HMW #131: The 4 Market Niches of Vacation Rentals

 Read Time: 8.5 minutes

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Many a short-term rental (STR) investor starts their investing career by looking at vacation rentals in the place they vacation the most. This sparks the idea to many a newbie of, "We come here all the time, why don't we just buy instead of renting?"

Is turning your vacations into a business venture a viable long-term plan? In short, it can be. However, consider this: if you are going to use the STR as a second-home during peak season, well, there goes all your juicy cash flow. If not, then that leads you to use your new STR in the off-season when you can't book it to others. But do you want to even be there when there isn't a mountain to ski or a beach warm enough to tan on either?  

Don't fret, that's what I (Alan) am here for!  

If you really want an STR in your favorite vacation destination you can run your numbers of expected booking rates and rental income from STR aggregator sites like Airdna.com and then subtract out the weeks you realistically plan to use the home yourself. This data along with your built-in blocked off dates should give you a back-of-the-envelope idea if it will be a profitable venture or not. I'd imagine if you are taking the best weeks for yourself the home will be closer to break-even than a major cash flowing asset.  

However, there are other options for you to invest in vacation rentals if you just can make the numbers work. Lauren Keen Aumond, our resident Short-Term Rental (STR) expert here at House Money Media, has broken out the vast vacation rental market into 4 distinct areas to help beginners narrow their hunt and focus on a business plan that works for you.

If you insist on turning your vacations into a business, here are the 4 markets you'll be able to choose from. Finally, all your future travel can be working vacations, but one with more emphasis on vacation than work for once.

Niche 1: Big Cities

Corporate retreats, family reunions, athletic or music events and festivals, and other big draws are evergreen in large metropolitan areas. This diversity of guests wanting bookings year round helps eliminate booking volatilities and rental pricing swings.

However, urban home prices are possibly more expensive than your home town, but will be cheaper than premium vacation destinations. You should have options when it comes to property management and be able to mitigate risk by pivoting to long-term rentals quite easily if your find short-term rentals too much to handle or cities implement short-term rental bans.

Lastly, home appreciation is more stable and predicable as well, which makes cities a great middle-ground and balance when it comes to the risk and reward of STR-investing.

Hey, you say that like it's a bad thing! I'm trying to not give you sleepless nights in a city that never sleeps.

Niche 2: National Tourism Hotspots

You are investing in the housing of national and even international tourists and all the good and bad that comes with that. These spots are very seasonal and you'll likely have heavy competition with deep-pocketed and corporate players in this short-term rental market who may be able offer amenities and perks that you can't afford or manage.

You'll find the properties peak seasons will be such a money maker and often making 3-4 times the expense of the mortgage for you that it will still greatly offset the low seasons where you may lose money each month. Make sure to budget for these swings accordingly. Third-party property management options will exist at a higher than normal rate and you'll want to make sure to have concierge like options to restaurants, site seeing, and tourism destinations to make all your guests happy.

Yes, but like with all investments, more risk means more reward. This can be risky move, but profitable with the right systems in place to put your portfolio on auto-pilot (which we show you in our STR class.)

Niche 3: Regional Tourism Hotspots

Like the above, regional tourism is also obviously dependent on tourism, but you'll have less competition with the corporate players in the STR-market. From a traffic perspective, you'll end up with more of the car drivers than plane flyers, which can equate to guests interested in longer stays.

This niche is a favorite of House Money Media, as it's usually a property at an attractive price point and has a local government interested in promoting tourism and short-term rental stays. This is more of a mom-and-pop approach to investing which allows for guests to not expect a resort experience. This allows long-distance managing to be the norm which can save you 20-30% of your rental revenue.

A pivot to long-term rentals is also in play as typically a smaller tourism area is not supported by just one industry. Furthermore, many owners have already switched from long-term rentals to short-term rentals, meaning local workers will be in desperate need of housing. This gives your property stability similar to a large city, but with lower property appreciation as it can be considered suburban and on the fringe of larger growth spots and new development.

Good point! These 4 markets all take work and it will feel like work until you become a well-oiled machine. And possibly the most work is niche 4.

Niche 4: Rural

These are properties that provide experiences over lodging as there is nothing else to draw a guest into the area.

Price points are low, which is plus. However, property management options are nil and you'll want to have local teams in place for maintenance and cleaners if you don't live nearby. There is still money to be made in a rural niche, but understand it's going to hit or miss similar to the peaks and valleys of national tourism spots. You may cash flow with just one weekend of booking each month and that's all you need to eek a profit, which can be a good business model in the long run.

Property appreciation will be lower and pivots to long-term rentals harder, but that is why the price point is so attractive to begin with to overcome these risks. But if you can provide that experience that draws people in with oversized pools, pick-your-own farms, petting zoos, or a any creative wacky or off-beat experiences, you might just have built a personal ATM for yourself and conquered a niche untouched by many.

Great! Just tell me where you end up so I don't compete with you. Man the best man, or woman, win.

Summary

• Consider if you will use your STR for personal use when you run the numbers
• Consider pivots to long-term rentals as a back up option if needed
• Settle and own a niche to start, rather than diversifying
• Urban areas appreciate faster than suburban or rural
• Consider your competition and their resources