Vacation Rental Numbers seem pretty good to me

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Vacation Rental Numbers seem pretty good to me

Matthew Bailey
Wholesaler · Sunnyvale, CA · Member since 2016 · 106 posts · 58 votes
So this is a deal that I came across, it’s out of my league but I was curious what you guys might think. It’s a vacation rental on a lake, for sale for 1.3M. They claim (an investor selling it) it has $190,000 per year in rental income (which could go up since the current owner lets family and friends use it some months for free. That’s a 1.2% rule on a property over $1,000,000. For comparison, I live in Silicon Valley. A 1.2M home here might rent for about $50K per year. Beside the volatility of the rental market (I assume it’s much more dependent on the economy and if people are willing to splurge for a vacation rental property at like $7k/week as the seller says) this looks kind of compelling. Ignoring the details of the property itself and just looking at the numbers, for arguments sake, what do you think? I can’t afford it, I buy and sell vacant land personally so this is out of my niche and out of my league but I have an interest in rental properties and this seemed like an interesting deal. I’d love to hear everyone’s thoughts on it, if not just for the conversational value. If you’re interested in the property I can point you towards the seller.
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Aaron K.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
8y

I am assuming that the number they quoted you is revenue, (so before expenses)  short term rentals have more expenses due to the high turnover, also someone has to manage it much more actively which costs more if you aren't doing it yourself.  Yes it is dependent on the economy and that there are enough people to spend on a vacation, so it could be more cyclical.  Also depending on where the property is located it could be normal or even over priced for the area.  As a general rule returns (excluding appreciation) are better anywhere outside of Silicon Valley.

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  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    8y

    I am assuming that the number they quoted you is revenue, (so before expenses)  short term rentals have more expenses due to the high turnover, also someone has to manage it much more actively which costs more if you aren't doing it yourself.  Yes it is dependent on the economy and that there are enough people to spend on a vacation, so it could be more cyclical.  Also depending on where the property is located it could be normal or even over priced for the area.  As a general rule returns (excluding appreciation) are better anywhere outside of Silicon Valley.

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  • Clayton MobleyPro Member
    Birmingham, AL · Member since 2014 · 875 posts · 947 votes
    8y

    @Matthew Bailey I definitely second the points made by @Aaron K. re: turnover, maintenance, and cyclical market. All of those things are true of vacation rentals and are necessary considerations.

    But the other point I'd like to make is that, while I know this is a hypothetical deal assessment, 'setting aside' the details of the property means it's basically impossible to asses. Things like the age of the roof, HVAC, other capex items, etc can be a HUGE consideration. This property sees a lot of traffic, which wears on some capex items (flooring, appliances) more quickly than, say, a multi-year tenant in an SFR.

    If this property was recently renovated and you have another 20 years on the roof and flooring, 15 on the HVAC and water heater, etc. That would be one thing. But if this prop has been held a while, you might be looking at some serious outlay in the next couple years which would eat into that $190k (which, as Aaron pointed out, I'm guessing is revenue, not return).

    If details didn't matter, then yeah this income sounds awesome. But without knowledge of the market it's located in, the actual past rental activity (someone could say it could bring in $190k a year, but that might be if it's rented year round), and a better idea of the condition, no one could really say if it's a deal or not. Also, being on a lake (and I'm assuming on, not just near), what's the flooding potential? How much is the insurance? Any water damage from prior storms/water levels? 

    I know you're not seriously looking at this deal, so of course you didn't waste your time collecting all the data - I wouldn't have either - but it's all that data that will make or break a deal like this, especially for a prop that will likely have cyclical income -  a vacation home is very sensitive to economic conditions, which makes them inherently more risky.

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  • Matthew Bailey
    OP
    Wholesaler · Sunnyvale, CA · Member since 2016 · 106 posts · 58 votes
    8y
    Thanks for the input guys! Yea I’m pretty sure they’re quoting revenue. I’m also aware of all of the capX/turnover/etc that’s got to be factored in. I definitely didn’t want to get too into the weeds in the deal analysis as I’ve got too much going on in my land investing business to be running the nitty-gritty numbers on a deal I’m not going to buy haha. It just struck me as a lot of revenue relative to the asking price because I’ve got no bearing on what it should be for a $1.3M house. I’ve always heard of people targeting the bread and butter 3/2s for a couple hundred thousand. A high end vacation rental seemed like a fun discussion to kick around since I haven’t heard anything like this before.
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  • John D.
    Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
    8y

    An informed $1.3mil investment here will net you $300k+ in gross annual rents.  I'm guessing $190k is ballpark break-even once you factor in all costs.  I'd steer clear given the inherent extra effort and risks when it comes to short-term rentals.

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  • Matthew Bailey
    OP
    Wholesaler · Sunnyvale, CA · Member since 2016 · 106 posts · 58 votes
    8y

    Thanks @John D., I guess I wasn't really sure what I was looking for on this thread other than some interesting conversation.  However I think that your post really quenches my curiosity-thirst haha.  Since I've never even considered what the numbers should look like on an investment over $1M.  It's interesting to know that in some markets you'd expect something on the order of 300k in gross annual rents.  Thanks for weighing in!

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