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Updated about 6 years ago, 09/17/2018
Vacation Rental Analysis Help
Hi everybody!
My wife and I are looking to purchase a vacation home as rental property. I have seen many of you post success you have had with these types of rentals, however, I am having trouble finding property that will cash flow.
My numbers look like this:
• Purchase Price $175k
• Closing Cost (est) $5k
• Repairs $2k
• Down Payment $35
• Monthly Income $2000
• Maintenance $100/mth
• Capex $100/mth
• Electricity $200/mth
• Water/Sewer $55/mth
• HOA $250/mth
• Property Management $400/mth (20%)
• Insurance $62/mth
• Taxes $146/mth
• Debt Service $752/mth
• Internet/Phone/Cable $240/mth
• Total Expenses (rough est) $2300
This is one example of a property I have been analyzing, I have been using the same methodology each time. For those of you who have had success with vacation rentals, how did you find your property? Am I missing something? Everything I have looked at so far works out cash flow negative.
Please help me to understand if I am analyzing properly. Would appreciate any help and stories on how you started out.
Thanks!
@Account Closed - From what I see the HOA and Management Fees are killing any potential profit. Does the HOA require that you use a their management company? IS it some sort of prearranged agreement? On a vacation rental you are much more likely to make the numbers work in your favor if you can find a unit that isnt subject to HOA. Also - 20% in management fees is pretty steep. What services are they providing?
Malachi Tresch I have found some that look like they will make money but none have given me the rate-of-return that a multifamily with give me. I've look at markets where PM can be anywhere from 20% (which I think is a good rate) to 40% so I don't think that the issue. The issue is emotion. Some family out there is happy to breakeven and have a "free" vacation destination. Some like the vanity of saying they home a vacation home (rental or not). Contrast that to a small 10-unit apartment building. Nobody who buys that is vacationing there. No family wants to visit one of the units for their one trip a year. Nobody brags about their new 10-unit apartment complex compared to a vacation home. So your competition isn't just investors, it's average people who can pay the "emotion" premium. All of that said, maybe you think that the location will appreciate so you're trading cash-flow for appreciation. If you have a stout W2 you might want a break-even property so you're limiting ordinary income tax exposure. So there are reasons to do it.
Justin Tahilramani For whatever it's worth, vacation rental PM rates of 20% are actually somewhere between "cheap" and "standard". Assuming you want a PM firm that handles vacation rentals, markets them, deals with weekly turnover, etc. If you get into some of those ski towns it can get up to 40% pretty easily. True, it kills ROI compared to 10% or 15% rates with a PM company for a "regular" property. Because of that, while I have found cash-flowing deals they never pencil out as well (for me) as multifamily properties.
@Account Closed In general VR's don't cash flow well because of the high Op Ex Ratios so unless you are putting 30-50% down you are going to have to find that perfect combo of numbers to get it cash flowing. That being said, it hasn't stopped me from continuing to expand my portfolio and having success with my current rental. I actually built a fairly comprehensive VR model and almost every property I put in doesn't cash flow, so don't be discouraged and just keep looking for that 'right' opportunity. If you live close enough I would suggest a hybrid management solution which I use which is using a company like Evolve for booking and advertising at 10% (plus 2.5% payment processing) and then remote manage with help from exterior video cameras, digital door locks and a trustworthy housekeeping service. I'm actually starting a Blog on my VR journeys very soon in which I plan to share my success and failures throughout, so PM me if you would like to learn more about that once I get it going. Good luck to you!
@Jon Crosby I would love to get some details on the blog as well. Considering a VR for our next purchase as well.
Thanks
Bryce
Thanks for all the responses guys :)
@Justin Tahilramani I'm starting to realize that the operating costs can get quite high with a VR.
I will keep researching and asking questions until it starts to make sense.
Being a new investor things can get overwhelming until I find the right strategy. I would actually love to read your blog when you get it finished :)
I guess I'm still learning what will cash flow and what will not.
My thought process was that if we like to vacation at a certain location we could potentially buy a vacation rental and rent it out, that way it'll cash flow a little and we get to use it for free when we go.
@Account Closed My upcoming blog landing page is at VH4F.com and you can search for 'Vacation House 4 Free' on Facebook. Ironically it was that UN-reality show on HGTV that started my journey and so that is the theme also of my blog...or at least it will be once I can get it going. ;)
Thank you @Jon Crosby . Great post, Kudos!
Quick question, what's the "14 days year allowed by the IRS" refer to? Is it a requirement to stay there 14 days per year or we can only stay there 14 per year? Can you elaborate?
Thanks .
@Account Closed Thanks! I believe it's the maximum you can use your vacation rental per year as a personal vacation rental and still write off the depreciation (or something to that extend, please ask your CPA for specifics). :) However you are free to make as many 'maintenance' visits as you need as long as it's clear you are not abusing the 14 day policy. Since my home is within 2 hours, I usually visit mine every 2 months for a few days just to take care of any maintenance needs and make sure housekeepers, hot tubs cleaners, etc are staying on top of things....but, I'm still at my rental and enjoying the scenery while I'm there. :)
@Account Closed you can also look at IRS Publication 527, Chapter 5 for additional information.
https://www.irs.gov/pub/irs-pdf/p527.pdf
@Account Closed I notice your monthly income is a fixed amount...
For those of you doing vacation rentals... Isn't monthly income seasonal too? During peak season you can fetch a premium. Later in the year you may have to drop price significantly and have a potentially high vacancy rate. How do you factor this in?
@Joseph Hennis Monthly income is averaged out. I'm not sure how to calculate peak and off peak rental times in terms of income. I will talk with the PM and hopefully get some answers as to what those numbers are. Right now this is just my attempt to do a VR analysis on my first investment property. I'm sure I will get better at analyzing over time. Hopefully I'm on the right track.
@Account Closed
I currently have 3 vacation rentals and am in the process of building 4 more. We have found in our market that the best returns are derived from 1 bedroom homes. Every area is different but we manage to catch visitors for every season whereas people with larger homes are usually only able to capitalize on the holidays and summer season. We also have no minimum stay and do quite a bit of business from overnight visits where a majority of VR around us have a 2-3 night minimum. We are running at a 46% expense ratio and have our properties fully levereged. We do not have any of the HOA fees to deal with but do pay someone 10% for booking services and to be the point of contact. We do live locally and handle any repair request ourselves, with one of our employees or with a subcontractor. With our expense ratio and current lending situation (25 year/4.75%) we are looking for gross income to be 25% of our all in land/build/furnishings cost. They are definitely not home runs but a 100k property fully leveraged is returning around 7k/yr net income. To fit our criteria with your projected income your property would need to have a purchase price of 96k. Good luck!
@Jon Crosby
Would love to connect in a pm about your style and type of VR you do
IMHO I would start with analyzing the "true" income potential for a property. You list it at $2k, but where is that data coming from? There are tools to use like airdna.co (my favorite because they capture true rental data by individual property and location). I also run a cash over cash analysis to sort out my true ROI which you have most of the numbers you need above (I've tweaked one for my own use I can send along if you PM me). I will tell you that this has been the second most lucrative business venture of my career (my first is a commercial project so real estate is the right gig), but I think most will agree it has to be a "business" to really be successful. @Jon Crosby @Andrew Johnson @Justin Tahilramani all great comments & suggestions!
STR's are a little more finicky with regards to cash flow. That is why revenue maximization can be even more important than on a LTR. If you are grossing enough, the home will cash flow even after expenses. Following up on @Michael Greenberg's reply, where are you getting the $2K gross rental revenue number?
It can be a challenge to find a STR investment property which generates enough revenue to make it worth your time but once you do, it'll be well worth it! Good luck @Account Closed!!!
What's missing here is that an STR is the same as a regular long-term rental in where you make your money. On the buy side. Not in how you rent it out.
If you're buying off the MLS, and paying the same for the property as anyone else in the market for a second home, it's not going to cash flow very well.
Sure, STR vacation rental can be much more lucrative than a standard annual lease, but as stated above the expenses are also greater, so it's a wash.
Make sure you're implementing sound foundational RE principals first, then get into the details of STR and how it differs from standard. Find yourself a fixer upper that you can get into for less than everyone else.
We have had four vacation rentals and I can tell you that between the active management, the expenses, and the changing city regulations it just gets to a point where it isn't worth it, especially when you get a mid night phone call about the internet not working.
As an owner of a property management company we get clients asking frequently if we will manage vacation rentals. I've said No every time except one and it was to a lady with a fantastic unit on a popular street in Portland. Our management fee for that would have been 30% of gross collected rents. She decided to go with a "more reasonable" management company that specialized in STRs for 20%. Wouldnt you know it but six short months later that lady called me up again saying that she fired the other company and wanted to work with us.
We now manage it for 8%, the lady got a couple thousand dollars back after the furniture was sold, the tenants pay for their own utilities and maintain the yard, there is no more headache about permits and regulations. The lady is now able to come to Portland and write off her trip to check on her rental property.
The biggest thing to remember is that STRs are not cash machines. They are businesses and have huge operating expenses. If you plan to hire out a PM, don't go the budget route because I guarantee that you will get what you pay for.
@Malachi Tresch while at first blush the higher than average PM fees with your proposed vacation home, I would obviously consider their impact on your property. That is, how effective are their marketing efforts? Do they rank well in SERP's for vacation properties in the area, and if so, how are they rated? Are they being occupied at a very high rate to offset the higher PM rate? My wife and I are considering a couple B&B in central Texas because the occupancy rate is astronomical
@Account Closed What's even more "fun" about vacation rentals is that depending on the location you can get annual visitors. Basically, people that rent that specific house for that specific week every summer. So the positive side is that you can get better returns over the first few years (assuming positive reviews) because as that base grows you get more predictability. The bad part is that if that property that you buy is being professionally managed by another firm when that renter goes to that firm to reserve it for this year, that firm is going to say "that property has been sold, here's another one that's similar". In short, you could lose some portion of that tenant base. I've heard that from time to time but it definitely shows up in the T12s when you looked at a property that has been managed by the same agency for 5 years versus occupancy rates vs. 12 months.
Another factor to consider is that certain properties can rent out at super-high premiums during the peak season: think beach rentals where you can sleep 14 people and extended families can split the rent among many groups. However, that same high-demand property will sit vacant in the winter because the snow-bird retired couple doesn't want 6 bedrooms and 3,700 sq ft. I know that's a very random/specific example but even the attractiveness of the rental house can be market specific.
Some awesome info in here. Much appreciated!
The monthly rental income is my inexperience at analyzing vacation rentals.
In my efforts to get better, I just got a VR spreadsheet from another BP member which has Nightly high and Nightly low rates and estimated nights rented at high plus low rates( I will verify these numbers with property management in person in 3 weeks when we go on vacation ).
I plugged some numbers into the spreadsheet and it seems to be working abit better than the way I was doing it...For now these are just rough numbers but the analysis already looks more reliable!
I'm kind of learning as I go here and asking alot of questions. I would never just jump in to a property without having some kind of understanding about what I'm doing, so thank you for helping me on my journey to my first investment property. @Jon Latorre @Michael Greenberg
@Kyle H. You have given me a great starting point to my analysis! I wasn't sure if I was supposed to be looking at 100k properties or 200k properties. After reading your post it gives me a great start and a realistic expectation.
I will run numbers on 100k property and compare them to the 200k just for my own curiosity. Thank you!
Originally posted by @Account Closed:
I guess I'm still learning what will cash flow and what will not.
My thought process was that if we like to vacation at a certain location we could potentially buy a vacation rental and rent it out, that way it'll cash flow a little and we get to use it for free when we go.
One of the riskiest ways I can think of to learn this is with a VR 3 states away ... that would probably be tied with a lower end turnkey rental out of state. The lowest risk, best and fastest way to learn by far would be hands on with a plain vanilla rental in a decent neighborhood (no ghetto properties) in your own backyard. Perhaps you can start with it as your primary residence and house hack it ... much safer way to go for a beginner, simpler with much fewer moving parts, and if it is in your backyard you have total control and can keep a close eye over those moving parts. Best to learn to crawl before you try to sprint IMO.
@David Faulkner Totally agreed with everything you said. We actually don't like Massachusetts very much and chose not to invest here. Not to mention its almost impossible to cash flow SFR here.
We have a friend in Georgia that moved there from here and loves it. Me and the wife actually stay in our friends vacation home every year so thats what gave us the idea of a vacation home there. We will have someone to keep an eye on it. Plus I would like somewhat of a passive experience, at least for now...