Even if you are happy to do everything yourself, there is a lot more work to owning and, more importantly, filling a vacation rental than a family home. As the owner, you are free to set the rules, so you could state minimum and maximum stay lengths, but this needs to make sense in terms of your target market. Do it yourself, and you need to be prepared to become a part-time property manager in your own right, so it is essential to factor that time into your returns.
The alternative is a professional property management service. Such a service will eat into profit margins on the investment and factor into the planning stages. However, a sensible pick can pay dividends, especially in terms of leaving the most challenging part of the process, finding occupiers, to someone else.
Naturally, the sky is the limit when it comes to managed investment properties. This could extend to cleaning between tenancies, repairs and maintenance, and anything else that keeps the accommodation in top condition. New investors should strongly consider this option, as it is easy to overlook the time investment that sits alongside the financial one when taking the plunge.
For those that wish to access the premium rental market and potentially have somewhere to take a break themselves at a reduced cost, a luxury rental property makes perfect sense. Like any investment, it is crucial to ensure that the numbers add up. It is every bit as essential to understand the need for ongoing investment, too, as management, upkeep, and fees also play a part. There are fantastic opportunities out there and much to consider when investing in this way. Ultimately, confidence in the numbers matters in this kind of property becoming the ideal growth strategy.
Paul Gladman is a property investor that took the plunge from investing in the residential market to vacation rentals over a decade ago. He maintains a portfolio spanning several states and writes extensively about his experiences.
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