Do you use the same metrics to analyze a vacation rental as you would a regular rental?

Question

Hi Everyone,

I've tried searching through the forums for some info on this, but haven't found anything concrete, so figured I'd ask.

My question is whether you need to bump up normal assumptions, RE maintenance, PM, capex, etc. costs when analyzing a vacation rental property to see if it will cash flow versus a regular long-term lease tenant?

I assume there are going to be higher maint and PM costs, but how high should I estimate those costs for analysis purposes, and what other costs do you need to worry about that you wouldn't otherwise in a regular rental?

I would be looking at a SFR versus a condo, so no HOA or CCC type restrictions to worry about.

Thanks in advance for any input!

Sundeep Amin · Answer

@Colleen F.

Michael Seeker

@John Cummings

Thanks for the detailed breakdown and other things to note. I especially liked the breakdown for vacancy expectations.

I know this site mostly deals with purchasing property, but I wonder if anyone out there has tried to create a business renting property to then sublet as vacation rentals. I know there are lease implications to look out for but if doable, you'd cut out property tax and home insurance too. Just thinking out loud.

Sundeep Amin · Answer

@David O

I live in San Diego and have two friends who have been AirBnBing their places (I'm unaware if their leases allow it or not, but let's assume they do). They were only doing it as they work out of town and wanted to cover their rents, but told me to do it as we're in the same line of work and my place has been empty for the past 3 months.

Here in SD it looks like people can easily rent out their apartments for 20+ days a month, and although I'm not 100% sure, we're pretty much a year round destination.

@Colleen F. You bring up some good points, but I wonder if they could be mitigated by renting a small cottage house here, so that you don't have neighbors to worry about. I would want to be up front with people and let them know that I may be subletting their places for some amount of time. Perhaps the next step is to call some places and see what they say when I tell them this?

@John Cummings I totally get your concerns John and that's why I'm kind of thinking out loud. I figure the unfurnished costs for my own 1br apartment are about $1200, plus costs to modestly furnish a place, maybe another $5k ( I don't think I spent that much, especially if I take out my $2k bed), the unknown are cleaning costs, which are usually tacked on and paid by the renter, so we'll not include those. Extra costs would then be reserves for damages, but I think you get a security deposit as well.

Similar apartments are going for around $120 a night (not accounting for boosting the price on holidays or weekends) which would put the bare bones  break even point at around 10 days...? IDK, again, I'm just doing quick back of the napkin numbers here, and would need to look into in more, but other places in my neighborhood are booked about 20 nights a month for the next few months which means about 10 days worth of "rents" should go to the bottom line.

This topic seems to have interested at least a few people, so I'll keep updating here as I look into this further, thanks for everyone's contributions.

Account Closed · Answer

@Sundeep Amin

Maybe I am too conservative, but the idea of renting and then subletting as a vacation rental seems full of issues, the first of which is profitability.

If you try to do a long term rental on a furnished place, then you have to turn around and do short term rentals to make enough additional margin to make it worth while and typically, the zoning will not allow you to do that, as most residential areas (or condo HOA by laws) do not allow rentals of less than 30 days.

If you decide to rent unfurnished, it can easily cost 10K to 20K to furnish the house, and while you can move the furniture and dishes from house to house, the furnished versus unfurnished premium is usually 500 to 1000 a month, so it could take a year just to break even on furnishing.

If I were thinking about this, I would do what the others have mentioned which is to rent a larger house than you need and do the Airbnb thing for rooms, and take on the clean-up and risk of random roomates.  It might be a great way to save a down payment to get into a duplex where your tenant can pay your mortgage for you.

Colleen F. · Answer

@David O   On the AirBNB  I used to do a free   version of this  years ago.  We would host international visitors through an organization we belonged to, just for a few days. They would call or mail to arrange a visit while traveling through the US.     We didn't get any money for doing it but it was lots of fun and I didn't even live  anywhere really exciting.   Not sure I would  like it as a rent a room thing ,  I would feel more like I was providing a product then an experience.  If you are in a good city though AirNB  might be a good way to pay your mortgage/rent.

Colleen F. · Answer

It is an interesting thought but most leases will prohibit subletting particularly in the kind of areas you are talking about. My year round leases in South County  prohibit it.  I would take it on as the  property owner if I wanted that tenant pool in my rentals. You definitely don't cut insurance though because you need to retain insurance for your contents and your liability much as a store would even though they are just  renting the space from a property owner.

Keep up the creative thinking you may hit on a niche.

David O · Answer

I've read articles on people who do this using AirBNB, but I've never actually met anyone. Seems interesting. If I lived in a more desirable city, I might look into it.

Account Closed · Answer

@Sundeep Amin  - don't forget the:

1) Credit card processing fees as this is the easiest way to collect the funds and the majority of my guests use this payment method. Also be careful with AMEX, I agreed to take this for one guets and it added $100/ month to my expenses.  This will of course vary by the company you use but should be factored as it will reduce your income by 2.5% to 3.5% depending on your processor and what they charge.

2) Also factor in a welcome gift if you plan to go that route (most VRBO's do)

Thanks!

Michael Seeker · Answer

In addition to @Colleen F. 's suggestions, you'll also want to factor in a higher vacancy rate.  This is very much dependent on the area where you're looking to buy and the seasonality of visitors.  The best way I've found to ballpark vacancy is by getting on VRBO or Homeaway (airBnB is another) and just researching properties in your target area.  Whatever availability you're seeing you probably want to double or triple.  In other words, if properties in the area show as roughly 90% booked up, I'd factor 20-30% vacancy.  Most owners block off time for themselves which doesn't show up any differently than a booked stay.

I've looked at some areas for a vacation rental and the lowest vacancy assumption I was using was 25%.

Colleen F. · Answer

And you have to do landscape costs so mowing.

Colleen F. · Answer

PM costs may be related to the area.  In vacation homes in South County, RI the pm costs are typically 12%.  It is expected that beach access be included so badges if you don't have a beach  they can use.

-Cleaning you pass on to the occupant but assume a little higher cost for this because you need to do end of season cleaning which you can't pass on. 
	-Furniture because the costs for investment properties don't include furniture and the maintenance is higher on that,

-cable/internet is usually included.

-general utilities are on you.

-Marketing is a bit more because you need to do it all the time.

I think I got most of it.