Vacation rentals: Expected vacancy rate and management fees?

13 Replies

I've accumulated quite a few rentals in the city I live in, and the focus has always been cash flow, but I'm considering purchasing my first "vacation rental". 

While I have set formulas for my lower/middle income inner city rentals, I haven't the slightest idea what to expect from a vacation rental.  

I'm considering purchasing in the Asheville, NC area, and would purchase something that not only satisfies me for my visits, but also is universally attractive for vacation tenants, meaning an attractive setting, reasonably close to downtown, and modern amenities.  The price range I'm looking at is $100k-$150k.  The only assumption I am making is that something like that would rent for around $99 a night. 

My typical rental property at my home has a cost basis of $40k and rents for $800 a month, and those numbers always work, but I understand that with a vacation rental I may not see much income.  I know that I won't be able to manage it, and I'll have to have a property manager who will charge higher fees then a standard long term rental manager.  

So, in order to really understand what a vacation rental like this might earn (and I don't need income to buy it, but I do want it to break even), I need to get an idea, even just a ballpark, of what type of vacancy rates and management fees I'd be looking at.  

Even if you aren't in that specific rental market, I'd appreciate your estimates.  Thanks!

Hi @Dan Inc of course vacancy rates definitely depend first on location.  Our Kihei, Maui VR easily gets high 80s/low90s in terms of vacancy rates whereas a condo here in the Colorado mountains will be much less than that.  

One way to estimate what your vacancy rate would be is to check out VRBO/ Homeaway/ AirBnB listings and their availability calendars for the area that you will be investing in and definitely focus in on any rentals that will be in the same condo complex as yours. Before purchasing a VR unit in a complex I haven't invested in, I also email all the owners through these listing sites and ask them questions about their rentals. Just about every owner/ manager I've emailed have been happy to answer my questions. Through this research, you'll get a good idea of vacancy rates and management fees along with some info on the HOA, housekeepers, nightly rates, etc...

Best of luck and let us know how it all works out for you!

Jeremy

Jeremy, great idea about the VRBO and Airbnb calendars!  

I will be looking for a single family home, rather than a condo, as most people traveling to Asheville, NC want a quiet mountain cabin.  

Hi Dan -

In the line of resources, for a more simple way to get some info on occ rates and going rates, you'll also want to check out something like www.airdna.co , which can give you a bit more comprehensive information on short term rental analytics... there's a free report which will probably be all that you'll need.

I would add that when you're looking toward other listings to drill down a bit more, keep in mind that it can be difficult to get apples to apples comparisons, as the success of one listing over another depends often times more on the way it is managed than the amenities.  One mistake I find people making quite often is thinking that their location isn't ideal for Airbnb or other short term rental sites, because it's not near any tourist spots... Many people shoot themselves in the foot on this and leave a lot of cash on the table.  Often times, the areas which aren't "touristy" can be a gold mine for someone who really does their homework on short term rental.  A great supply of guests, usually 1-3 month long stays, comes in the form of just about any hospital or medical research center... I've hosted countless doctors and nurses over the years, all willing to pay a premium for a furnished and convenient pad without a long term commitment needed.  I know people who have forged relationships with the HR departments of nearby large campuses (academic and corporate) to get to the point where their income is generated on autopilot (some no longer even need to list via airbnb, homeaway, etc.).

Along the lines of management, you can turn to a company like Pillow, which likely operates in your area.  I can also provide you with some other recommendations along the lines of management if you get to that point.

The bottom line is that, though it takes more work to set up properly in the beginning, you can make 40-50% more through short term rental (notice I didn't say vacation rentals :) )

There are other regulatory caveats, etc., and I feel like the extra work in setting it up cause some people to just say "it's not worth it"... I have taken apartments that were renting on the regular rental market for 1,400 dollars in L.A. and had them making over $6,500 verifiable income in the busy months, netting around 3K after management expenses, etc... It's definitely worth a second look!

What we have done is identified the seasons  for a property.  In some areas you will have high , low, and a shoulder season. After that determine vacancy and rate for each season.  Instead of 3 units in our  calculations we  will do  three seasons with different rental rates and vacancies.   An area like Asheville may not have as large a season difference in rates but maybe there is say an event that drives up rates like a music festival.  I usually assume 100% occupancy  for high season and the best rate  then adjust the other seasons.   RI has an 8 week summer season and 3-4 in between weeks with a winter student rental.  You can look at VRBO and ads to get a feel for the seasons/rates. Watch out for owner occupancy though.   There are some longer term corporate markets but sometimes they compete with a higher summer rate for us.  I see nurses looking for short term summer rentals a lot.

Management fees seem to be higher for these.

I've also been interested in checking out cabins here in Ohio.  It seems like they could make a killing for just the in season months.  Some of these little cabins rent for $300/night and are booked out 6+ months in advance.

Dan,

One other cautionary note on Asheville.  The City Council is struggling with a way to deal with the vacation rental issues inside the city limit.  Earlier this year they increased fines for folks caught operating vacation rentals with-in city limits (currently not allowed, but done all the time) and eased some restrictions for folks who just rent a room within their primary residence (referred to as homestays). Some local investors who were fined and shut down, have filed a law suite against the city.

Several communities around the city are watching the issue closely to see what Asheville does and them may adopt that policy. (Woodfin is one example just north of the city limits)

The county (Buncombe) doesn't have a prohibition on this use currently, but HOAs may have a restriction too.

So if you do start looking, make sure you team (agent, lawyer, property manager) understand your intent and advise you appropriately of any risks. Most folks in the area are aware of the myriad of issues and should be able to help you.

Best of Luck!

Pat

Hey Dan,

We live in Asheville and have used AirBnB in the past.  As Pat stated above, there are fines on short term rentals that are pure investment properties.  The city is trying to crack down on how the constant influx of short term visitors is detracting from the "neighborhood feel" - I think it's pressure from the hotel industry. Anyway...

I've spoke with a number of other AirBnB and VRBO "landlords" and have found the following - During the summer/fall months, you can expect 130-150+ per night on a 3/1.5 in town on weekends, and possibly more around Thanksgiving/Christmas/NYE.  Consensus with whom I've spoken with is that VRBO produces a much more refined crowd - AirBnB tends to be "C" renters looking for the cheapest rate.  There has been little to no haggling on price with VRBO and almost constant haggling with AirBnB.  The place is almost always cleaner and better kept with VRBO.

Good luck in your search. If you make your way to the mountains, hit me up with a PM and we'll try to connect.

Jay

Hey Dan,

I would agree with Jay about the difference between VRBO and AirBnB. I am in Boulder, also a college town. Our city council has been cracking down on STRs and I am not sure yet how to navigate around the new ordinances. Currently, they disallow STRs that are not occupied by owners as a primary residence. My STR income has been very lucrative. At the very least, I will continue to rent my home furnished and generate additional income that way. Once you make the additional investment in furniture, you can earn at least 25% more on a rental.

Location is very important on an STR. In Boulder, folks want to be close to what is happening. Rentals more than a mile or two from the university or downtown are more difficult to rent. I also like Jay's idea of working with corporations or schools. I am actually meeting someone that has a small start-up in Boulder tomorrow at my house that needs housing for educational boot camps. I would love to set-up something long-term with them.

Grace

Originally posted by @Dan Inc:

Jeremy, great idea about the VRBO and Airbnb calendars!  

I will be looking for a single family home, rather than a condo, as most people traveling to Asheville, NC want a quiet mountain cabin.  

 Hi Dan! Lots of really great tips here! One thing to be cautious of with the VRBO and Airbnb calendars is that a lot of owners will block out personal usage, and it can sometimes be difficult to differentiate that from when the home is actually booked. Like others said, Airdna is a really fantastic tool, and I'd recommend reaching out to them. 

If you're looking for some benchmark industry averages, here's a link to a rental income calculator. While you might not know your numbers now, the numbers on the right are industry averages, and hopefully that helps! 

Also as far as standard occupancy rates, I've usually seen them around 50-60%. I'd also be wary of ever estimating 100% occupancy (even in the peak season). It can be difficult to achieve that with a lot of turnover or days scheduled for maintenance.

Finally, if you are looking for a competitively driven property management rate, I work for a free marketplace where over 400 property management companies bid with their lowest commission rates. The contracts are all standardized and extremely homeowner friendly, so it's always an apples-to-apples comparison of what service you'd be getting.

Good luck, Dan! And I hope this helps! :) 

Thanks Jay for the local beta!  Looking forward to meeting you and other local investors whenever I'm in town and can make it to a CREIA meeting.  Thanks for the invite!

Chris