Rules of thumb for vacation rentals?

11 Replies

While I realize that rules of thumb like the 1% rule cannot replace proper due diligence and thorough analysis, they can help focus time/energy. Does anybody have any helpful rules of thumb that can be applied to a short term rental search? And to make it even more challenging, the area I’m targeting is coastal Maine, which is a highly seasonal market for vacation rentals. I’d have to pay a property manager too. Any advice appreciated.

David,

I would look at rates that other VRBO/AirBNB's are getting and look at their calendars to see how full they are. This may be skewed some from dates owners may have property blocked for maintenance or self use. 

Determine cost for mortgage, taxes, insurance, utilities, maintenance, housekeeping, repairs, furnishing house, replacement of high uses items like sheets, towels, pots/pans etc. Stocking toiletries, coffee etc.

Then take a huge chunk out for property management. This can be 30%.

If you get a great cleaning service and some repair people on standby then it isn't too difficult to self manage remotely with VRBO/Airbnb. You need a GREAT cleaning service that can be your eyes and ears and restock items for you.

Put all this in a spreadsheet and run the numbers based on what you think you can gets in rents based on comparable s as described about.

You may find you are barely breaking even or worse for a lot more work.

If you are in a highly desirable tourist area then you may be be able to make money.

It is a labor of love and we get to use our place some so that helped in our decision.

You can use your spreadsheet to run different scenarios to help you evaluate potential properties to see if you can find a place where the numbers work for you.

Here's my rule of thumb: vacation rentals net less income than long-term rentals.

You won't hear that very often on BP. Most users claim to be making a killing but rarely provide actual numbers or account for their own time/money invested. If you are honest about the numbers, you will find most vacation rentals don't produce the same return you would get with a long-term rental and the workload is significantly higher.

@David Gerber Everything @John Underwood said. It sounds like it's a place you would like to use too and that matters because you will be trying to make the numbers work in order to support your vacation home. Profit isn't necessarily your motive in this case. If you just want to run a STR the numbers might not support it as an investment if it's very seasonal. And run an exit plan: would it rent as an annual and at what rent?

@Nathan G. I highly disagree with your statement. If no one was making money I think all of us would be smart enough to exit the business. There are two sides of the spectrum in Vacation Rentals. 1) Those who are buying a second home for their family or themselves to retreat every few months and those who consider this a business and never see our rentals because it's making us money. If you have done short term rentals I'd like to know where you fell short and I'd be happy to provide any tips.
Note: I'm a manager and own multiple properties in FL doing both short/long term so I can speak from all angles. I've never seen anyone here ask for numbers but I can provide those as well.

@David Gerber , it is very difficult to create a rule of thumb for VR/STRs due to all the variances with regards to the Operating Expenses and ADRs...that was actually one of the reason's I created Clik2Flip.   I wanted something to provide high-level returns instantly without heavy calculation to figure out if it warranted deeper analysis.  I will sometimes do a quick back of napkin calculation for certain areas however, such as median residential home price divided by average annual revenue provided by either Everbooked.com or AirDNA.com when quickly comparing two potential VR areas. 

Cheers!

@Richard Ibeh I managed over 70 vacation rentals for a couple years so I'm pretty familiar with them and don't need any tips. I think you misunderstood what I wrote so let me try to explain.

My basic statement is this: vacation rentals usually produce a lower return than long-term rentals. Most users claim to be killing it but they only share income, not expenses. I recently saw a guy on BP say, "I made over $40,000 last year with two vacation homes!" but when I asked him about expenses like marketing, utilities, or taxes, he refused to share anything and got upset that I was raining on his parade. Things to consider:

  1. What did it cost to furnish the home?
  2. How much do you pay for utilities, internet, repairs, maintenance, marketing, insurance, etc?
  3. How much is your personal time worth and how much time did you spend managing the homes?

When the expenses are figured in, their "$40,000 return" quickly drops to $30,000 (or less) which means they earned $1250 a month per home. They could have earned as much, often more, by renting it long-term. Long-term rentals tend to produce more income and require less effort.

Don't take my word for it. Professionals have examined numbers on a national basis and come to the same conclusion. Read this article for a different opinion. Notice they throw out a "top performer" earning nearly $60,000 but they don't mention any expenses so you can expect the actual net income to be around 50% of the gross.

Many Landlords handle everything themselves but never calculate that into their return. For example, they charge the tenant a $100 cleaning fee, clean the house themselves, and then calculate $100 income. In reality, their cleaning time is worth $20 an hour, they spent four hours cleaning, so they really only netted $20 of the cleaning fee.

I hope that makes sense.

My housing market is not typical.  My rule of thumb is to count the number of bedrooms in a house and multiply it by $200, that's how much I charge a week.  My other rule of thumb is that 6 months of gross rent should pay for the purchase price of a house.  In this town you can buy a bank foreclosure 3 bedroom house with CH/A for just under $10k.  Can't do it every day, but you can do it once every 3-6 months when one comes available.  Another rule of thumb is that utilities and other variable expenses are going to take up to 33% of your rent each month.  If utilities are less than one weeks rent, you had a good month. My tenants are refinery contractors with a per diem.

@Nathan G. good to hear you've done short term. I started off managing 50 and scaled up to 326 rentals then purchased my own so when people give off a negative connotation on short-term rentals I have to question their take on it.

Evolve is a "marketing only" manager so they wouldn't factor in expenses. They only advertise rentals and book guests for 10% commission. You have to contract out maintenance/cleaning or handle yourself. (for anyone reading this)

You are right about the expenses and those who brag in that sense typically are new to it. Vacation rentals are a long-term business. As you build your reviews and figure out what works best for that rental(s) just like any business is when you'll see the rewards. There are so many add-ons that owners can offer guests without lifting a finger that can significantly increase their bottom line but that's for another post.

Thanks for your feedback.

@Richard Ibeh , @Paul Sandhu@Nathan G. , @Jon Crosby , @John Underwood , @Nancy Bachety THANK YOU ALL. Perfect example of why I love BP. Ask for advice, hop on a flight, and by the time I have internet access again I have several thoughtful and insightful responses. And it's fine that you don't all agree on everything. As I process these points I may follow-up individually with specific questions. Thanks again!

My rules of thumb are:

--We only buy properties where I can expect 30% of the total cost to purchase, renovate, furnish, etc. in gross annual rents.  So I guess that's the 2.5% rule when viewed monthly.

--We only purchase or property manage properties expected to generate $150k+ in gross annual rents, if they are within 20 minutes drive of the mid-point of all of our homes.  Or $300k+ gross annual rents if they are within 40 minutes.

--We will consider expanding to (distant) new markets if we expect to be able to generate $1mil+ in gross revenues relatively quickly, and meets the previous rules.  I'm looking for a second market.

--I expect to spend about 20% of gross revenues in property management costs (staff, overhead, etc).  So long as I follow the above rules, we can manage these properties professionally and with a very hands-on approach, while still generating amazing returns.

I'm a coastal Maine resident, property owner, and investor. A few points about this market specifically: 

Some areas of coastal Maine are becoming year-round destinations. We don't invest in STRs personally, but those I know who do cite an unexpectedly full calendar, even in the so-called off season. This is primarily happening in Portland and surrounding coastal towns as the city increasingly becomes a mecca for foodies and beer drinkers. We're also seeing a steep increase in the number of people who want to move to Maine and need more short term housing while they look, and empty-nesters who are downsizing, but not ready to leave the area. That said, price to buy in these areas is high, and both Portland and South Portland are feeling the pressure to regulate the STR industry, so be aware of the local politics in whatever area you choose. Most other areas will see the most traffic in June, July, August, and September, but expect it to be pretty slow for the remaining months of the year. I've read to plan for about 70% vacancy over the course of a year, and I think that's a reasonable way to estimate it in those highly seasonal markets.

The other point I would make is one of maintenance. Those who don't live on the coast are rarely aware of the cost to maintain a property exposed to regular salt air. I'm not sure where you're looking, but areas south of Portland are increasingly vulnerable to extreme weather -- flooding, beach erosion, and structural damage impacted many southern coastal towns this past winter. 

Good luck! I love coastal Maine. Nowhere else I'd rather be! 

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