Vacation Rentals seem very lucrative!!

General Landlording & Rental Properties
10yFollow

Vacation Rentals seem very lucrative!!

Kristi Bass
Waco, TX · Member since 2016 · 16 posts · 3 votes
VRBO's are they a good way to maximize a properties returns? I have 2 very nice properties under contract. One has a main home, 3k sq ft with a 1 bedroom cottage, a 2 bedroom cottage & an efficiency apt. The other property was a renovated barn that was just featured on the fixer-upper tv show! Both properties are extremely unique but both seem perfect for short term vacation rentals thru Airbnb or VRBO website booking services. Have local friends who are doing this with their home & stay at about 90% occupancy & they are quadrupling what their mortgage expenses are every month. In fact they are looking to move out of the home permanently to keep from living with family pretty much all the time. So in trying to decide if this is a good direction for me to take on these 2 places it if there may be pitfalls I'm unaware of. I have forecasted the numbers & at 25% occupancy (at local comp rates) I cover my NOE. Would love any advise or theories about going this direction.
0Reply
73 views

Most Popular Reply

Russell Gronsky
Specialist · Baltimore, MD · Member since 2016 · 384 posts · 318 votes
10y

Make sure you have an alternate strategy for these properties if and when laws in your area change on VRBOs. If doing VRBO is your only strategy to cash flow off these properties, it is too risky to take on.

3Reply
See this reply in the discussion

33 Replies

Jump to latestLatest
  • Russell Gronsky
    Specialist · Baltimore, MD · Member since 2016 · 384 posts · 318 votes
    10y

    Make sure you have an alternate strategy for these properties if and when laws in your area change on VRBOs. If doing VRBO is your only strategy to cash flow off these properties, it is too risky to take on.

    3Reply
  • Casey Cuppy
    Real Estate Agent · Phoenix, AZ · Member since 2014 · 81 posts · 25 votes
    10y

    These can be very tough. On paper all the numbers typically look good but it can turn bad very quickly. Here in Phoenix the homes are amazing and do great during the high season (Jan- April) but the rest of the year I have seen people with vrbo and airbnb properties not get a single day of occupancy. Another thing to consider is the amount of work and time it takes to manage them. You will have to work with people moving in and out constantly as well as cleaning, maintenance, etc. It can become a lot of work very quickly. Most property managers I have dealt with end up charging a premium for management of vacation rentals. I would just be weary of that and make sure to run worst case scenario on everything. 

    I also agree with Russell. Be very careful as I have also seen people run into problems local laws and the required time of a lease. Something to look into for sure. 

    1Reply
  • John Duffy
    Surprise, AZ · Member since 2016 · 58 posts · 20 votes
    10y

    @Kristi Bass Wow, "90% occupancy".  You indicated you have two properties under contract. What was the main reason you purchased them for? As Russell pointed out, laws can change so have a back-up plan for the properties, however, i must assume you didn't purchase them short term vacation rentals. I have three seasonal rentals here in Surprise AZ. I am typically able to rent them from about Oct -March/April (6 months). Because i am in a desirable gated 55+ community that is hard to get into, i "know my market" well. Again, for a variety of reasons, i would be cautious getting into the vrbo, airbnb, flipkey...makets unless you truly know your market and had a contingency plan for teh unknowns of life. I would also question your friends, "90%" rate!  Just sayin!!! lol Good luck

    0Reply
  • Kristi Bass
    OP
    Waco, TX · Member since 2016 · 16 posts · 3 votes
    10y

    Thanks to all for such great words of wisdom. I am going to tread lightly as I approach this venture.

    0Reply
  • Stone Jin
    Rental Property Investor · Chandler AZ and Sylvania, OH · Member since 2009 · 708 posts · 561 votes
    10y

    We own and self manage several short term rentals in the Phoenix area.  I can tell you from experience that the amount of work to manage short term rentals is significantly more than unfurnished rentals.  Our winter rates are about 2-2.5 times our summer rates and we stay booked through most of the year.  We have had situations where the person moving in and the person moving out are on the same day and our maids(we have 3 crews that we use) were unavailable, guess who had to go clean a unit.  Yes, the return is much higher, but the effort is also much higher.  Also you have to look at the market you are in, if you are in a tourist market then you'll get a lot of demand, however if you are in a small market it might get risky if the demand is not there.  

    Also don't forget to add in the furnishing costs into your calculations.  

    1Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    This seems to be the trend right now.  Eventually the market will saturate and only the best will remain as vacation rentals.

    1Reply
  • Erica Muller
    Real Estate Agent · Orlando, FL · Member since 2016 · 139 posts · 80 votes
    10y

    @Kristi Bass I'd like to validate what you mentioned about your friends. 90% occupancy is absolutely possible and where I'm at it's completely the norm. As a matter of fact, most of the VR management companies here are so overbooked they're having to borrow homes from other management companies just to be able to host the demand for their vacation rentals. Please don't be discouraged but definitely approach this (as with ANY investment) with caution and research. Here are some expenses you may want to think about and add to your spreadsheet: 

    1. Liability insurance. This is a must and is above and beyond a tradition home owner's insurance policy. It's roughly about $500-$800 per year depending on how much coverage you get. I wouldn't get anything less than a million in liability coverage. 

    2. Zoning issues. From what I understand, Texas is a pretty VR friendly state, just like Florida where I'm at. Homeaway's main office is there (they own VRBO). I know tons of prople successfully renting vacation homes in Texas but definitely contact Homeaway and considering joining their owner's community to stay updated on any laws and regulations that could affect this. 

    3. As for the effort being higher, yes there's more work involved IF you self manage. I've sold over 100 vacation rentals to investors and only about 5% of them opted to self manage and then they ended up hiring a property manager to take over because it's too much work. It makes no sense to buy a property to use as a lifestyle investment, only to take it on a job. If you aren't considering using a vacation rental manager, I would say don't even do it. It's a ton of work. If you do, it's a fantastic investment. VR manager's will usually charge about $120-$150 per month as well as a percentage of the bookings they put in place. If you put the bookings in pace they typically don't take anything from that. You might want to read this article: http://www.thepinkflamingo.info/10-questions-you-m...

    Best of luck to you and if you have any further questions don't hesitate to reach out! 

    Erica

    3Reply
  • Tamara Elliott-Deering
    Real Estate Agent · Cedar Creek, TX · Member since 2010 · 161 posts · 63 votes
    10y

    @Russell Gronsky was spot on when he said to have an alternative strategy. Austin is trying really hard to ban or limit VRBO and short term rentals. Also, many homeowner's and neighborhood associations are putting in restrictions because they feel that VRBO's bring in too much noise and trash in the area. They have a reputation for party houses in Austin.

    1Reply
  • Russell Gronsky
    Specialist · Baltimore, MD · Member since 2016 · 384 posts · 318 votes
    10y

    @Tamara Elliott-Deering, that's exactly it! Same thing is happening in San Francisco. If the State or the City aren't cracking down on your VRs, the HOAs will gladly take on that job.

    I grew up in SF, the city is near and dear to my heart but they make it damn near impossible for Real Estate investors to make a buck. Rent controls and tenant laws like you wouldn't believe. And when people with property saw the light through VRBO...wham! In came legislation and HOAs to issue fines and beat you senseless with rules to prevent any real profits. I feel so bad for people who own all this expensive real estate and are so limited with what they can do with it.

    One other thought: watch for a business permit fee coming at you soon if you haven't gotten one yet. I own property (not in SF) but in the bay area. The other day, I got an application in the mail for a business permit because I am renting out my investment properties. Borderline ridiculous! I'm sure this will soon catch on in other hot markets around the country, if it hasn't already.

    0Reply
  • Caroling Lee
    Austin, TX · Member since 2016 · 25 posts · 6 votes
    9y

    In Austin, you do have to get a license for short-term rentals. When I first applied, it was a $285 one-time fee, it appears that has gone up in the last few years. They also have a limit to the number of STR licenses permitted in a particular area.

    They also recently amended the rules and are no longer taking applications for 'Type 2' STRs, which are the non-owner occupied type.

    Here's a link: https://www.austintexas.gov/str for more info.

    0Reply
  • Lisa P.
    Investor · San Antonio, TX · Member since 2014 · 20 posts · 5 votes
    9y

    We have a vacation rental on a lake outside of San Antonio.  It is about 45 minutes from where we live and we self manage and often clean it ourselves as well.  One of my main reasons for investing in a vacation rental is to give my kids a job, so it's a family affair. The guests typically check out at 11 on Sunday so Sunday is a mix of cleaning and playing/skiing.  We have a back up cleaner if we don't feel like doing it ourselves.   (PS my husband and I both work full time also)

    Homeaway makes it so easy to self-manage.  I have instant booking so most of the time I get a text telling me someone wants to book, I go on the app to approve them and the deal is done in a matter of seconds.  I get about 3 emails a week with questions (I tried to make my listing as thorough as possible with lots of pictures to minimize questions).  

    I think the key for a successful rental is to be sure it is spotless with lots of amenities.  We provide toiletries, have a Keurig with Kcups, kayaks, stand up paddle boards, provide soap for the washer and dryer, etc.  

    I think allowing pets has helped us as well.  About half of our renters have brought pets (we charge a $100 pet fee) and we haven't had any issues.

    We only have to rent it 10 nights a month to be profitable.  Jan and Feb have been slow, but we are still profitable since we started renting this past summer.  The upcoming summer is going to be even better.

    1Reply
  • Kenneth McKeown
    Real Estate Agent · Dallas, TX · Member since 2016 · 432 posts · 341 votes
    9y

    @Lisa P. are you talking about Canyon Lake? I've considered looking into a flip or potentially a VRBO out in the Canyon Lake area myself.

    0Reply
  • Jake Miller
    Flipper · Huntington Beach, CA · Member since 2016 · 83 posts · 40 votes
    9y

    I don't necessarily agree that managing a vacation rental is "hard" I've been managing two of my vacation rentals for nearly a decade now and haven't noticed it being "hard". I've worked full-time, gone to college and lived in entirely other states in that time and still everything just keeps going. 

    Have multiple cleaning crews, handymen and plumbers ready to go and the job will essentially just boil down to answering inquires, everything else is pretty much autonomous. 

    Homeaway for example has a hospitality application which essentially tells the guest where the house is, how to get into the house and general house rules, check in and check out times. For how much money I make on my vacation rentals I spend very little time actually having to work on them, maybe a couple hours a week just answering questions and inquiries. 

    If you're thinking of having a property management team do it just dig around and find the ones that aren't trying to gauge you, managing a vacation rental isn't hard. You can even consider hiring on a virtual management team such as pillow or evolve, they're both known for working with vacation rentals and don't try to screw you over by imposing a 20% take home from your income. Property management teams aren't going to do anything you can't do yourself, they'll usually say that they can market your home better and yadda yadda yadda, reality is Homeaway,VRBO and Airbnb are doing all the marketing for you and that's all the property management teams are going to do is list your home on there like they're something special.

    The only thing they'll do for you is simply respond to inquires,pay your bills and schedule your vendors... which honestly is so easy and virtual that it's something you can do pretty much anytime and from anywhere.

    0Reply
  • Jonathan Safa
    Rental Property Investor · Temecula, CA · Member since 2016 · 151 posts · 63 votes
    9y

    Hello Kristi, while it is true that Airbnb is more lucrative, it comes with many complications. Namely, are you willing to field hundreds of inquiries every month on your property? Or, do what I do and hire someone to take care of that (I pay  them 5% net rent). Expenses are through the roof on an Airbnb home. Cleaning, Amenities, etc. - it adds up! One of my homes posted earnings of $29k, only to find out I passed along a mere $13k in net earnings. Absolutely ridiculous. Best of luck to you, especially in a market like Waco. 

    0Reply
  • Lisa P.
    Investor · San Antonio, TX · Member since 2014 · 20 posts · 5 votes
    9y

    @Kenneth McKeown Medina Lake.  I would imagine prices are higher on Canyon Lake, but perhaps you could charge more per night. 

    0Reply
  • Account Closed
    Specialist · Bozeman, MT · Member since 2016 · 237 posts · 153 votes
    9y

    I've been doing this for awhile, and have had hundreds of guests by now... It's not so much of an investment, but a business you will be running. I have had my wife quit her job to help me, as I have many other things I *should* be doing. You'll need proper insurance, structure your business properly to protect yourself from liability, furnishings, cleaner contacts, maintenance contacts, and a lot of business and technological sense. You will be, after all, working on the internet. It's a lot of work...

    It all depends how much money you want to make, and customer service is paramount. If you want someone else to clean, you will have much slimmer margins for example. Once you get that 1 star review, your vacancy rates will take a hit. All STR sites use an algorithm, which isn't solely based on the cheapest price, but all sorts of things, like reviews, "turn downs" (like if you turn down a customer for ANY reason at all), options (business ready, superhost, instant check-in, etc), and even how fast you reply to your customer. You really need to be on the ball, and downloading whatever site's app you are using, is crucial to get those notifications on your phone ASAP. It's a very competitive business.

    Just be aware that what you calculate on paper is not necessarily reality. I always depend on a 50% vacancy, no matter what. It just seems to work out to proper numbers that way for me in my market, after all expenses. There is truly a giant pile of expenses you will run into, especially if you are going to be contracting out all the work. If not, then make sure you are ready for this to become your lifestyle.

    0Reply
  • Jake Miller
    Flipper · Huntington Beach, CA · Member since 2016 · 83 posts · 40 votes
    9y
    Originally posted by @Account Closed:

    If you want someone else to clean, you will have much slimmer margins for example..

    You shouldn't... you should be charging a cleaning fee to begin with, I agree with your mindset of understanding it's a business, and because of that the costs of business are passed on to the consumer. Cleaning Fee should be covering not only your interior cleaning but if you have a yard that needs to be maintained you need to factor that into what you charge the guests.

    0Reply
  • John D.
    Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
    9y

    @Jake Miller Regardless of whether you charge a cleaning fee, your margins will be slimmer if you pay someone to clean (vs. incurring no charge if you do it yourself).

    0Reply
  • Jake Miller
    Flipper · Huntington Beach, CA · Member since 2016 · 83 posts · 40 votes
    9y
    Originally posted by @John D.:

    @Jake Miller Regardless of whether you charge a cleaning fee, your margins will be slimmer if you pay someone to clean (vs. incurring no charge if you do it yourself).

    Yes, but those shouldn't be calculated as expected revenue or a debt. It's merely an opportunity at bonus revenue if you deem the opportunity cost to be worth it, and it can't be considered a cost to the margin as it should already be factored into the guest paying for it. The only way it would hurt your margin is if you decide to not have the guests pay for it, or perhaps you end up paying your cleaning crew more then what you're charging.

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    9y

    @Kristi Bass you will find that VRBO have risks.

    1. Most state and local governments have not caught up with regulating this industry. VRBO are taking business from hotels by avoiding taxes and regulations that hotels are forced to follow. That will not be allowed to continue indefinitely as cities start to categorize VRBO as a small hotel or resort. 

    2. The vacation market goes through cycles with the economy. Right now, vacationing is very popular, but when people see their income cut, vacationing is the first thing to go. For this reason vacation rentals are much more volatile than the general rental market. You need a place to live, but not a place to vacation.

    My recommendation is to keep cash reserves and an exit policy.

    0Reply
  • Jake Miller
    Flipper · Huntington Beach, CA · Member since 2016 · 83 posts · 40 votes
    9y
    Originally posted by @Joe Splitrock:

    @Kristi Bass you will find that VRBO have risks.

    1. Most state and local governments have not caught up with regulating this industry. VRBO are taking business from hotels by avoiding taxes and regulations that hotels are forced to follow. That will not be allowed to continue indefinitely as cities start to categorize VRBO as a small hotel or resort. 

    2. The vacation market goes through cycles with the economy. Right now, vacationing is very popular, but when people see their income cut, vacationing is the first thing to go. For this reason vacation rentals are much more volatile than the general rental market. You need a place to live, but not a place to vacation.

    My recommendation is to keep cash reserves and an exit policy.

    Both are very key to keep in mind.

    I think one thing you can do to try and hedge with Number 2, is keep your expenses within the realm that if the vacation market tanks you could still hypothetically rent out your house long term and cover your expenses on the home. This way you keep a safety net incase things go south.

    As well as that you don't necessarily have to keep your vacation rental running year round, you could very easily just rent out your home four months or however long you believe your vacation market to be and then rent it out long term furnished for the remainder of the year. This way you're not banking on having a huge hot-season booking list and enough through the slow season to keep afloat.

    0Reply
  • Account Closed
    Specialist · Bozeman, MT · Member since 2016 · 237 posts · 153 votes
    9y
    Originally posted by @Jake Miller:
    Originally posted by @Account Closed:

    If you want someone else to clean, you will have much slimmer margins for example..

    You shouldn't... you should be charging a cleaning fee to begin with, I agree with your mindset of understanding it's a business, and because of that the costs of business are passed on to the consumer. Cleaning Fee should be covering not only your interior cleaning but if you have a yard that needs to be maintained you need to factor that into what you charge the guests.

    I do charge cleaning fees, but if I charged the customer what my cleaner would charge me, it would be roughly 30-40% of the rental fee, which is not something people want to see once they attempt to book your property.

    As for maintenance, I find that signing up for a PM maintenance company is a huge waste of money. It is around $300+/month or about 10% of revenue per unit. For a few lawn mowings... No thanks. 

    Once again, it is up to you how much money you want to make, but having a cleaning fee of 30% of rental, would be a deal breaker for me, so I would assume that other customers think along these lines as well. 

    0Reply
  • Account Closed
    Rental Property Investor · Philadelphia, PA · Member since 2016 · 40 posts · 53 votes
    9y

    My wife and I rented out our primary residence for 290 nights in 2016 and we made about $20,000 from it gross. We have another property in my wife's name that we lived in for a year that we are now renting out for $1,200 a month, both these are in Philly. While it's lucrative make sure you budget taxes. Ours were about 28% of the gross. Our area is in high demand which means we get a lot of bookings but you'll also have to factor in cleaning, furnishing, etc. 

    I've had great experiences in Airbnb nothing really negative. Airbnb makes it very easy in my opinion. Just factor in vacancy and be OK with having irregular schedules sometimes. 

    0Reply
  • John D.
    Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
    9y

    @Jake Miller Every property management company, owner, and CPA I have talked to counts cleaning charges as revenue.  And cleaning and maintenance expenses as expenses.  Both in future forecasts, as well as historical financial reporting.  And I don't think the IRS has a section for "bonus revenue"...nor do many people do financial forecasts with "bonus revenue" in them ;)

    1Reply
  • Jake Miller
    Flipper · Huntington Beach, CA · Member since 2016 · 83 posts · 40 votes
    9y
    Originally posted by @Account Closed:
    Originally posted by @Jake Miller:
    Originally posted by @Account Closed:

    If you want someone else to clean, you will have much slimmer margins for example..

    You shouldn't... you should be charging a cleaning fee to begin with, I agree with your mindset of understanding it's a business, and because of that the costs of business are passed on to the consumer. Cleaning Fee should be covering not only your interior cleaning but if you have a yard that needs to be maintained you need to factor that into what you charge the guests.

    I do charge cleaning fees, but if I charged the customer what my cleaner would charge me, it would be roughly 30-40% of the rental fee, which is not something people want to see once they attempt to book your property.

    As for maintenance, I find that signing up for a PM maintenance company is a huge waste of money. It is around $300+/month or about 10% of revenue per unit. For a few lawn mowings... No thanks. 

    Once again, it is up to you how much money you want to make, but having a cleaning fee of 30% of rental, would be a deal breaker for me, so I would assume that other customers think along these lines as well. 

    Sounds like you may need to find a different cleaner then, in my experience I tell the cleaners what I pay and how long it will take them between flips, if they want it good, if not I move on to someone that's motivated to get it done. I definitely don't talk to cleaning companies that advertise themselves as "vacation rental cleaning companies" reason being is they're no different than a Property Management company thinking they can gauge you because it's a vacation home.

    For example one of my units is a 4 bedroom 2 bath 2000sqft home, I have my own cleaning crews that I pay 100 to clean in three hours time, that comes out to 33$perhr. Now for pure interest I called two separate cleaning crews who advertised themselves as "vacation rental cleaning specialists" and they quoted me 300 per cleaning, which is just insane.

    Cleaning is cleaning folks, whether it's a vacation home or not we're talking about changing sheets and scrubbing floors. Attention to detail is the only distinguishable characteristic one generally needs to do the job, their is no degree behind it or general skill that takes one years to learn to limit the labor force to allow them to price gauge.

    Same thing for lawn maintenance, I call the big companies and they quote me 40 bucks per mow, I call a handyman and he quotes me 20bucks per mow... mowing is mowing folks, there is no degree or distinguishable reason to mark up the price beyond what it is.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free