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Vacation Rental Investment: 10 Funding Options to Grow your Property Management Business

Owning a holiday home is at the top of your wish list? Or perhaps you’re determined to expand your vacation rental business as our industry gains momentum? In this article, we take a closer look at funding options and some of the handy resources available. 

Is vacation rental investment for you?

Firstly, is this the right choice for you? Whether you’ve got the funds or need to acquire them, you’ll need to make an informed decision and calculate your ROI (return on your vacation rental investment). In theory, revenue from a short-term rental property is higher than the long-term alternative, but let running costs show you that. Can the estimated income return a profit or pay off a bank loan? To evaluate the full potential of a vacation rental investment, make sure you include the following variables in your calculations:

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

To help you with due diligence on potential profit across different markets, you can turn to data intelligence companies specialised in vacation rentals, such as Transparent or AirDNA. Alternatively, you could get in touch with experts in finding high-quality holiday rental and real-estate portfolio to invest in, such as Yann Oliver. Wondering which are the best places to buy a vacation rental in the U.S.? Check the 2019 Report by Rented.com.
If you’ve already picked your dream location, jump to Vrolio to see short-term rentals up for sale. Finally, if you’d like to entrust your investment to a specialised management company, you’re spoilt for choice. We’ve listed here only the world’s Top 20.

10 Options to Fund Your Vacation Rental Home or Business

1. Mortgages

The most common option to purchase in real estate, a mortgage will allow you to buy a property and pay off the loan plus interests over a specific number of years. The value of the property itself “secures” the loan. When considering mortgages for a short-term rental, it’s important to look for a bank or lender that will finance one (not all do), and shop around: get as many offers as possible and negotiate interest rates.

2. Private Lenders

As the name implies, private lenders are individuals or companies who represent individuals willing to invest capital and profit from the interest rate on the loan. In real estate, they come in handy when buying a second home. Compared to banks and traditional institutions, private lenders have different requirements and often proceedings go faster.

3. Crowdfunding

Otherwise known as raising money from the “crowd” online, crowdfunding is a fairly new practice for raising small amounts of capital from a large number of individuals. Popular real estate crowdfunding sites include Fundrise, Crowdstreet and Realtymogul. Many successful vacation rental tech companies have run successful campaigns already. Check this example of a property manager in Barcelona currently raising on Crowdcube.

4. Seller Financing

Seller Financing, as the name suggests, is a real estate financing option where the person who’s selling the property finances the purchase, compared to a bank providing a mortgage to the buyer. This option can be handy in particular cases (e.g. when you have a low credit score). In order to avoid risks, both parties should consider hiring professional mitigators.

5. Credit Unions

Credit unions are “financial cooperatives” that provide traditional banking services, such as loans and mortgages, often with more competitive rates. A credit union uses the funds provided by its members and can range from a small community undertaking to a large organization.

6. Angel Investor

An angel investor is typically an affluent individual who invests into a business start-up to help kick start the project, generally in exchange for equity. It’s not unusual for angel investors to be family members or friends of the entrepreneur launching a business venture.

7. Venture Capital

Venture Capital is a type of financing provided by professional investors to small businesses and startups in exchange for equity in the company. Compared to Angel Investors, Venture Capitalist use investors money, not their own. As a result, these Venture Capital firms or individuals look for businesses with high return and profit.

8. 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 provide mortgages and loans.

9. Franchising

A franchise is a common way to kick-start a business in competitive industries (e.g. fast food) making use of an established brand name. And they’re not uncommon in vacation rentals, led by companies such as SkyRun in the U.S.

10. Government Incentives

Last but not least, you should check if you qualify for any governmental incentive program. In the U.S. there are agencies, such as the Federal Housing Administration (FHA), that sponsor loan programs. In the E.U, you can find programs designed to help entrepreneurs get their business off the ground. Check EBAN, the European Trade Association for Business Angels.

 


Interested in vacation rental investment? Which options are you considering?

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