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 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
@Jeff Kehl, glad you think so! It's a bit of a new concept, so it's always interesting to see people's responses to our model. And to clarify- I suppose the term "wholesale" is a bit misleading as there is usually no discount to what owners are receiving in comparison to what they could make by self-managing.
Here is a site to check out if you're interested in bidding out your VR:
https://www.vacationfutures.com/
Management companies will put a lump sum / hard "bid" on your vacation property, so there's your guaranteed cash flow. I haven't tried it yet, but I think this is a new startup from here (Atlanta). I am guessing their model is a bunch of different property management companies bid on your property. You take the highest one (or whatever you deem best). The management company pockets however much more they make over what they pay for your place. Seems risky for the management companies, but I'd guess they know their local markets pretty well.
I'm going to see how this first year goes with our new unit in Destin before looking into it.
Yes. I have a property manager and still cash flow nicely. I prefer vacation rentals to regular long term rentals because I get way more in rents, I don't have to deal with the day to day landlording responsibilities (the cash flow from my non vacation rental properties doesn't warrant the cost of a property manager) and, they are just more fun for me because I get to furnish them and do interior design work, which I really enjoy. I'd like to buy more!
Obviously location plays a huge factor in whether your vacation rental will do well or not. Places that can be year round rentals are ideal. I recently sold a duplex I had in Minnesota. It got around $1750/mo in rent from each unit. The new owner lives in one unit and rents out the other as a vacation rental. He is booked solid through September and asks $1000/week! Good for him! I just wonder if he'll still be booked up when it's the dead of winter there...
One thing that's happening now is that many cities are cracking down on vacation rentals by not allowing short term leases or simply not allowing vacation rentals at all. So that adds to the risk if you buy a place and can only cash flow if you use it as a vacation rental.
-M
They can definitely be profitable. I've been renting vacation homes in northern Michigan for 8 years with great success (compared to any long-term rental that I've ever owned). However, the first couple of years for each property, are not profitable, as there are several start-up costs to make up for over time.
Each of my properties is different from the next. What I have found to be the most appealing to customers is a blend of aesthetics and amenities. For example, all of my places are lake front. However, I have a property that out performs the others because of it's new, but rustic (knotty pine) interior and furniture. In addition, it's beach and crystal clear water. I operate a second lake house, directly across the lake from it. It is more modern (drywalled), larger than my other homes, and it it only brings in about 75% of what my top performer does.
I earn enough over a 3-month summer rental season (June-Aug) to cover all of my annual costs. Anything above and beyond is profit. I know what the annual sum of my debt service, utilities, maintenance, cleaning, etc is. I rent by the week during the peak season, so I divide those costs by 12 weeks, which determines my rent and cleaning fees to achieve my break-even point. Determine the length of your profitable rental period and do the same calcs. Every booking beyond that season is your profit. If the rental fees don't comp to others nearby, move on to another location and property that does. Remember that dealing with expensive properties equals high carrying costs while they sit vacant.
@Timothy Gleason in regards to owner's use, it can really save money for an owner. With our VR in Maui, it saves us over $2,000 in hotel costs each time we visit there so it can be a "push" when compared to the possible rental income. As I've mentioned before, it's not money coming in, but it's also not money leaving my pocket.
Depending on your market, going with more than one VR listing site isn't worth it. We just list on VRBO and easily have a very high occupancy rate. In my view, if your rental needs that much marketing (multiple listing sites, running specieals, FB ads, etc...) then it's not a good deal.
You did a great job breaking down and sharing your costs. Every location, property and owner are different and VRs work great for some and not so good for others. We really love owning and running VRs and enjoy putting the work into them. For my wife and I, when we compare the positives and negatives of VRs and long term rentals, it as an easy choice. I'm not saying we'll never own a long term rental, but for us the money and effort we put into a VR is far more rewarding than investing in a long term rental.
@Steve Dove interesting POV: using the peak months to cover costs and shoulder months for profit. That could work in my area.
@Jeremy Baker absolutely concur. Personal use has both a quantitative and qualitative value that can't be ignored. I hope I didn't come off as not enjoying owning a VR. Like you, I find it extremely rewarding to be able to apply a personal touch and see direct rewards of my efforts. The other perk is problem tenant issues are mostly self-solving. (Short terms).
@Robert R. I LOVE Gatlinburg TN! Such beautiful winters. Great place to live and definitely great place to own a VR. Well done sir.
@Robert R. I took a look at your places on VRBO. They look great and you must be doing something right with all of those good reviews. Couple questions if you don't mind. How many nights on average are you booked over a year? Your calendar looks pretty booked out over the next 3 months but I'm curious what it is over the course of a year in a place like Gatlinburg.
Do you carry loans on them or own them free and clear? Are there any HOA costs on cabins like those?
I'm thinking that would be a great retirement strategy, get some VR properties owned free and clear and live off the income. Do you just own in the mountains? Ever considered adding a beach property?
You can absolutely cashflow, but it obviously depends on location. If it's somewhere in colorado on a mountain or some beach in the keys or in NYC that can be used 90% of the year, then you're going to make a lot of money. Mountain houses, could be good most of the year, but it depends what the purchase price was, the demand for the area. Maybe try connecting with someone who's already doing it in the area you're considering via airbnb or homeaway
@Robert R. I took a look at your places on VRBO. They look great and you must be doing something right with all of those good reviews. Couple questions if you don't mind. How many nights on average are you booked over a year? Your calendar looks pretty booked out over the next 3 months but I'm curious what it is over the course of a year in a place like Gatlinburg.
Do you carry loans on them or own them free and clear? Are there any HOA costs on cabins like those?
I'm thinking that would be a great retirement strategy, get some VR properties owned free and clear and live off the income. Do you just own in the mountains? Ever considered adding a beach property?
All 3 are in the mountains here. We booked 250 days on each last year and are ahead of last years pace at this time. They will each gross between $25,000 and $30,000 this year. All 3 have the dreaded hoa's. 2 of the hoa's are in great shape and the other can be a drain at times. We do manage them ourselves on vrbo, etc. Real estate taxes here are about 1/2 of 1% of value. Very cheap. The cabin companies here charge 40%. Yikes! That would be a recipe for cash flow killing.
We hire out a cleaning company and do most of the maintenance and handyman work ourselves.
We would love to own a beach property at some point and were just talking about that last week. Any suggestions?
There is a pretty good show called "Vacation House for Free" on HGTV that I've seen a few times. I think it is better than most home improvement/HGTV shows as they get to a decent level of numbers. As many people on their thread have already spoken to, the show is basically trying to show you how to get someone else to cover all the costs of a vacation home that you can use in the non rented periods.
What I've found most interesting is that they are normally only putting down 10% which I didn't think a lot of banks would allow on a 2nd home but they are also putting another 10% or more into rehab to get the rental value up. I think anyone who is breaking even, or better, with a 90% mortgage is well ahead of the curve.
It's funny you bring up that show. As a VR manager I was excited when I saw the title of the show, but that's where it stops. Without saying too much, I personally know the broker they used to find houses in the episode filmed near me. You know... since Matt Blashaw is not at all a real estate agent, even though he is the one who is filmed showing the homes and presenting offers to the listing agent. (One of the few shows on HGTV that doesn't give any recognition to local professionals.) Nevertheless, knowing what I know about this one episode alone is enough to make me not believe anything I see on HGTV ever again.
I've been doing a fair amount of research looking for rental properties where the "highest and best use" of a property is a short-term vacation rental. I am primarily looking to convert traditional long-term rental into a short-term "vacation" rental, and significantly increase net operating income as a result.
There are many, many markets where you can 2x+ NOI converting long-term rentals in short-term rentals. The mostly common re-occurring theme that I am finding is their proximity to a sports stadium, events center, or airport. In many cases the neighborhoods immediately adjacent to a sports stadium, events center, or airport are places people do not want to live long-term, but are highly desirable short term. A $1,000 per month long term rental in a somewhat industrial and dicey neighborhood may rent for $250 per night with 40% occupancy as a short-term rental, if it's close to a local sports stadium that hosts many events or similar. That means instead of $1,000 long-term, you are getting an average of $3k per month short-term, and even after property management and other costs have probably doubled NOI.
Thanks John D. that is an interesting point. I had not thought of looking specifically for a place that had demand for short-term tenants and then backing into a rental. One downside I see with the airport/stadium/event center strategy is that they're all going to pretty much be in bigger cities where you'll likely eventually end up paying hotel taxes on short-term rentals. I've seen hotel taxes in cities be 20-30%.
One additional thought to throw in. My town has two hospitals so it has a large medical presence. There are a number of people I see that make a decent business out of specifically targeting medical professionals in town on a short-term basis. They usually want furnished and fairly high end.
I run a real estate company in Hawaii and a large part of our business is managing vacation rentals.
It is possible to have positive cash flow with a vacation rental but its just like a longer-term rental - it all depends on what you pay to purchase the place, how much work it needs and how much of the day to day work you want to do. With a long-term rental, you usually will have to locate new tenants and prepare the home for them only once a year or so. With a vacation rental, you'll be doing that every week or so.
Just for the record - as people complain about "expensive" management fees, that vacation rental management is not nearly as profitable as some would like to believe. Once you factor in all the marketing, 24x7 customer response team, cleaning crews and the like - it a heck of a lot of work to do right. A heck of a lot of expensive work.
The people that lose money on vacation rentals have a few common characteristics:
I could write a book. Probably should. But I hope these ideas help.
I often tell people that they need to expand their idea of profit. If you find a place that you love, and that you can see your family enjoying every year and it comes close to being cash flow positive - is that an acceptable loss to you considering that you will get to use it for yourself at no additional cost?
It all comes down to your goals - if one of your goals is a personal vacation home that you can love, enjoy and share with family and it will offset MOST of its costs, you have a lot of options. If its purely an investment property with no personal use or emotion, there are less options and it will take longer to find (but not impossible).
whoo, lots of different opinions and experiences. From my humble experience: location is the most important. Equally important is the furnishing, decoration and general feeling of the place, better it looks and more homey and luxurious it is, better it will rent and for more money. I would suggest using flipkey or home-away for advertising, you can manage reservations your self, and those sites would even cash all dues for you. Instead of using expensive management agency in town, hire clean and honest house keeper that would be available to welcome your guests, and to clean upon departure. You need to include anticipated utilities in your rental price. Don't try to be the cheapest in your area - be the best!
We are renting our penthouse in Biarritz for several years now. We started just with summer period while we traveled. As we moved back to California, it is available to rent year around. While it would not make you rich, it is still paying your mortgage, your home is not empty, and is appreciating year after year. For us, it works very well. If I can provide any advise to help, just ask :-)
I would say for sure possible. You have to factor the wear & tear and the big one are the UTILTIES. Those always will get you. For vacation rentals it's all about the bottom line and the location and amenities. They are not an arm chair investment even if you find a property management company you trust, you have to be pretty hands on. A good marketer to rent out year round helps. There are so many web sites now that do help and you have to be savvy enough to work them and be proactive with the reviews. People can be brutal with their yelp reviews. The days of letting some things slide have gone thanks to our modern technology. Again, with all that being said if managed well with the right numbers they can be wonderful long term investments with some French benefits.
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?
How much money do you need to spend to get started up? Beds, bedding, towels, etc.
And when you search VRBO, how many reviews are other places in your area getting? Do they have 1 review per year or 10 or 20? That will tell you what the supply and demand situation is like.
People on vacation often want a great view and/or walking distance from stores, the beach (or Ski resort or whatever it may be that attracts visitors). Does your place have that to offer?
I have a rental in Big Bear I bought in April 2014- it's giving me great cash flow- so much so I haven't worked at any other job over the last 4 months. Loving it and looking for a second one. I manage it myself because I heard horror stories about property managers taking 40% and doing nothing. I'm rented out about 200 days a year- mostly 2 to 3 night stays.
@Mike R. thanks for the post. 200 nights a year seems really good for what I'm assuming is a Ski Rental. I guess you get plenty of hikers through the non-winter part of the year?
If you don't mind me asking, what's the approximate value of the property and average nightly rental rate? I have been mostly looking at lower price condos but with really low interest rates it occurs to me that maybe higher value rentals with a low mortgage payment because of interest rates might actually cash flow better.
@Mike R. Wow - $50k or so in annual rental income on a $200k property, those numbers are killer! Even if you got professional management and factored lots in for repairs, maintenance, furnshings etc. that's a cash-cow! I'm looking at places for $1mil or so that should do $200k per year in rental income.....you've got my ratios beat, this a much safer bet (and probably less money down and cash invested)!
Yeah I researched a long time. I know what people want in Big Bear properties, which I don't think I'd get with a property manager. And I am now considering starting my own prop management company since I have been getting so many "Wows" from my cleaning crew, spa guy and realtors- ha.
My place came furnished, another big savings- I added a few other touches based on what renters wanted- and so far very little maintenance or problems have occurred so far (knock on wood)
A little less than $50k once you add in taxes, maintenance, utilities, etc... But I try to keep costs down by going up myself with supplies from Costco at least twice a month as well as doing things like staining the deck myself- etc..