The compound annual growth rate of short-term rental investment is expected to grow by 11.1% from 2022 to 2030. That’s why more people are investing in vacation rental properties. But don’t get too excited yet! Prioritizing due diligence before investing in rental properties should be your top priority. It should be done before you learn how to buy your first rental property.
Unfortunately, many beginners rush or skip this step when they invest in short-term rentals. Even worse, they don’t think critically and end up in a pit. This shouldn’t be you!
Our article explores further how to perform your due diligence before investing in a short-term rental property. But first, let’s get a profound understanding of what due diligence entails.
What is Due Diligence in Short-Term Rental Investment?
Due diligence is simply “doing your homework” before getting into the rental property investment. It is when you investigate and evaluate a potential investment thoroughly to assess the risks and returns.
In short-term rental investments, due diligence involves researching and analyzing various aspects of the property. It involves looking at the local market to determine whether the investment is a good fit.
Due diligence aims to gather as much information as possible to make an informed decision. This way, the investor will know whether or not to invest in vacation rental property. Most importantly, having a reliable short-term rental strategy will ensure your due diligence isn’t in vain.
Here, your STR strategy is a crutch to ensure your vacation rental business grows. This is true whether you rent your short-term rental during the off-season or the peak season. Even better, it’ll help you earn passive income from the rental property. Rest assured of excellent monthly income, a high ROI, and high occupancy rates. Indeed, it sounds good.
Above all, conducting due diligence will help you make an informed decision. Here are 5 essential due diligence steps to help you buy a vacation rental property for the best returns. Keep reading to the end!
5 Important Steps to Perform Due Diligence Before Investing in a Short-Term Rental Property
- Shop the Marketplace
Usually, investing in rental property for beginners involves looking at a few houses before putting in an offer and finally buying one. However, the drawback here is that you don’t know what more could be out there because you only sampled small amounts. So what should you do?
It would be best to take your time to go through several properties. Shop around the marketplace and see what’s trending, what’s dormant, and what’s in high demand. This will help you eliminate a quick, ignorant, and emotional decision.
Get to know where to buy a rental property. Drive around the neighborhoods, check whether the houses are rundown or well-kept, and see if young families, students, or older couples live there. Better still, talk to the residents to determine if home values are increasing or dropping.
Checking the crime rates is one of the most important tips for buying rental property. This will help you know which markets are safe and which ones to avoid.
- Look Into Local Regulations and Zoning Laws
Local regulations and zoning laws can vary based on different locations. So, it’s vital to understand the laws and regulations in the area you want to invest in short-term rentals. This will ensure that you operate within legal limits and avoid penalties for non-compliance.
Furthermore, some places have restrictions or outright bans on short-term rental investment. As a result, researching regulations and laws determines whether you can invest in vacation rental property in your desired location.
Local regulations and zoning laws may also dictate the taxes for short-term rental investments. A clear understanding of these laws and regulations can help you know the impact on your investment returns.
Finally, it’s essential to know that laws and regulations may change over time. Thus, you must keep updated on any changes impacting your investment.
- Assess the Property’s Condition
When purchasing rental property, it is critical to evaluate the property’s condition. It allows you to identify any repairs or renovations that may be necessary before investing in a vacation rental property.
The property’s condition gives insight into the ongoing maintenance costs you can expect to incur. For example, an older short-term rental may require more frequent repairs and maintenance than a newer property.
Also, how the property looks can impact its appeal to guests. A well-maintained house with modern amenities is more likely to attract renters than one in poor condition.
Additionally, assessing the property’s condition is vital to establishing safety. For example, checking for structural issues or electrical hazards when you have clients will help avoid accidents.
Lastly, evaluating the vacation rental’s condition can help establish its value as an investment. A short-term rental investment in good condition is usually worth more than a property with a badly-off house.
- Review the Property’s Financials
Reviewing the property’s financials when performing due diligence for a rental property investment strategy is essential. This includes past rental income and occupancy rates to help you understand your expected income potential and ROI.
Reviewing the property’s financials can also help you learn how to invest in apartments and the expenses associated with them. Such expenses include:
- Mortgage payments
- Property taxes
- Insurance
- Maintenance costs
Reviewing the house’s financials will make it easier to anticipate future expenses. So, you can effortlessly plan for any necessary renovations to estimate the property’s income potential. Plus, you get to identify any red flags, like a history of late payments or unpaid bills. This can indicate a potential problem with the rental property.
- Consult With a Real Estate Agent or Lawyer
Consulting property-related experts helps to ease the due diligence process. Usually, famous experts are lawyers and real estate agents. What do they do?
First, a lawyer can help you understand short-term rental investments’ legal requirements and regulations. This includes knowing the terms and requirements of zoning laws, permits, and insurance.
Also, a property lawyer can review and negotiate the purchase agreement for the property. This helps to ensure that your rights and interests are safe and that there are no chances of fraud.
Conversely, a real estate agent can provide valuable insight into the local market. Such insight includes information about similar rental properties and future short-term market trends.
Both an agent and lawyer have adequate experience with the short-term rental strategy to help you identify potential issues. They can also assist you in future transactions, like buying or selling property, or in cases of client disputes.
Generally, consulting with a real estate agent or lawyer can provide valuable guidance and expertise in understanding a vacation rental investment’s legal and financial implications. They can help you navigate the complexities of the legal and regulatory environment safely.
Parting Shot
Though performing due diligence before you invest in short-term rentals can be lengthy and stressful, it is worthwhile. If you know what to do before you buy a vacation rental property, it’ll be easy to proceed confidently.
Above all, it’s vital to take your time when performing due diligence and avoid rushing into purchasing any property. This way, you’ll snag a perfect real estate deal!