Are Vacation Rentals ever cash flow positive?

91 Replies

I just finished reading Christine Karpinski's book 'How to Rent Vacation Properties by Owner' . The slant of it was that if you manage yourself and use portals like Airbnb, vrbo, etc. you can break even or even get positive cash flow. The idea's appealing to me but I have a hard time believing any vacation rental is very profitable.

So I thought I'd throw it out there to see if anyone was doing this profitably and if so, are there any characteristics that help? For instance beach better than mountains? Any Vacation rentals with exceptionally high occupancy?

I am pretty sure Brandon and Josh have done a podcast on this.  Maybe someone else remembers which one it was. 

@Jeff Kehl  you can definitely cash flow with a vacation rental.  Just like any other aspect of rei, it's all about the deal and it is tougher to find a positive cash flowing vacation rental in many markets these days.  We have a cash flowing rental in Kihei, Maui and working on a deal right now that will be cash flowing...well, cash flowing if we can get the seller to agree to our asking price that is!

From my experience, the beach (but not just any beach are) is going to have a higher occupancy rate than the mountains (ski areas) just because most ski areas are very seasonal.  We have thought about getting a place in the CO ski areas, but it's much tougher to keep those places full in non-ski months.  On the other hand, it's very easy to have an 80% occupancy rate in Maui and with a little extra work it's not hard to keep your occupancy rate above 90%.  Also, condo prices with ski area condos here in CO are about the same as condo prices in Kihei, Maui.

You don't have to go to HI to find great occupancy rates either as I've heard many investors enjoying great occ. rates in the Disney areas of FL.  I don't know much about that area, so maybe some one else will shine some light on that area.  There's also some on here who have great cash flow success in non-beach areas too.  

If you want to see more of our numbers and how our vacation rentals perform, feel free to private message me and I'll be happy to share any info and give any advice about VRs.

@Jeff Kehl I know a couple of people who cash flow positive with their vacation rentals. If you buy in the right place, it seems to work quite well. Example: Arizona = Chicago in the winter. I think everyone I know goes there for 3-4 months of the year. Also, in those "prime" months, you can rent out the place by day/week/month for much more than you can the rest of the year. I know a couple of places that rent for $3,500/mo during Cubs training camp for example. If you can budget that and get people in the unit during the offseason, you could very easily cash flow.

Jeff -

There are a number of vacation rentals here in Central Florida near Disney World that produce a positive cash flow, and the owners use property managers.  A key ingredient to the positive cash flow is the vacation rental market here is year-round due to Disney, Universal and SeaWorld.  However, I would be remiss to not also say that there a lot of vacation homes here that, even with the year-round market, do not positive cash flow.  The size of a home, its location, the home's amenities, the property manager, etc., all have bearing on the profitability of each vacation home here.

The good news for you is you can look at VRBO, Airbnb and the others and get a good idea what rent you can expect in an area that you are researching.  Creating pro forma statements is invaluable with the rent numbers and with all of the expense numbers.

Keith

@Jeff Kehl

A buddy rents out an inlaw at his parents house west of Boston $200 a night 90% occupied. Another bought an old Victorian in SF 8 beds $200 a night also 90%

Paul

Thanks for all of the responses. I understand that if I buy at a really good price or have had a vacation property in my family for years it would be profitable. But I was more wanting to see if I bought something today at market prices what might be profitable.

3 were mentioned, Hawaii, Orlando and Boston. The thing that strikes me that is common about them is that they all would have pretty good appeal year-round. Higher occupancy which translates into higher profitability. That makes a lot of sense.

I have owned a ski condo in Colorado before and had pretty poor results. High Occupancy in the winter, very little the rest of the year and a 30% management fees made for a bad experience for me.

I had been thinking in terms of beach or mountains so thanks everyone for the other ideas to consider.

@jeff 

@Jeff Kehl I'm sure you are going to get a lot of opinions about this.  However, for the majority I think they are unprofitable after the fees, taxes and insurance, etc.

HOWEVER, I do believe it can be very profitable renting out your house at ABSORBENT rates for short-term special events.

we made about $4000 per year on a beach condo in Galveston.  But honestly the hassle of taking bookings, paying taxes monthly, scheduling cleaners, ect wasn't really worth it for us.  We tried it, decided the hotel business is not for us and sold it this last spring. Our time is more useful elsewhere.

@Jeff Kehl I'm in the process of buying a vacation rental right now in Destin. I've run the numbers into the ground, and it looks like the best I can expect is to break even with cash flow (at least for the first few years).

However, there's an additional value in that we will have a condo for my family to go to any time it is not rented (or anytime we want, if we choose to block off some weeks). So we are kind of approaching it from a different angle: We want a place on the beach, and we want other people to float the cost of it.

When I run the numbers that way, then it pretty much becomes a net gain if we own the place for just 2 years (i.e. we would likely break even with cash flow and also cover all closing costs if we sold). Beyond 2 years and it becomes slightly profitable. I know you can't really anticipate property appreciation (or it's probably dangerous to). But I did anyway. At a pretty modest 1-2% appreciation rate over the course of 10-15 years, then the total investment becomes about a 7-8% annual return. That's about where it seems to level off. And doesn't account for the "free" use of our condo several weeks per year. Can't put a price tag on that.

But I decided that if we hold it long enough to average 7-8% per year, then we have pretty much matched the S&P 500 and it was worth it.

A lot of "ifs" in there, though. I'll let you know how it goes in 15 years.

@Brandon Richardson,

I'm sort of there as well. If it will come close to breaking even I'm fine with that. I just don't want a money pit. I was also looking at Destin/Panama City/Ft. Walton.  What number are you estimating for occupancy? Where did you get it? That's my biggest fear is that I can't hit the occupancy number I would need.

Here in southern Californias coastal areas many of the people rent their homes for the summer months and make enough to pay for their morgages the rest of the year. Others have vacation rental businesses and make a nice living. 

Here's a quick link to look at summer rates in San Clemente, but you can search anywhere. I chose that city as that's where we are currently building a house and have 2 condos in the planning stages. We have been approached by people regarding the suitability for Vacation Rentals. 

San Clemente Vacation Rentals

  1. Absolutely yes. It depends where it is though and what you're paying for the property. If it's in the keys and it's occupied 95% of the time and the house or mobile home (yes those sell for 150-200k in the keys and rent for $1500 a week) then yes it's very cashflow positive. However if you're in a more seasonal area like somewhere in Colorado that primarily only attracts renters during the winter months, then that's a big factor. A lot of vacation rentals are in expensive areas so it's important to factor in the % of time it can be rented. And always charge cleaning costs on top of the rent per night, regardless of how long someone stays there, so you don't have to cut into your profits.

I have had a rental house in Lake Tahoe for the last five years.  It ranges from netting $5k/yr. or so to breaking even, depending on expenditures.  I bought with cash.  If I had a loan it would be negative cash flow.

The biggest issue is the constant wear and tear on the furniture, appliances, etc.  The more it rents (which is the goal - keep it filled as much as possible,) the more wear and tear.  Then there are years where I will need to replace the deck furniture, or the hot tub, and that wipes out any cash flow.  But at least it breaks even, and is a great place for my family to use when it's not being rented.

The biggest expenses that kill short-term rental cash flow (for me) are utilities and management. If it was a long term rental, some of the utilities would be absorbed by the tenants.  Which would make a big difference in a mountain/winter area like Tahoe.

Management fees are as high as 35% for full service vacation rental management in Tahoe.  I think I pay 28%.  It's worth it for me, but obviously a huge expense.  

cash flow - not with a mortgage, high maintenance area, expensive management fees.

We manage our own(VRBO) and make an average of about a 3-4% annual return. Rent it about 100 days a year average. But we use the place 6-10 times a year. 

Wouldn't trade the great family times at our house for ten other rentals. 

Originally posted by @Jeff Kehl :

@Brandon Richardson,

I'm sort of there as well. If it will come close to breaking even I'm fine with that. I just don't want a money pit. I was also looking at Destin/Panama City/Ft. Walton.  What number are you estimating for occupancy? Where did you get it? That's my biggest fear is that I can't hit the occupancy number I would need.

 Any occupancy estimate is really just a guess, so I kind of backed into my numbers.

Looking through VRBO, it's pretty obvious that if you have a beachfront condo in Destin, you can rent it every week for the months of June and July. You can just pull up peoples' listings and see how rented they are. And you'll be able to do at least 2-3 weeks in April, and a couple of weeks or so in May and August. The other months are less tougher, because it's so seasonal. So I got those numbers from VRBO, specific properties' managament sites, and then from some friends who sent us their rental spreadsheet.

So I basically used those assumptions above and ran all the numbers on it. I figured that the top end of rental income that you can expect in that area is $40k. And that's on nicer properties. Some of the older, "less nice" buildings top out at around $30k. And then we have friends who are in their first year of a rental unit in Destin who confirm that $40k is the cap. You could really hustle and maybe get mid-40s.

We are honestly okay with even paying a few grand out of pocket every year, because we'll hopefully be spending several weeks a year there.

Originally posted by @Brandon Richardson :
Originally posted by @Jeff Kehl:

@Brandon Richardson,

I'm sort of there as well. If it will come close to breaking even I'm fine with that. I just don't want a money pit. I was also looking at Destin/Panama City/Ft. Walton.  What number are you estimating for occupancy? Where did you get it? That's my biggest fear is that I can't hit the occupancy number I would need.

 Any occupancy estimate is really just a guess, so I kind of backed into my numbers.

Looking through VRBO, it's pretty obvious that if you have a beachfront condo in Destin, you can rent it every week for the months of June and July. You can just pull up peoples' listings and see how rented they are. And you'll be able to do at least 2-3 weeks in April, and a couple of weeks or so in May and August. The other months are less tougher, because it's so seasonal. So I got those numbers from VRBO, specific properties' managament sites, and then from some friends who sent us their rental spreadsheet.

So I basically used those assumptions above and ran all the numbers on it. I figured that the top end of rental income that you can expect in that area is $40k. And that's on nicer properties. Some of the older, "less nice" buildings top out at around $30k. And then we have friends who are in their first year of a rental unit in Destin who confirm that $40k is the cap. You could really hustle and maybe get mid-40s.

We are honestly okay with even paying a few grand out of pocket every year, because we'll hopefully be spending several weeks a year there.

I am also looking for a property in the Destin / Panama City area.   Do you have any suggestions for condos to avoid or ones that looked promising?   I am doing a 1031 exchange so looking for something in the 200k-300k range.   If I could find something that would gross 30k-40k that would be great.   

Originally posted by @Steve Bing :

I am also looking for a property in the Destin / Panama City area.   Do you have any suggestions for condos to avoid or ones that looked promising?   I am doing a 1031 exchange so looking for something in the 200k-300k range.   If I could find something that would gross 30k-40k that would be great.   

We just closed on a 2/2 in Miramar Beach two weeks ago. It's a beach-front unit right where Scenic Gulf Drive runs back into 98. The building is called Edgewater, and it's about 30 years old. The building has a big following, though, and the better units there will gross in the $35-40k range (or possibly higher). Well, at least that's what we have seen and been told. I'll find out for sure in 12 months.

However, it's going to be hard to get into a beach-front place for under $400k in the Destin area. We didn't look in PCB, so I can't really speak for that area. That being said, what are you looking for? Are you just looking for an investment/rental unit? Like I said above, we sacrificed a good bit on the return because we plan to own the unit for a long time and use it occasionally. We just want to break even on cash flow so we will have a place to take the kids growing up.

If you are looking at it only for an investment, then I can point you toward some properties that may work for you. There are a few that are across the street from the beach that do over $30k in rentals, and you can buy them in the high $200k range. And there are some toward downtown Destin that are actually beach-front that do the same thing. They are just more like hotels than condos.

Let me know what you're looking for and I'll give you some ideas. PM me if you want.

Hi @Jeff Kehl !  

My company specializes in vacation rentals, so I was really excited to see your post!

It's definitely possible to be profitable with a vacation home. Maui and Palm Springs are always good places for a rental, and we've seen quite a bit of success for homeowners even with more seasonal rentals in Park City, Beaver Creek, etc. Even the urban neighborhoods are becoming increasingly successful as short term rentals with the increase in demand for corporate housing.

With this in mind, investing in a short term rental is risky and the fees are generally high. You said that you were previously paying 30% in management fees for your Colorado home. Have you ever considered doing a guaranteed wholesale rental so the manager would be paying you and taking on all the risk?

Best,

I own a waterfront VR in Pensacola Beach, FL. The minor cash flow it produces is almost meaningless. Even those who say that VRs CF would likely concede that their money and time could be spent more productively elsewhere. I liken it to a timeshare with equity buildup. Appreciation is the big unknown on these properties...but that's not CF.

VRs have expenses you wouldn't ordinarily pay on a std rental. Below are a sampling that I've seen to date. These are real numbers on a $750k house. I wrote this for a friend, but I'll post here for general use.

Mgmt: 10-20% of gross rent. 10% if I coordinate the bookings, and 20 if I do a complete handoff. I strongly believe in the former. I control my brand, I have extreme agility with my rates, I control my marketing, etc. if it doesn't rent, I have only myself to blame...which is my preference as a control freak. I convert about 1/10 inquiries to bookings. Each inquiry takes about 5-15 min of work. This is a game of minutes...you have to act fast or your prospective guest will move on to their next choice.

Utilities: You pay all utilities. My power bill was $450 last month. Tenants are not shy about temp set points in the 60's. I know because I have wi-fi thermostats and I monitor them. This also allows me to put them in 'vacation mode' from afar if I have some vacancy. You're also paying for a full cable/internet/phone bundle. WIFI is expected, and a landline phone is handy for reaching your guests mid-stay. Cost: $100 Water/sewer is standard for a home of this size: $120

Marketing: VRBO and Homestay is $400/year for the lowest plan option. Up to $1200/year for highest search ranking. They also allow you to run "specials" which I've used to pump out discounts. $20/week, 2-week min. FAcebook ads are giving me limited success. I've dropped about $200 there, but now sure how much conversion I've had off these.

Turnover: Cleaning and linen for my house is $250. This provides hotel quality cleanings with the same crew each week. They also provide towels, sheets, soap, shampoo, sponges and dish soap. (Think Country Inn & Suites).

Damage waiver is $50. This is like a pooled insurance policy through the Mgmt company. Better than a large security deposit in my eyes.

Credit card fees. Somewhere around 2-3% of gross costs. I'm paying $50-80/booking.

Hotel Tax 11.5% on rent, cleaning and damage waiver. All these fees/taxes are charged to the tenant (except CC fees), but they serve to limit profits. If a family's budget is 4k, you'll only be able to get rent in the 3200 range...then pay Mgmt compactly 10% plus CC fees.

Furnishings: Dishes, furnishings, AV, games, etc. you need to provide a full home, replete with everything they need that isn't consumable. Beach chairs, sand toys, board games, grill are all expected. A full kitchen is also expected. (Including baking ware, crock pot, griddle, etc). When gramma wants to make her traditional pie for summer vacation, she needs everything to do it. Keep in mind everything in this list needs to be refreshed periodically.

Concierge service. When people drop $4k/week, they feel entitled to ask for anything and I don't blame them. Even tho 25% of that cost is straight to fees. I have sent flowers, picked up specific kitchen items, coordinated fishing charters, and helped draw out weekly itineraries. I make it clear that once they check in, all requests go through The mgmt company (to eliminate urgent requests of me), but up front, I probably spend 2hrs per booking to give them a custom vacation. And I don't bill for the small stuff.

Maintenance Coastal homes have a high maint burden, and VRs have a very high std for functionality. There can't be any 'idiosyncrasies' about the home. Everything just has to work. This was my biggest initial expense, along with furnishings (even tho house was bought furnished).

Time: I spend about 30min/day on marketing, inquiries, pre-arrival comms, and post-guest follow up. It's gotten easier, but still needs to be done if you want to run it like a business.

Liability insurance: Std fare for you but don't forget it. I'm at $525/yr just for liability. Flood is $6k. Taxes are somewhere around $12k. Fire/wind is $2600. Lease fee is $800.

Owner use: You're obviously losing revenue, but also have to budget for cleaning, either in terms of your own time or $$. I pay the $$ because all my discretionary time is spent on maintenance. I don't have 2-3 hrs to clean at the end of a sun drenched weekend.

Future costs: VRs are getting mainstream. I forecast having to provide paddle boards/kayaks/fishing gear to differentiate myself in the next season or two. I'm also considering a strategic partnership with a fishing charter service, but will wait until offseason to begin those discussions.

Bottom Line:  There are market specific items that will improve your bottom line.  In my area, proximity to the beach, a pool, and heads-in-beds directly translate to higher rents.  "Check as many boxes" in your market, and get a deal on the home and you have a chance to make $$$.  (Ex: Having a dock in my area is a large expense that doesn't translate to much more revenue).

Hope some of this helps.

-Tim

@Timothy Gleason and @Jeff Kehl , if you're looking to calculate your net income after the associated costs, this link might help. http://content.vacationfutures.com/income-calculat...

Having a management company place a net income offer on the property is always a good way to pass off the associated costs and risk to a management company.

What about in georgia specifically? Does anyone have positive cash flow vacation rentals in the georgia mountains? Or any other area.

@Timothy Gleason thanks for that exhaustive list. Made me tired just reading through it. That's one thing that scares me off Vacation Rentals. The Ski condo I had was very simple and I think if I get another I will stick to a condo instead of a house at least until I have more time to deal with it.

@Monika Haebich that's an interesting business model you have. I had not heard of Wholesale VR. I like the idea that the NOI I received would be a known quantity so maybe I could find something with a very small return but at least I knew I wasn't going to be losing money. And not having to worry about all of the little details is certainly appealing. But I'm sure it would just make my search that much harder because I have to find something with positive cash flow after your cut.

@Florian N. thanks for the spreadsheet. Looking at that, the example properties seem good. I will see what some real life examples look like. I think mainly the examples in there are kind of nuts. A $78k purchase price that rents for $175-250/night? I'll take it! It's been awhile but I think the stuff I was looking at was more like $200k  renting for $100/night. I wonder if there is a 2% rule for VRs using the daily rate? I guess it would have to take into account occupancy rate as well. A VR rented 95% of the time at the nightly rate probably looks good no matter what the expenses are.