Vacation Rental: Schedule C vs Occupancy Rate

2 Replies

Hello everyone! New REI here, and looking to get straight into a vacation rental property that my wife and I will maintain ourselves. However, something with the seller's Schedule C isn't lining up with my expectations.

I was told by the seller that they have maintained around 37% occupancy over the last 12 months, and I know the amount the seller has said that the cabins are rented for. However, when I do math for total rent per night * 365 * .37 to get an idea of gross rent for 1 year, I get a number around 3 times what was reported on Schedule C. 

Is this something to be worried about? or is my math flawed? I did some title searching as part of my due diligence, and didn't see any tax issues at all there, so I'm hoping that it may not be an issue.

Also, does anyone know if the Schedule C is used in appraisal of property value for commercial loans? I'm not sure if the seller would agree to sell below agreed purchase price if the appraisal came back much lower than their expectation, and I would hate for Schedule C to be a deal-breaker.

Thanks so much, and I greatly appreciate all the amazing information on here! Keep up the good work!

Tim Doenges

First, see Sch-C vs Sch-E.

Second, the appraisal is not performed based upon EITHER schedule.

However, the GSI-Expense = projected NOI, times 0.37 is actual NOI and that has to cover the mortgage+interest, insurance and taxes.

The high vacancy rate (1.00 - 0.37 = 0.63) is a killer and usually, you would take such a loss ONLY because you would be year long resident AND love the life style - - aka it's typically a bad 'investment' and you're making this choice for OTHER than financial gain.

Wow, that's fantastic information. Thanks for clarifying Schedule E vs Schedule C. It really doesn't make sense to use a Schedule C in this case, since I don't think the current owner put near 750 hours into this property, and didn't have any others, so I'll have to get some more information from my banker as to why they are requiring it for this deal.

The one thing my wife and I believe we can do in this instance is play to our strengths--that is, leverage social media and online booking tools to increase the occupancy rate. The current owner has an outdated and, frankly, not-too-useful website and client list that will convey, but beyond that does not list the property on any sites like AirBnB or VRBO or HomeAway, and relies almost entirely on referrals from other vacation rentals in the area once they fill up. We believe that we can add value instantly by increasing the online presence of the property.

Even at the high vacancy rate, creative financing on down payment, and with accounting for property management and cleaning costs (which we plan to pay ourselves to do, but may want to outsource later if able), the cabins at their current rent price will cashflow, according to the actual NOI formula above, so we are feeling pretty confident in the purchase even if the value add play doesn't work out. And, not trying to be a speculator, but there are a lot of attractions nearby that are ramping up tourist interest so there is also potential for rapid appreciation if that comes to pass.