Vacation Rental Valuation??

3 Replies

Hello BiggerPockets! I am very new to real estate investing and need help putting value to a property that I have come across. The property has 3 log cabins that sit on 5 acres of land. All built with in the last 20 years and are in great shape. There is also a plot with a 50' x 70' metal building and a well that supplies the cabins. The couple runs a very successful vacation rental with these cabins. This property is not on the market, I approached the owner after learning they want to sell in the near future.  We have had a number of conversation and we have gotten to the point of talking price. Being that it is not actually on the market I have no clue what their asking price will be or should be. After talking with the owner, he wants me to shoot him a price. The only numbers that I have are the assessed value from the county assessor. I also know their approximate yearly income from the rentals. How do I value this type of property? Any help will be greatly appreciated! 

Originally posted by @Jon Moser :

Hello BiggerPockets! I am very new to real estate investing and need help putting value to a property that I have come across. The property has 3 log cabins that sit on 5 acres of land. All built with in the last 20 years and are in great shape. There is also a plot with a 50' x 70' metal building and a well that supplies the cabins. The couple runs a very successful vacation rental with these cabins. This property is not on the market, I approached the owner after learning they want to sell in the near future.  We have had a number of conversation and we have gotten to the point of talking price. Being that it is not actually on the market I have no clue what their asking price will be or should be. After talking with the owner, he wants me to shoot him a price. The only numbers that I have are the assessed value from the county assessor. I also know their approximate yearly income from the rentals. How do I value this type of property? Any help will be greatly appreciated! 

Jon, if you know the amount of gross annual income they are generating from the property, then you need to find the expenses on the property. This should include everything. Since this is a vacation rental, it will typically have more than a normal SFR. Here are a few expenses to consider:
- utilities
- marketing
- taxes
- insurance (can be more for vacation rentals depending on the area)
- cleaning expenses
- toiletry & other supplies (since this is a vacation rental)
- property management (this can be high if you are not going to manage it yourself)

After you have all of these then you can find out NOI (net operating income). Once you have NOI, you can divide that with the going CAP rate for the area (if you know this). If not, then you probably have to find out. If you can't find out, then I would think that whats the BARE minimum return you want from this, and use that number to come up with the maximum you would pay.

Hope this helps. (btw, don't look at the county values as they usually are very off). 

@Jon Moser

Try exploring the Vacation Rental Forum and searching the site in the upper right hand corner. I think I came across a similar forum post the other day! Hope this helps! 

@Jon Moser

 I would throw in a tip that pops into mind when negotiation. "He who speaks first, loses." This family seems nice and great that they are willing to talk to you off the market. Be careful though. If it's not on the market, and a unique type property and use for that area, it could get messy really fast. I would recommend finding a local Realtor that is familiar with this type of property and use. 

Couple benefits to using a professional. 

1) They are not emotionally attached like you will be. They can look at hard numbers and tell you what you need to take or offer to make it work out. 

2) They know what to look at and consider in the big picture to make sure this turns out to be a profitable venture. 

3) You have someone else to blame. lol. Funny way to say it. Honestly though, it removes you from the negotiation so the current owners are not hurt or offended by your offer. I don't know if you know them personally, but it sounds like you have built some relationship there. If you go and offer $X, and they are upset, you can easily say, I have been talking with my Realtor and this is what they have come up with as a fair offer. They are free to do the same. Getting other professionals involved turns it into a sales fight by agents, rather than a spitting match with you and your new business friends.

Keep it clean, keep it fair, and save your relationship for coffee and getting to know each other. That is the best way to do business and keep from burning future bridges with people. Hope that helps. I know it's not a calculator to answer your question, but hopefully it helps lay some foundation on how to approach this to keep relationship, not rip them off (by not knowing), and not lose money that could have been easily saved in the deal. 

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