How do you analyze VRs in a changing industry?

Question

This thread in the context of new fees on VRBO/Homeaway prompted me to think of creating this one.

I wonder how investors analyze a vacation rental property.

Do you try to find a ROI high enough to cover potential pitfalls of regulation/fee changes?  If so, what kind of padding do you give yourself?

Do you make sure to analyze and verify that it's a good deal as a long term rental also? I have found that most VRs don't do well long term.  At least not in HI.  I imagine most renters don't want to live in a VR area anyways.

Ryan Rabideau · Answer

Correct when property is scarce prices go up but so does nightly rates. And regardless of luxury class your always selling nights, nights expire and change in value as lead time diminishes. You can look at selling experiences but the unit of measure are still nights that expire. The closer you are to a date the less time you have to sell it.

With high end luxury properties does come with some higher operating costs sure but your nightly rate is higher and you can start to even out on the expense ratio or drive it down due to selling intangible factors such as luxury. Its hard for people to put a price on experiences sure and thats where photos, content and the mushy feelings come in to play. At the end of the day though you are still selling nights.

I would not call preferred check in and out times to be concessions but rather part of ancillary fees or up selling opportunities. If the home is clean it doesn't cost you anything to add early check in but the guest values that more so you can place an additional fee on that. I would caution on providing too many discounts on revenue you would of earned otherwise earned. Do you need to provide a returning guest discount for July 4th? Or should you instead increase your discounts for October mid week days.

HA argues that their service fee is to help with the regulatory stuff they do as well but realistically it comes to the home owners and local support. My firm sends our people to be part of these conversations anytime something arises with the facts. STRs often get turned into the scapegoat for larger systemic issues that are not entirely related. Stay ahead and apart of the conversations but have a back up plan just in case there is not a grandfather clause.

Ryan Rabideau · Answer

David,

The economics won't change, some of the cost will be borne by the consumers while some will likely result in slightly reduced rates--the deadweight loss will be marginal (lost demand). Adding marginal fees won't fundamentally destroy demand which is increasing as part of a larger trend. While this move is Expedia pushing HA to be more like Airbnb they are only one player and anytime a giant stumbles other newer options become available. This only makes having good channel distribution ever more important. I would recommend taking this time to evaluate your rates against the competition to make sure you are competitively priced and keep an eye on the comps if they are reducing rates, you may also start to see your channel attribution shift.

VRs can offer good yields in less than fantastic LTR markets as there are less bidders and institutional money driving up prices. VR investing does not have a lot of big money behind it which is why it still offers some good yields. I always recommend checking the VR comps (check calendars, rate sophistication, review counts and listing population) and checking the LTR rentals around. Some markets its actually profitable to rent from the LTR and list as a VR. Long story short it depends on the market and the property, every property is unique.

Timothy Gleason · Answer

There is a lot of insight in @Ryan Rabideau post, almost all of which I agree with.

Valuation is tough on two fronts:

First up is actual rental rates.  Just viewing the rates of competitors is akin to valuing property based on "For Sale" signs.  As an owner/manager, I'm often providing concessions that impact value - preferred check in/out times, discounts, repeat-guest incentives, etc.  These items are unknown to any competition shopping my rates page.

Second issue is the expense ratio of the VR.  My home is a SF waterfront home and one of the more expensive rentals in my local market.  I'm not selling days in my home, I'm selling a temporary luxury experience to my guests.  With that comes a high expense ratio.  My home better be in tip-top shape, hospital-clean, and exude an air of elegance.  Additionally, my guests have paid a high cost - they rightfully expect premium service and occasionally demand some extra benefits, which comes in many flavors...but always exerts a time or cost on my bottom line.  Simply put - my VR has a much higher expense ratio than a condo on the same block, and much higher than a bread & butter SFR.

Lastly - I see the greatest risk to our market is local policy.  VR's are usually located in affluent areas, and many neighbors are power-players in the community.  In my case, my greatest risk is the stroke of my HOA's pen, followed by local regulations, and then Acts of God.  On a macro level, local acceptance of VR's certainly impacts value.

David L. · Answer

Are you saying it's not high cost to obtain VR property?  Not sure which market you're in but over here, properties are ridonkulous.  However, the returns are still much much sweeter than LT.

In regards to economics, if booking engines (HA, VRBO) are increasing fees on customers, wouldn't that change the economics?  I guess, perhaps, what you might be saying is that increases can only go so high before it becomes detrimental to the industry itself... which the big companies wouldn't want to do anyways.  So whatever increases occur, are probably negligible and can be easily adapted to.

How do you analyze VRs in a changing industry?

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