Is It Profitable to Own a Vacation Rental? Calculating Income vs. Expenses

Are you looking to buy a vacation home rental property but want to make sure it is a good deal? Below, let’s walk through a vacation home deal analysis.

How to Calculate the Vacation Rental Expenses

The best thing to do first is to calculate vacation rental expenses—figure out how much the vacation home is going to cost on a monthly basis.

Here is a list of the typical expenses that most vacation homes have each month and/or year:

Most of these expenses are pretty easy to figure out on your own without much help from anyone else. Your monthly mortgage fee can easily be calculated and most insurance agents can give you a pretty good ballpark figure on the renter’s insurance.

Your Realtor should be able to ask the current owners for their last 12 months of statements so you have a better understanding of how much utility bills will run. If not, call the utility company, and they will be able to give you an average monthly cost.

Please note that vacation rental properties tend to have higher utility usage than other rental properties. Think about it: The guest is not the one paying, so if a light is left on, they are not too concerned. Utilities will also be higher during popular travel seasons and lower during the off-season.

How to Calculate Vacation Rental Income

Once you’ve tallied up all the expenses, you’ll have an idea of how much the vacation rental will cost monthly.

The rental income of a property, however, can be a little more difficult to figure out. To get the most accurate gauge, email or call other homeowners or get in contact with the current management company.

When you speak to the current property manager of the unit you are interested in, ask them a few simple questions:

What can you tell me about the rental history of the property?
How much is the nightly rental rate on average?
How much annual income does the property produce?

A lot of management companies handle all the bookings for the homes they manage. If the current management company does this, they should be able to provide the last 12 months of invoices, complete with all the costs associated with the house and the rental income.

Management companies are always the easiest to start with because they know the more helpful they are to the new homeowners, the better chance they have of retaining the unit under their management after the sale goes through. They are also in the property more often than the current owner, so they can provide better information about necessary repairs, ongoing maintenance, and guest feedback.

Next, go online to VRBO, HomeAway, and Airbnb. Look for a vacation home that is similar in size and location to the property you are looking to purchase. Pay attention to the comparable properties’ nightly rates. Check their calendars to get a feel for the occupancy/vacancy each month, too.

Don’t forget that vacation hot spots have high, mid, and low seasons, and pricing will vary accordingly. Because of this, you can’t expect your rental income to be the same each month.

Lastly, reach out to individual homeowners who list their properties on VRBO and HomeAway. (You can’t do this for Airbnb, because homeowner contact information is not available.) For me, email has worked best. Send the homeowner a note, telling them that you are interested in purchasing a home in the same neighborhood where their house is located, and you have a few questions you would like to ask them. Typically, people are pretty open to helping each other out.

Wrapping Up

After you have talked with a few homeowners in the neighborhood and done your research online, you should have a pretty good idea as to how much rental income to expect on a monthly basis. Now all you have to do is simply compare your income to your monthly expenses to see if it is a good deal.

What other questions regarding investing in vacation rentals do you have?

Let’s talk in the comment section below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.