Vacation Rental Financing

8 Replies

Anyone have advice on how to calculate the 'numbers' on vacation rentals?

I believe it can have a good cash flow even with the added expenses as long as the property is in a area of high rental demand and the property itself is priced right to buy. Is there a more precise way of checking the ROI before making an offer?

Added expenses at the outset would be furnishings, decor, household items, linens, etc

Monthly expenses would include property management, housekeeping, landlord insurance, utilities, internet/cable, lawncare, etc.

Any help or advice is appreciated!


Hi @Julie Dillon! Very good idea to run the numbers. When we bought our vacation home I went through each and every AirBNB and VRBO/HomeAway listing for the general area. Lakefront only. I pulled numbers from all listings, even those 8 bedroom log mansions with 2400 sqft of dock to the 1 bed 1920's lake cabin. Even though they are very dissimilar, I made sure I knew the numbers.

You need to find the sweet spot. Our's was a 3 bed 3 bath (or somewhere therein). Price was right and the rental numbers were very doable. Once you narrow down the field, you can look at everything else. 

Then I pulled the calendars for all homes that were even a little bit close in size and nightly rate to see how their bookings were. What did the pics look like? How many 5 star reviews did they have? Amenities? That is your more direct competition. You can then decide who you want to market to.

We market to families specifically and the house is setup that way. A separate kids bunkroom with TV and stuff. All the beds are Queen or King. A cool convertible game/card/bumper pool table. TONS of kitchen supplies. Everything from coffee makers to a single egg poacher. Depending on your area, do not skimp here. We get rave reviews for our kitchen and it's completeness. 

Decor is a matter of taste and location. You wouldn't want to decorate your mountain cabin in a Caribbean beach theme. There are a ton of resources out there on the Web to get ideas. 

I found most of our furniture on Craigslist or family who were changing out stuff. Always go for USA (or other quality) made furniture. We have almost all Thomasville, Drexel etc in the house with some exceptions (one bed was made locally by a craftsman around 1940). 

Memory foam mattresses with gel topper. Best combo for most people IMHO. You don't need to spend a ton. 

If you are a summer place I highly recommend Percale weave sheets and not Sateen. Percale is a crisper weave and they run cool. Ours are a 75/25 Cotton/Poly blend. Always white. 250TC. We are a more casual place so that's that. If you are doing something for 2500 a night, then buy accordingly. 

White bathtowels, hand towels and washcloths. We provide dark grey cheap washcloths to remove makeup. Hair dryers in every bathroom. We have dedicated beach towels. 

Our vacation home is about 360 miles from us and we self manage. No way I am giving up 40% to full service property managers. Our housekeepers are 225 for each flip, we pass through the cost of course. 

NO LANDLORD INSURANCE. Get insurance specific to short term vacation rentals. We use Proper (Lloyd's of London). It is more expensive but it covers damn near everything. Regular landlord insurance will leave you hanging.

We have no yard so other than trimming some Oregon Grape vines back, zero work. 

Utilities will greatly depend on the location. We have city water (even though we are very rural) and sewer. Propane for the furnace and electrical service. Your real estate agent should be able to get numbers on any property you are considering.

We have 12mb DSL internet (Frontier) and that is as fast as we can go. No satellite TV. People just use their Netfilx accounts. 

Communication is the key. I email the folks and call them before they go. Chat for a few minutes and text them when I see the house is unlocked to make sure everything is good, then text them the night before checkout with some instructions and asking how things were. Then I ask for that coveted 5 star review!

I hope this helps. There is a ton of stuff to cover, but it is fun. It took us a year to find the right place and about 9 months getting it in shape. Your first year will be light. People like reviews and a place with no reviews will take longer to book out. Of course if you have a very popular area and everyone gets booked fast, then you will just ride the wave. Your second year should be much better.

One thing I forgot. You will pay a higher rate for a second home of course, but even higher if it is to be a rental. 

When we bought our home, we were on the fence whether or not to make it a rental. We got a lower rate. If we were to refinance it, our rate would go up by 1.25 percent according to some mortgage people I talked to.

It has verifiable revenue as a rental from 2018 so there is no way around it. 

Now, we were honestly not sure about using it as a vacation rental. Lots of horror stories about crap happening (which hasn't happened to us) so it was probably something we weren't going to do. But if you tell them it's just a second home...well...

Hehe, also, most lenders will not use projected revenue for a vacation home. Only existing or past revenue. So if you find a place that was used as a rental and it has verifiable income, it might be able to be used. If not, I doubt any regular lender will allow the use of possible revenue (when it has never been done before). So if you can qualify without any kind of income, that would be your best bet. 

Another thing, we went with a small local bank as the lender. Made it easier and personal. Made the difference. All the numbers worked out, but they also thought we were great and I think that helps. Plus there are sometimes weird things with vacation homes that local lenders know. Our area for example has all the lot lines out of whack by about 10 feet. Only way to fix it is to have a full area redraw, but that is a lot of dough, so you just use the local title company that knows it.

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@Michael Baum

Wow...all great info!

We have a house in a Las Vegas suburb that we rented out for the first time last month with a local property manager. My husband and I live on the road so we're rarely home. We kind of got our feet wet with vacation rentals but we'd like to expand by buying another property that can be furnished and marketed to a specific niche market. I'm not sure which makes more financial sense...a turnkey home which will cost top dollar with a bland interior or a fixer-upper which although cost less, the labor costs would add up plus time off the rental market. It's a tough decision.

@Michael Baum wow! This is one of the best, most complete replies regarding STRs I’ve read on BP by far!

Incredibly insightful, thanks for taking the time to share. I've updated my STR criteria list based upon your input. Thank you!


This thread seems to have gone in multiple directions so I'll do my best. (TLDR may come in to play here lol) 

As far as financing.... It's not much different than a regular home with a few small exceptions. After all you are just buying a SFH. Unless it's a condo. At which point you'll need to research if it's non-warrantable or warrantable. If it's warrantable that likely means it's in a building that is NOT STR friendly. Non warrantable loans have much higher rates fees terms and conditions than conventional loans.

Which brings me to the most important part..... MAKE SURE Short term rental is LEGAL in your market before wasting time looking at any properties. 

A second home loan will have the SAME rate as a primary home, (as opposed to the previously mentioned higher rate). Down payment is 10% minimum, must be 65 or more miles from your primary residence. You will pay PMI if you put down less than 20%. You CAN put 20% down on a second home loan. Get the lower rate and avoid PMI. Most folks find the 10% down is a very inexpensive way to get into a property. 500k property only 50k to get in to. In my market it will gross 100K per year.

You will also have to sign a "second home rider." Google this and discuss with your lawyer and banker whether you feel comfortable "airbnbing" a property on which you've signed a second home rider. This brings much controversy on the forums, do a forum search for it. 
My opinion.... If you're not putting a lease on it wherein the tenant has legal rights, it's not an issue. Short term renters do not have tenant rights (unless you LET them stay 30 days) and if you need them out and they wont go, you simply call the cops and they get booted. As opposed to an eviction which can take months. Believe me I'm going through one right now. 

Investment loan = 15% to 20% down. Higher rate (usually 1-1.5%) 15% down you will pay PMI 20% down no PMI. No second home rider. And the best part.... projected rent can be counted in favor of your DTI! If you're in a heavy STR market they'll likely count projected rent in the form of STR income

As far as running numbers it's no different than running numbers on any rental. 

The lower the down payment, the lower the monthly profits. 

How much money is coming in (Gross) minus How much money is going out (Expenses) equals NET profit. 

NOTE: If you do not self manage an STR you're not likely to make much of anything no matter what market you're in. (There are a few small exceptions)

In a true STR market, the property may come furnished such as where I am in P Forge G Burg because that's all there is here. NOTHING but STRs. Nothing bout tourists. Millions and millions of them. The property was built as an STR and has always functioned as an STR. The seller isn't going to fly in from Oklahoma to haul a 10 year old couch across the country so they leave it, and everything else, for the buyer. Which of course generally means you're inheriting 5-10-15 yer old furniture and appliances, but it's much cheaper and easier to replace them as they break, or at your leisure, than having to do it all before you get up and rented.

And don't forget the best part of STR! They can be easily self managed from anywhere in the world with just a smart phone. Don't let anyone tell you otherwise. I self manage 15 doors in 3 different markets and I'm constantly traveling. I just came back from running a marathon in exotic Minnessota!

The title and the subject matter went a few different directions. Hope this helps! 

Good luck I'm here if you need me! 

I fully agree with @Michael Baum. I would drop all your numbers in Excel and don't forget Internet and Cable/satellite.

I would put in worst case for electric and water. Then you can manipulate the numbers and easily run different scenarios. 

Try and not use a PM as they will eat up 30% of your gross and will make it very difficult to cash flow.

Speaking of insurance. I have been shopping this and Proper and CBIZ are the two leaders but they are much more expensive. I finally found a great vacation rental/commercial policy through Foremost that isn't much more than a regular homeowners policy.

@John Underwood I've got Proper on all of mine, and yes it's expensive, but boy has it been worth it!  One of the cabins got bed bugs last month, they covered every dime with NO deductible - that claim alone was worth my whole premium.  Had a tree fall on another cabin last week - my deductible does come into play on that one, but they're super easy to deal with.  It's easy to get a real person on the phone (vs CBIZ that took three days to return my call) and I'm always happy with the treatment I receive.  

I hope Foremost is awesome for you, but just had to get a plug in for Proper, 'cause I'm a fan :) 

I just went through this process for my first STR and besides what everyone is saying remember these others expenses.

Rental site fee: Every platform charges a fee, AirBNB is 3% while VRBO is close to 8%. If you're renting your place for $20k/year that's $600-$1600 year in extra expenses.

Cap ex: You'll want to save some to replace furniture or fix stuff when it breaks.

Consumables: Soap, toilet paper, cleaning supplies, etc.

One of the best things we did was calculate out various scenarios. Basically, if we were only able to rent it for x weeks a year how much would we potentially lose vs if we rented it maxed out how much could we make. We have 11 of such scenarios ranging between those two extremes of which four would make us negative cash flow. Knowing this helped us understand our potential loses/gains before making the purchase.