Revenue from VRBOs (Vacation Rentals By Owner)

16 Replies

I'm still waiting for banks/lenders to acknowledge revenue from VRBOs as real.........it's my understanding from countless interactions with the above that this industry isn't sure how to deal with this, in relationship to mortgage lending. 

The other side of this is when it's time to sell do you price and market the property as a business/commercial property and set price based on revenue and cap rate? or market it conventionally and assume that someone isn't interested in the revenue it brings in? I've asked commercial Realtors this and no one has given me a clear answer.

I feel like the only one who "gets it" with the VRBOs. It's an industry that is growing at a rate ten-fold the hotel industry and it's so misunderstood in the real estate lending world.

Am I alone??? 

You are definitely not alone. Basically, in Branson everything holds true that you are seeing in your area.

VRBO is a grey are in many respects. No lenders I've come across acknowledge the revenue either. However, it's a big market here in Branson and many lenders are familiar with it enough to be slightly more lax in their requirements. It is most often treated as a residential property but you do have commercial loans and SBA's available to use for purchase as well. As for resale, the value is officially determined by traditional comps but clients that are looking for a VRBO property definitely look at the revenue history and expect to pay a premium for a well-performing property. Luckily, many realtors here know the market and at least one I know specializes in it.

Originally posted by @Stacey Johnson :

I'm still waiting for banks/lenders to acknowledge revenue from VRBOs as real.........it's my understanding from countless interactions with the above that this industry isn't sure how to deal with this, in relationship to mortgage lending. 

The other side of this is when it's time to sell do you price and market the property as a business/commercial property and set price based on revenue and cap rate? or market it conventionally and assume that someone isn't interested in the revenue it brings in? I've asked commercial Realtors this and no one has given me a clear answer.

I feel like the only one who "gets it" with the VRBOs. It's an industry that is growing at a rate ten-fold the hotel industry and it's so misunderstood in the real estate lending world.

Am I alone??? 

 GREAT topic - we are in the process of financing our 4th Vacation Rental (3rd investment mortgage), and the big question by the banks are "huh - what - no year lease?". We found a bank that "gets" it, I think, plus we are able to provide reported income from our 3 weekly rental properties plus my vacation rental reservation business, but getting a mortgage is very stressful each time. 

On your next topic - we also have a lake side VR up for sale for $95K turnkey - it's a 1966 trailer so holds virtually no real estate value - but is in great shape, has great views, looks fab, brings in $23K year gross, very low maintenance, and has 8 years of 5 star reviews. So the only way to sell it is for the business of it - as it makes no sense for us to sell it for less because how else could we clear $15K year on $95K? We've had one inquiry from someone who "gets" the investment value of it - but that was through an ad in Craigs List. There doesn't seem to be any real marketplace for this type of investment. Would love to see one created - I would also be interested in pursuing new properties that way! 

I haven't had a problem with this ( I own two in Disney area)...but I think it might depend on the strength of your bank relationship, and/or finding the right bank...The first property I bought with an unsecured loan (yes unsecured!) because my bank in TN couldn't conventionally mortgage the property because it was considered a "condo" (even though its actually a townhouse....... I have such a great relationship with my bank that they just gave me the unsecured loan to buy the property....I bought at the right price, it appreciated a great deal in short term...and then while looking for my second property a few months later I got referred to a bank in the Orlando area that "gets it!" in terms of vacation rentals..... they refinanced my unsecured loan, I was able to pull the added equity out of it from appreciation and use towards my downpayment on the second one, which they also put a conventional mortgage on without even thinking about it...cause in my case they understood that obviously the vacation rental business in Orlando is huge......

Sounds like the bankers/lenders in more "touristy" areas are more comfortable with VRBO arrangements/revenue. I've tried 3-4 different bankers here in MN and they think the revenue without year leases is too risky. 2015 will be my 4th year in this business with 3 units so I am hoping that my track record will speak for itself. 

What's funny is that they are really impressed with the revenue my little one-bedrooms bring in, but still don't want to finance. 

Thanks for the comments everyone!

Stacey

My guess the only way for the  banks to count this income would be through income showed on taxes! I have found that they will usually count the income on the taxes

Hi Elizabeth - yes you are right but here's the "conundrum"; I don't want to pay high taxes and write off everything I can, that I can defend......which means the bottom line looks a lot different than the top line. They do add things back in like depreciation, mortgage interest, etc.........so that brings it up some.

Stacey

Banks have no problem with it here. We have more VRBO's than anywhere in the country, so it's very common. I even have contacts that will finance specific types of foreign nationals for a vacation home, all without a US tax id number lol.. (they have to get one of course before they close)... But yes, it's more common in touristy areas. I happen to specialize in properties near Disney, and our area saw more visitors than anywhere else in the US last year, and VRBO's are surging in popularity because of their economy compared to hotels.

One question I get ALL THE TIME is.. "What is the rental history?" and, "How much revenue does this property generate?" 

Unfortunately (or fortunately, depending on how you look at it), it doesn't work like that. Rental history is proprietary information, it's not public, so it's up to the discretion of the owners if they want to reveal it. It's not common in the listings, allthough it is asked for frequently. Sometimes we get it, sometimes we don't, but it's hardly ever easy. Regarding revenue, it's not consistent. It depends on the owner. The potential is certainly there, but not everyone will operate their vacation home like a business, so many (most?) owners will not approach anywhere near the earning potential of a given property. If you're savvy though, and you're smart.. you can kill it in this business, and many do.

It's a grey area for a lot of reasons.. I see it as an opportunity to cash in when others aren't. If it was so easy to make 8%-15% everyone and their mother would do it. But it's not that straight forward, it requires homework, but the writing is on the wall, and the opportunity is there for those that see it. I can point you and any of my clients in the right direction to see the numbers and realize the potential, but it's up to the owner to make it happen. It's a joint effort of a great market, and owner input.. it's a not a free ride. Make sense?

Regarding "I'm still waiting for banks/lenders to acknowledge revenue from VRBOs as real.........it's my understanding from countless interactions with the above that this industry isn't sure how to deal with this, in relationship to mortgage lending." I'm clearly missing something. Is the issue that you get VRBO revenue but don't declare that revenue on taxes as income? In general, financial institutions "see" VRBO income from line 3 of your property's Schedule E on your tax return(s), right? So VRBO is as "real" as your declared tax return. 

Thanks for the enthusiasm Levi! We are closing on our first rental property in two weeks ???? and still very wary! This is the most "expensive" home we have ever purchased but has never been used as a rental property before ( no rental history, yet). We have done all the 'worst case' scenario calculations and are very excited to making a decent above average CoCreturn! If all goes well this won't be our last! Please Keep posting on this topic! Cheers

Thanks for the enthusiasm Levi! We are closing on our first rental property in two weeks ???? and still very wary! This is the most "expensive" home we have ever purchased but has never been used as a rental property before ( no rental history, yet). We have done all the 'worst case' scenario calculations and are very excited to making a decent above average CoCreturn! If all goes well this won't be our last! Please Keep posting on this topic! Cheers

Please keep up the posts on this topic! I am a newbie and purchasing my first vacation rental! I can see the opportunity Levi! Thank you, cheers

Update - I met with my lender this morning to go over the re-fi on one of my properties (It is a triplex, 2 VRBO units, one long term tenant.)  He asked for leases of which I produced one, for the long term tenant I have. He said he isn't sure how the underwriters will feel about not getting leases for the other two "rental units."  He worries that if they accept the VRBO income they will require a commercial loan - at a higher interest rate of course. My tax returns on Schedule E show the income this property is bringing in but he still is concerned about how it will be treated by underwriters. I swear it's a "Minnesota thing," because a lot of you have responded that where you operate VRBOs (touristy/warm areas) lenders get it! 

I'm crossing my fingers and will know in about a week if the underwriters have an issue with this. Sometimes I think they'd rather see a year lease at $800/month then the reality of the $2300/month I get per unit. Argh!!!!

Stacey

If the underwriting is following Fannie Mae guidelines, then this section applies: B2-3-01, General Property Eligibility; Property Requirements (pg. 273):

The mortgaged premises must be

  • residential in nature as defined by the characteristics of the property and surrounding market area (see B4-1.3-03, Neighborhood Section of the Appraisal Report) ...
  • suitable for year-round use.

Seems like you should be Okay. 

https://www.fanniemae.com/content/guide/sel041514.pdf

Thanks Chris! That does make me breath a bit easier. 

S.

This is good information and I guess it really depends like Mr. Pennington said on the bank and the relationship you may have with them.   I would certainly look to see if there are some local banks that perhaps you could sit down and meet with someone to explain it more in detail might help.  I know I referred a friend of mine out here to a local bank to get a 300K line of credit on a home that he owned outright with a value of 1 million, because his other banks could not see past the tax schedules of a business person.  Result was that local bank could see the business sense in it and gave him his line of credit.

There might be other alternatives, but for now this might make the most sense.

Originally posted by @Maura Paler:

 GREAT topic - we are in the process of financing our 4th Vacation Rental (3rd investment mortgage), and the big question by the banks are "huh - what - no year lease?". We found a bank that "gets" it, I think, plus we are able to provide reported income from our 3 weekly rental properties plus my vacation rental reservation business, but getting a mortgage is very stressful each time. 

On your next topic - we also have a lake side VR up for sale for $95K turnkey - it's a 1966 trailer so holds virtually no real estate value - but is in great shape, has great views, looks fab, brings in $23K year gross, very low maintenance, and has 8 years of 5 star reviews. So the only way to sell it is for the business of it - as it makes no sense for us to sell it for less because how else could we clear $15K year on $95K? We've had one inquiry from someone who "gets" the investment value of it - but that was through an ad in Craigs List. There doesn't seem to be any real marketplace for this type of investment. Would love to see one created - I would also be interested in pursuing new properties that way! 

 So it looks like that trip to Florida yielded a positive result..congrats!

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