What investors forget when penciling a Vacation Rental

[Neal Collins]

There is a lot of hype around Vacation Rentals. It's true that they can generate higher cash flows compared to long term rentals, but there are many factors that I think people overlook when they haven't done a vacation rental before. I've had some interesting discussions with other investors and clients which has motivated me to share some insights into our adventures into vacation rentals. Through these discussions I've heard multiple times that the only way a deal works is if they vacation rental the unit(s), rather than a long term model. There are a couple things that are a must know before pulling the trigger:

1. Furnishings are not cheap. Have you ever bought brand new everything for an entire apartment or house? I can personally attest to the shock factor when you tally up how much you spent to furnish a place. Expect to drop at least $10,000-$15,000 up front for just for a one-bedroom apartment. You can save money buying from consignment shops, but don't skimp on quality or use a dirty mattress you find on the side of the road. You're financial return is now tethered to user reviews and it's best to provide quality furnishings that hold up well because you are going to have wear and tear. Another thing to note is that furnishing a place takes a lot of time and energy. It's not a one time trip to IKEA and you're done (plus think about all the time it takes to put together IKEA furniture...). In the end you need to factor in how long it will take your cash flow to recoup the initial investment in furnishings.

2. You live and die by your cleaning service. Initially we turned over the units oursevles in order to know how much work and times goes into it. That time commitment quickly adds up, and for us, it came down to the highest and best use of our time. Do yourself a favor and get a good cleaning person. Most cleaning services claim they can handle vacation rentals, but they either have a hard time with the checkout/check-in schedule, or they apply their normal business model to your vacation rental and end up charging you a lot more than you want to pay per turnover. There is an equilibrium in there somewhere, and hopefully you find it sooner rather than later.

3. Zoning and permitting. Do a search through the BP forums and you'll find lots of good information regarding permitting in your local area. Someone commented today that they heard of someone getting fined $20k for illegally operating a vacation rental. This can completely kill your property performance. Do yourself a favor and make sure you understand the risk going into it if you choose to forego permitting (if applicable in your area). 

Some people argue that banning vacation rentals is an infringement on personal property rights. Well here's a news flash...that's what zoning laws are all about. I see both sides of the coin because on the one hand I own property and want to be able to do whatever I want with it, especially if it means I can generate a higher return on investment by operating a vacation rental. On the other hand I think it's worth understanding that city planners have the responsibility of ensuring the integrity of residential communities by not having entire swaths of areas get converted into vacation rentals. I'm not saying that outright bans are the way to go, but I do recognize the grey area and it's good for you to be aware of it as well.

4. Ratings and reviews. We pride ourselves on receiving all five star reviews. We make sure that everything works in the units, the spaces are immaculately clean, the furniture is comfortable, and that our guests have everything they possibly could need while staying with us. That said, however, you just can't please everyone. I got a review this morning from a lady that complained about the memory foam bed being too hot (these beds are top of the line and we sleep on the same one so it's hard to have any empathy) and that we should put darker curtains in the bedroom (this is in the heart of the grey, gloomy Portland winter). Give me a break, this is absolutely ridiculous and slightly infuriating that this is now visible to the public. Welcome to your new business. These ratings are your life raft and you could provide the most outstanding customer service and incredible space for your guests and still not please everyone.

5. Bookings. This doesn't take up your entire day, but it does require time and effort. If you outsource it make sure that you do not compromise on excellent customer service and clear communication. It's just one more thing to pile on to your day that you don't have to do with long term rentals.

So now that I've gotten that off my chest let me tell you about our model. We actually use the vacation rental model so that we can get medium to long term renters. Think corporate rentals, people relocating, people visiting for the summer, etc. We are fortunate that our city is becoming a popular destination for travelers and is also leading the nation for net migration. Many of our guests stay with us to be in the heart of the city while scoping out Portland before they make a move. As a property management company with brokerage services, we have the ability to convert our vacation rentals into month-to-month rentals, we have additional properties coming vacant that we can put the people into, and we have a great platform to welcome guests to our city and help them with their real estate needs. By offering ancillary services in addition to our vacation rentals, our return on investment is quite high. If we didn't have the ability to offer a range of services, I would seriously reconsider getting into vacation rentals. If you're running short on startup capital then be very cautious going into it. Lastly, please do not base your investing decisions on the vacation rental model. There are just too many variables that people overlook or are too hard to quantify. Best of luck!