How I’m Earning an 8% Cap Rate With My Vacation Rental

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In 2014, I bought a vacation rental on the Oregon coast. In my first full year of ownership, I earned more than $35,000 in net rental income. Vacation rentals can be lucrative, headache-free investments, as well as amazing assets for you and your loved ones.

Here’s how I went about making my investment.

Where and When to Buy

When you’re looking for a vacation rental, focus on drive-to markets where housing prices are depressed or recovering slowly. Drive-to markets are easier and cheaper to get to, so they’re more recession-proof and more appealing for last-minute bookings. My property had been on the market for several months when I bought it, so the seller was motivated to accept when I offered less than the list price.

I chose a 3-bedroom, 1-bathroom house in Rockaway Beach, Oregon — about a two-hour drive from Portland. The oceanfront property includes a separate guest house and an additional undeveloped lot.

Keep an eye out for homes that can accommodate extra guests with guest studios, basement apartments, and in-law quarters. My two-in-one home makes an attractive vacation rental since the main house and the guest studio can be rented either separately or together. In high-demand periods, I can capture more peak revenue by renting the units separately.

Related: 6 Way to Impress Your Vacation Home Renters With Top-Notch Service

If your rental doesn’t have multiple units, you can increase the number of guests you can accommodate by adding fold-out sofas and bunk beds.

I put $100,000 down on the property and spent an additional $22,000 furnishing the home and outfitting it with appliances. This included a hot tub, the cost of which was amortized over five years. Adding a hot tub (which usually will run you $3-5K) was a priority for me since I knew it would help maximize ROI by allowing me to generate more bookings, justify higher nightly rates, and enhance guest experience.

Once a guest has decided to stay in a vacation rental, they typically begin narrowing their search parameters to find the best possible house for their needs. Amenities like hot tubs and fold-out beds and property features like ocean views help your home stand out in filtered search results. Allowing pets won’t cost you a dollar and expands your reach immensely.

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Location, Location, Location

My vacation rental is right on the ocean, which was a key factor in my decision to buy it even though it made my insurance more expensive. As with hot tubs, many prospective guests filter their searches so that they only see oceanfront homes, meaning that non-oceanfront properties are essentially invisible.

Your vacation rental investment will be more successful if you educate yourself about the location, the market, and the costs involved before you buy. Consider proximity to local attractions — like a lake, a ski resort, or an amusement park — as well as to popular events. Convenience is a crucial factor when prospective guests decide which home to book. On that note, make sure your home is physically accessible in all seasons. If the road to your home is impassable during the winter months, you’ll miss out on a lot of potential income.

Be sure to gather real numbers on insurance and property taxes based on the home’s location (e.g., an oceanfront property demands higher insurance costs). I recommend talking through these variables with an expert, like a financial planner or a professional vacation rental manager before you sign on for costs that might be higher than you expect.

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Show Me the Money

In 2015, its first full year in operation, my $410,000 Rockaway Beach house brought in more than $35,000 in profits. Here’s how I got there.

My rental generated $86,000 in gross rent in 2015. Of that, 35% went toward the management fee, which includes marketing, rate optimization, guest services, housekeeping, maintenance, and everything else involved in the day-to-day operation of a vacation rental. Working with a reliable management service saves you the hassle of those midnight calls from guests who’ve locked themselves out of the house or can’t connect to the internet.

Related: 8 Evergreen Materials to Market Your Vacation Rental & Keep Guests Informed

A further $5,000 went toward insurance costs, including flood insurance, while repairs and supplies cost me $2,300. I usually recommend setting aside about 5% of your gross rent for these costs. Property taxes set me back $3,345, and utilities for 2015 totaled $5,287. I spent an additional $350 on lawn care in 2015 and $4,400 on furniture.

This left me with net rental income of $35,218 in 2015, with a cap rate of 8.6% after fixed and variable expenses (excluding interest).

My vacation rental investment has been successful in large part because I did my homework first. I bought while the housing market was still recovering, sought out a home with multiple units so I could accommodate extra guests, and added features like a hot tub to enhance guest experience. I also decided to allow pets in order to attract guests with four-legged companions, and I opted for an in-demand location even though it increased my insurance costs.

When people stay in vacation rentals, they’re paying for the experience, so your home should be optimized to provide the best experience possible. Investing with that in mind has resulted in a rewarding, recession-resistant asset that I can enjoy with my family and friends whenever I want.

If you’re investing in vacation rentals, where did you buy and why? What kind of cap rates are you seeing?

Let me know your experiences with a comment!

About Author

Cliff Johnson

In 2009, Cliff Johnson cofounded Vacasa, a technology-enabled vacation rental management firm that has since been named one of the fastest-growing private companies in the nation. Today, Cliff oversees investor partnerships, organic growth and sales, and international development as the company's chief development officer. Not only does Cliff personally invest in vacation rentals, but he also works with real estate investors across the country to identify and set up lucrative vacation rental opportunities backed by the Vacasa guarantee. Cliff is also a member in good standing of the Colorado and California State Bars, serves as a board member for MAPLE Microdevelopment, and is a board member for the Vacation Rental Managers Association (VRMA).

10 Comments

  1. Katie Rogers

    We only use VRBO and manage to stay fully booked all year. In fact, we dabbled with some other listing platforms, but ended up rejecting all of them. We absolutely will not use AirBnB. Too many problems.

    I agree that allowing pets really opens up the customer pool. We have not had any problems with pets.

    • Ross Bagley

      What were the problems you noted with AirBnB? In my experience, they save you from a lot of work and so far… no big problems. I didn’t want to deal with payments, deposits, return of deposit, etc. and am happy to pay AirBnB 3% to take care of that along with a big chunk of my marketing.

      Caveat: I am only buying true vacation SFR’s, not leasing urban apartments for business travelers which means that I am far away from most of the “AirBnB apartment drama” that absolutely does exist.

      • Katie Rogers

        We want to screen our own guests. We do not want guests we have not screened in our house. In this way, we have avoided drug parties, porn filmers, and a host of other issues. We want to deal with payment issues ourselves. The fact that our guests deal only with us, and never with a third party, also means we do not have to worry about double-bookings because some random site scraped our VRBO listing. One reason is the scrapers hardly ever edit the listings they scrape. They just copy and paste, so they don’t bother to delete the part that warns guests if they saw the listing anywhere but VRBO, it’s fake. We regularly search for scraped listings, and insist they be taken down when we find them.

        • Ross Bagley

          Thanks for the detailed response. I think I understand your concerns and so far, we simply have different concerns 🙂 My big deal is both my wife and I work full time jobs and we need to outsource 90% of the work or this simply can’t work. I tried dealing with payments for exactly one month. It sucked enough time away from other things I needed doing that I had to stop.

          I have a small worry about parties, but have directed Guesty to use screening guidelines (don’t live locally, at least three positive reviews from hosts, etc.) that have so far limited the potential damage. The porn shoot thing has the power of urban legend and we had to make an early judgement call of whether we trusted that most people were going to be reasonable or not. We realized that if we couldn’t trust that most people putting up a credit card would be reasonable, we shouldn’t get into the business. So far, so good.

          On the listing scraping scammers, the smart lock codes only work for the authorized guests and we make it clear that your code stops working after check-out time. I wonder if that is keeping the craigslist scammers at bay since their approach appears to be stay in your place, copy the key, then attempt to list your place and collect the fees. That won’t work in our place since there is no key to copy. Fingers are crossed, but so far nobody has shown up banging on the door who didn’t belong there.

        • Katie Rogers

          “at least three positive reviews from hosts” How does that even work? I would say most of our guests had never rented a vacation home before, much less at least 3 times before. Porn shoots are not urban legends, and they positively love houses like ours located on 30 private acres. As far as keys and codes go, we do not use either. On the other hand, the vacation house is not the only occupied building on the property.

  2. Michael Baum

    We were all set to buy our first vacation rental home in Lincoln City, but the flood insurance was astronomical. Over 6k per year and it wasn’t a beachfront property. It was only 1/2 block to the public access and you had some views from the upper deck.

    In the end, paying that much for just flood insurance was just too much for us.

    Great story!

  3. Ross Bagley

    Maybe I’m doing this wrong, but I expected the cap rate on your vacation rental to be significantly higher than 8%. As I understand it, cap rate is Net Operating Income divided by property value. Specifically, the mortgage interest and principal expenses are not deducted from gross income when calculating cap rate. Assuming those came to about $2200/month, that’s another $26400 along with the $36000 net profit for $62400 NOI. $62400 / $410000 or more like 15% cap rate.

    Which is more what I would expect for a reasonably run vacation rental.

    One other thing: a 36% management fee is where things used to be in decades past, but with the rise of Airbnb and the constellation of Airbnb-enhancing services like Guesty, Pillow, Beyondpricing, etc. 36% is now far too much to pay. I pay cleaning services and handymen but don’t manage them (leave that to Guesty or Pillow) and I get price optimization with 90% occupancy for a total of 9% of gross + cleaning fees (which I pass through to guests as a zero-profit fee). Modern property management services can easily push the cap rate to 18% or more depending on how well you chose and outfitted the rental (good call on the hot tub).

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