Does the 50% rule hold true for vacation rentals?

9 Replies

I'm considering Hawaii in particular but was wondering in the broad market as well, does the 50% rule hold true for vacation rentals? I know the expenses are different given the nature of the revolving door that vacation rentals are. From those who have experience in this space what have you found to be the case? What is s safe quick assumption to calculate expenses if the 50% rule doesn't hold true? Thank you all for your insight. Barry

I've never bought a vacation rental but I would imagine the 50% rule would not work very well as a general rule of thumb.

Vacation rentals have many extra expenses than a normal 6/12 month rental. However, the profits come with the extra premiums vacationers pay to be at those properties. I would imagine expenses and revenues to vary greatly from location to location, even more so than they do with normal rentals. 

No, the 50% rule doesn't apply.  You have to cover all utilities, which can add add a significant expense every month, especially if your rental requires a lot of heat or a/c, and if you have amenities like a hot tub.

Unless you manage it yourself, you can pay anywhere from 10-35% for full service management.

You also have to budget for replacement of furniture and other items.

It's much harder to net cash on a vacation rental than a long-term rental, in my experience.

Buying property with the intent to use it for the vacation rental business model is a totally different kind of investment. You have to run real numbers.  No rental v. purchase price formulas.  Your income is like that of a hotel, so you need to determine nightly/weekly rates and allocate a vacancy rate (like hotels do).  Then there are expenses for advertising, PM, cleaning and supplies/furnishings. You are also more likely to run into 1099 territory with your help, costing you more in bookkeeping and tax prep. Then there is the cost of booking. Even if you use airbnb, you're looking at about 6% of income going to airbnb and paypal just for booking.  There also might be local permits and taxes. It's just a matter of time before all munis in the US pass ordinances to collect some kind of hotel tax on the "sharing economy".  (Just my opinion of course.)

Unless you have experience in this area, I'd not purchase any rental property that can't support itself as a regular rental.  You need a Plan B if the unit doesn't work as a vacation rental.  And/or if the industry or munis make policy that regulates vacation rentals.

thanks for all the great info and opinions. I appreciate them. Exit strategies are very important so making sure the property can work in other facets is key. I see very clearly that there are extra expenses with vacation rentals but 2 to 3 times what a regular rental would be? That's what the income potential is for many of these. You might get $2200 for a house on a long term lease but over $5000 with 80% occupancy as a short term rental. It's takes some work but not impossible. The big thing mentioned is the unknown of future regulations and "hotel taxes" from cities (always looking for more money any way they can!) thanks again

Originally posted by @Barry Belknap :

thanks for all the great info and opinions. I appreciate them. Exit strategies are very important so making sure the property can work in other facets is key. I see very clearly that there are extra expenses with vacation rentals but 2 to 3 times what a regular rental would be? That's what the income potential is for many of these. You might get $2200 for a house on a long term lease but over $5000 with 80% occupancy as a short term rental. It's takes some work but not impossible. The big thing mentioned is the unknown of future regulations and "hotel taxes" from cities (always looking for more money any way they can!) thanks again

Our experience is that yes short term income on our VR's far exceeds what we could get from long term income. Yes check the local regulations, but keep in mind if they start to tax you, they are taxing everyone, so everyones rates go up, keeping you competitive. Keep in mind the extra expenses (furnishings, housekeeping, utilities, supplies, etc which are pretty easy to factor in), but the key factors are occupancy rate and mgt fees. I see you are looking at Hawaii - a year round destination. I would research comparable properties in your area of interest on VRBO, etc and follow them for a while to see how booked they get. If you are self managing take into account that your time needs to be compensated. And if not...check the local mgt fees, in many places they are so high they eat all profits. If you do proceed - make yours the nicest in your price range, get professional pictures, spend the $ marketing on VRBO, Flipkey, HomeAway and list with Airbnb. Do a Facebook page and ask every renter to post pictures to it after/during their stay. Their friends will see your VR, like the photo, then all their friends see it. 

Originally posted by @Barry Belknap :

thanks for all the great info and opinions. I appreciate them. Exit strategies are very important so making sure the property can work in other facets is key. I see very clearly that there are extra expenses with vacation rentals but 2 to 3 times what a regular rental would be? That's what the income potential is for many of these. You might get $2200 for a house on a long term lease but over $5000 with 80% occupancy as a short term rental. It's takes some work but not impossible. The big thing mentioned is the unknown of future regulations and "hotel taxes" from cities (always looking for more money any way they can!) thanks again

We have a vacation rental condo in Kihei, Maui so please feel free to PM me if you have any questions about the market and regulations there or if you have any other questions about running a VR in HI.  

As for the 50% rule, as many mentioned above, it doesn't really apply to VRs, especially HI since your expenses will be higher than most markets.  

I wouldn't worry too much about the "hotel taxes" in HI.  The current tax rate there is 13.42% (general excise and transient accommodations taxes) and these get passed to the guests.  Everyone has to do this, including hotels, so it's really not a disadvantage to anyone to have to charge this, although there are some that are "skirting" the tax law there (HI is starting to crack down on these "Illegal" vacation rentals).  

Exit strategies are important, yet, in HI (especially Maui) it's going to be tough to really find a property that will work as a VR and a long term rental.  With property prices there, even if a VR is generating monthly positive cash flow, it's highly unlikely that it would produce any positive cash flow as a long term rental (unless you put down more than 50% or purchased with all cash).  I'm not saying it's impossible, but very tough to find a property there that has the possibility of both which is why you really need to do your best when evaluating properties there.  

I think it will be different in different areas. Many expenses vary. These can be deal breakers depending on local situation. 

Real Estate Taxes. Big variance depending where the property is located. 

Management fee. 40% charged where mine are. That is why we manage them ourselves. 

Hotel/Motel tax. We have them here at city, county, and state levels. It totals 12.75% and it can be passed along to the renters. It is customary I think in most areas. Cleaning fees can also be passed along. 

HOA costs. They can add up if not careful just like on a regular rental.

There are many more considerations but these seem to be the big ones. 

I had looked into it for owning a vacation home by the beach etc. but then looked into the realities of it. Beach good for a few months of the year, hurricane insurance, million other things to deal with.

When I take a vacation I want to drop all problems and just enjoy my time. If I have to deal with BS then it's not a vacation for me.

Ultimately I decided against it and will just stay at a very nice hotel or rent a place. Renting a  place is concerning that you are dealing with fraud people who are not the real owners or are double booking etc. I can't imagine booking a vacation and then finding out where you want to stay is a sham and you are left high and dry.