The Challenges of Purchasing a Successful Short-Term Rental Property
I talk about investment properties on the Big Island these days because there is a large demand for purchasing a property that generates income. I recently assisted a buyer in purchasing a successful vacation rental property at the Fairways within Mauna Lani Resort, not too far from Waikoloa Beach Resort. It was challenging, to say the least, but having a real estate agent with experience can make the process less stressful and ensure that future renters are not affected by the transfer of ownership.
I wanted to share this sales experience and what lessons I feel are extremely important to know if you are interested in purchasing a short-term rental property on the Big Island.
Self-Managed vs. Company-Managed
It is important to note the difference between self-managed and company-managed rental properties. Transferring future bookings from company to company can be easier than self-managing with third-party booking systems, but both options are not without their potential hiccups.
Self-managed rental properties mean the owner manages the property. This can be more challenging because the process is often new to the owner. You will need to ensure that the seller cancels the future bookings (which must be stated on the purchase contract), and the renters will need to re-book with your new property manager or you. During this process, you can lose some of those bookings – there is no guarantee that all of the bookings will transfer over.
Another thing to note is that if you change property management companies, the reviews and possibly even future bookings will not come to your new property and business. Those reviews only continue with the property if you stay with the same property management company.
Purchasing Future Bookings for Your New Big Island Investment Property
There can be good and bad things when you purchase a condo with future bookings. The great part about future bookings is that you already have an income! Your new rental business is already generating income, and you can stress less.
But something to consider about purchasing those future bookings is the daily rates and cleaning rates. When the condo is self-managed, the rates can be low as there are no property management fees to cover. When you switch over to using a property manager, you’ll not only have the management fees to cover, but the cleaning rates may also be different, and there is no way to change this with already-purchased future bookings. So, if the current rates are very low, you will have to cover these fees out of your earnings and possibly out of your pocket.
Taking the time to review the nightly rates, cleaning fees, and holiday bookings for your new Big Island investment property is highly recommended, and you will have time to review those when you’re under contract if you can review them before you’re in escrow, even better!
If you are purchasing a successful rental, there could be a challenge with coordinating the closing date, cleaning crew, transfer of utilities, and obtaining keys. Planning for these is critical to the renters.
For example, you have passed on the contingencies for your dream vacation rental at Waikoloa Beach Resort, and you’re set to close on Friday. The renter is still in the condo until Sunday. You can’t turn off the Internet or cable when the renter is in the condo. And who will clean the condo on Sunday when the renter checks out? How is the income divided up between the seller and buyer? How will you get the keys to your new property?
To complicate things even more, at some complexes like the Fairways at Mauna Lani, the HOA pays for the Internet and cable bills with separate companies. These items need to be addressed and agreed upon in writing prior to closing. Ensuring the renter has Internet and cable, the electricity is on, and the renter is not disturbed during escrow is essential.
Repairs in a Busy Rental
When purchasing a short-term rental property on the Big Island, you will have your due-diligence period during escrow, and the home inspector may find that repairs are needed. When you purchase a rental property, there will be wear and tear with the years of renters coming and going. No property is perfect, especially when it’s a business.
Finding time to do those repairs can be challenging when a condo is booked heavily. Many sellers prefer a repairs credit over fixing items because of the short escrow period. Yet how do you know what the repairs cost if you don’t have them evaluated by a licensed professional? If you have time to get with a licensed professional, I highly recommend it, especially if there is some particular item you are most worried about. Scheduling an A/C technician or plumber weeks in advance is advisable – don’t wait until the last minute to notify your real estate agent of this.
Food for Thought
It is worth purchasing a short-term or long-term rental property on the Big Island. Getting ready to start a new business (yes, a short-term rental is a business!) has lots of moving parts and pieces. It can be stressful. You may not have all the answers at once. It takes patience and persistence. Having a place you can enjoy on vacation for yourself and your family while making income to cover your costs can be very rewarding.
If you’re considering buying or selling a vacation rental in Mauna Lani Resort or nearby Waikoloa Beach Resort, give me a call, and let’s talk. There are many options to look into when purchasing a rental property on the Big Island, and my experience will help you through the process.
With warmest aloha,