If you’re one of the growing number of people earning extra income by listing your primary or secondary residence as a vacation rental, you’ve probably noticed that your income fluctuates with the season. That’s normal — the travel industry is inherently seasonal as people trek off to different destinations based on the time of year, holidays, and events like conferences or concerts.
The resulting dips and surges in income can present cash flow problems for vacation rental owners. If your rental or rentals are your primary source of income, it can be tough to make mortgage payments and meet other financial obligations when your income ebbs and flows throughout the year.
I sat down with Ryan Rabideau, our Portfolio Analytics Manager, to discuss how to balance seasonality in the vacation rental space. Ryan manages the health of our portfolio across the many different markets where we operate. Working with a qualified vacation rental manager will help you maximize ROI, especially if you own property far from where you live. You won’t have to worry about the day-to-day details involved in running a vacation rental, and your manager will help you set rates in response to market trends, geographic location, and other variables.
Here are our tips for managing a risk-adjusted return in a highly seasonal industry.
4 Tips to Balance Out the Highly Seasonal Nature of Vacation Rentals
1. Balance your portfolio between fixed-rent and commission-based contracts.
Modern portfolio theory tells us that diversification can help you achieve a superior risk-adjusted return. Diversification in the vacation rental industry comes in many forms, including geographic area, home size, how travelers will reach your vacation rental (e.g., plane, car, ferry), what kinds of travelers you’ll attract (e.g., business or leisure), and even what kinds of management contracts you choose. By building a diversified portfolio, you can not only earn a better risk-adjusted return, but also give yourself an array of personal vacation options.
A fixed-rent contract is exactly what it sounds like: You work with a vacation rental manager who pays you a consistent dollar figure on a regular basis, rather than a variable amount of your rental income.
Fixed-rent contracts provide an even, predictable source of income over time, so they’re ideal for investors seeking a consistent return or even cash flow. With a fixed-rent agreement, you know your exact take-home amount without having to factor in property management costs and other fees associated with generating revenue.
In fixed-rent agreements, management companies assume booking risks and seasonal fluctuations in income, which adds to your peace of mind. Managers subsidize the off-season while earning their margin during peak seasons.
Fixed-rent contracts are ideal for financing your first investment property in such a way that you can be prepared for the next investment opportunity, since you can use your fixed-rent property as proof of income when applying for a bank loan.
In addition, fixed-rent contracts are great for mitigating risks in winter markets like Park City, Lake Tahoe, and Aspen, where peak seasons can fluctuate based on annual snowfall and traveler taste. Fixed-rent contracts also work well for markets that carry greater risk or where you have less investment experience.
Fixed-rent offers tend to be more realistic than commission-based agreements. Since the management company is assuming the risk, they’re less likely to be aggressive in their income projections. That said, many investment-focused homeowners find the security and reliability of a fixed-rent contract appealing. While cap rates on fixed-rent properties may not be as aggressive, the consistent return — with very low risk– is its own reward. A commission model offers more exposure to the upside potential (and downside risk), while a fixed-rent agreement offers a stable income to ensure that expenses like mortgage payments are covered without worry.
2. Diversify by investing in properties in different seasonal markets.
Investment diversification happens by adding uncorrelated or negatively correlated assets together for a blended smaller standard deviation. In this case, the volatility is the change in cash flow throughout the year. In vacation rentals, this could be summer and winter markets, a wine region and a spring break destination, or a fly-to destination and a drive-to destination.
Generally speaking, drive-to markets are more recession-resistant than fly-to markets. Even when they need to trim costs, people don’t want to forsake their vacations entirely, so they usually opt for a destination they can drive to, rather than paying for airfare. When you’re on a tight budget, it’s cheaper to drive to a family reunion, but when times are good, fly-to destinations look awfully appealing.
Travelers are also more likely to book travel to drive-to destinations on the spur of the moment – or, at least, with less advance notice than fly-to destinations. You can just hop in the car and go. Fly-to destinations, on the other hand, often have longer booking windows due to the planning and costs involved.
Balancing your vacation rental portfolio between winter and summer destinations is also a smart move. If you have a beach house that generates plenty of revenue in the summer, consider balancing it with a condo in Park City or Tahoe, where travelers flock in the winter. When one market ebbs, the other flows, and vice versa. Places like Naples, Florida or the Coachella Valley attract a fairly steady stream of visitors in the shoulder seasons, so they set off summer destinations.
3. Position yourself to take advantage of peak season.
When you’re deciding when and where to buy, I’d advise you to look for homes that are about six months out from their peak season. This lead time can vary by market, so do a little homework and talk to a local manager. Those six months (or whatever amount of lead time your local manager recommends) will give you time to buy the property, make any necessary renovations or improvements, and book out for peak season. You’ll also use this time to build a brand for your home by attracting a range of (ideally positive!) reviews before the big influx of seasonal visitors.
Being a buyer during the slow season — that is, during the time of year when properties are producing the least amount of income — has its advantages. Sellers aren’t seeing as much cash flow, and they may be staring down a list of maintenance issues from the previous season, making them more motivated to sell. Off-season buyers also face less competition from other investors.
The bottom line in the vacation rental industry is that if you miss peak season, you’ve missed the year. During peak season, your home will attract more reservations at higher rates, which means more revenue for you. If you want to hit the ground running when peak season arrives, give yourself time to get your house shipshape and attract some reviews well in advance.
4. Take advantage of updates and upgrades that give you more bang for your buck.
As an owner, you can do a lot to improve your ROI by investing in the little things that will set your home apart and keep it competitive with other local properties. Think small-scale amenities that allow families to relax together, like a hot tub, fire pit, or ping pong table. Making your rental pet-friendly attracts families with four-legged loved ones, while disallowing pets limits your business. Sleeper sofas allow you to accommodate bigger groups, while fast wifi appeals to just about everyone.
Scope out the competition, pretending that you’re a traveler looking for a rental property. Which homes look the most appealing? What features or amenities can you add to your home to attract more guests?
Guests will be attracted to the extras your home offers: the beautifully appointed bedrooms, the inviting porch swing, the collection of vintage board games. Investing in the details of your home adds up, over time, into an impressive ROI.
A balanced portfolio that aligns with your unique financial situation and goals is key to achieving sustainable success as a vacation rental investor. These strategies, as well as working with a property manager who is familiar with your local market and who understands how to utilize data effectively, will help you balance the inevitable ebb and flow of demand in a highly seasonal market while mitigating risk.
What seasonal effects have you noticed in your market? How do you mitigate the low seasons?
Let me know with a comment!