Vacation Rental Analysis Help

[Account Closed]

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!

[Kyle H.]

@Account Closed

Glad you found the information useful, just make sure to not confuse lower price with lower quality for a VR.  We are basically building a stand alone luxury 1 bedroom/1bath condo.  We are spending roughly $200 sq/ft on the builds with high end finishes, and that is at cost using our own construction company.  There is a lot of competition and having a nice place really helps with the review based OTA's.  Just to give you an idea of how small I am talking about, here are some pics of our 398 sq/ft built unit and a 440 sq/ft unit under construction.  First one is within walking distance to town and the next one is on the river just outside of town.  On track for 28k gross income on built unit and already have a list of renters waiting for other unit to be built.  

[David Faulkner]

Originally posted by @Account Closed:

@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...

Unless you have millions lying around in the bank, I do not think it is wise to concentrate so much capital and debt into a single investment that you do not intend to keep a very active eye on. REI for most as it is practiced here is more of what I call a Mark Twain portfolio: "Put all of your eggs in one basket, and then watch that basket very closely". That means being active, not passive. If you want passive REI, then a plain old REIT may be a better bet. Either that or get active and learn the ropes locally, or move somewhere you think would be better and learn the ropes there ... BTW, I built a portfolio of cash flowing single family homes in SoCal, so I refuse to buy any complaints that it is too expensive to do it in my market and cash flow is impossible. Where there's a will, there's a way ... just please think long and hard before plunking down a significant portion of your net worth three states away if you don't already have significant prior experience.

[Judy Rae]

Still good deals to be had in Cathedral City (near Palm Springs) I bought there about two years ago for $240,000 with 30% down. I funded it via one of my private hard money investors.  I make money every year.  Still good deals there.  Just be sure the home has a pool!

[Blair Russell]

On another note your Internet/Phone/Cable costs are really high, you don't need cable or phone for a VR. Just get a good high speed internet plan will cute that down by a 1/3

[Bruno C.]

@Account Closed I've been able to keep PM fees at 9-10% with some creative adjustments. PM me and I can fill you in on the details. 

[Shannon R.]

Paula Pant at the Afford Anything podcast makes the argument that unless the VR cashflows well, run away!  She says why not find something close to you or in a nearby city where you will get renters year-round and not all the high fees.  If it cash flows well, it will pay for your vacations!  She says it is a purely emotional decision to buy a VR so that you can vacation for "free", when it just about breaks even, and there are usually better deals somewhere else.   

[Matt F.]

Great read so far - thanks @Account Closed! 

i too an looking into doing this myself - one question i had is how do you go about estimating the income / rents for a vacation rental? i never had much trouble estimating rents for my SFH for long term but was a little fuzzy on determine short term vacation rates. I check out AirBnB, VRBO, homeaway, etc but never got really comfortable with what i was seeing.

do you make "safe" assumptions like out of 4 weeks during peak season , maybe you fill it 3 of 4 weeks?  During off peak, maybe you fill it 1 of 4 or a few long weekend here and there? 

anything you could share would be helpful  - thx

[Jon Crosby]

Hi @Matt F. apologies for the delay in response, family caught the bug going around town and we have been down and out a few days and just catching back up on the BP threads.  So my insight on your questions are unfortunately that 'it all depends'.  Depends where you are investing, what kind of home you are investing in, what kind of guest experience you are creating, etc. etc.   

You can only make a decision based on all the data you have the ability to gather.  You just need to get the numbers using VRBO, AirBNB or whatever is more prevalent in your area to get an ADR (average daily rate), which will be based on a homes with similar guest experience.  Try reaching out to property managers as well and even other VR owners for local ground truth on the area you are looking at to corroborate your ADR and to help get your estimated occupancy rate.  Those two rates are most important in the end and then put a 5-10% safety buffer on your estimates since you want your cash flow model to be your worst case scenario and not your best.  

[Jim Mitchell]

I have 2 both,cash flowing well. One on cape cod one in north conway nh. in the process of buying a 3rd. Wont buy unless cash flows 300 per month and 30k equity. I stay away from associations. My north conway home has a property manager at 25% and still cash flowing. You just have to buy right, market and bring more value than your competition. It sounds like you are really buying a second home and looking to have someone else pay most if your costs annually, not necessarily looking for positive cash flow. I also automate everything, doorlocks, thermostats, cleaning, bill pay etc. good luck

[Chad McMahan]

In my area, there are some $175k homes with all the same expenses, grossing $2500 - $3k per month. I recommend you keep looking for something with better numbers. If you keep looking, chances are you will find homes that check off more boxes that tenants are looking for, increasing your net income.

In my area, views and convenience are big factors, boosting the rent tenants are willing to pay. With a HOA, hopefully you can offer renters a pool, etc. I don't recommend "avoiding" HOA's, unless it hurts your cash flow. One of our best investment areas in this price point has an HOA. It brings in extra cash (more than the HOA cost) because it offers a pool, tennis and a hot tub.

[Amy Nakos]

I work in a resort market with many properties in a short term rental pool. You should be able to get actual rental numbers for properties on the market through your broker. We often attach this information to the MLS listing. After doing this for 12 years, I can pretty much tell you the amount of income you can gross in rentals by the product type and its location, but that comes with experience and changes with the economy and snowfall. My clients who rent their properties on their own via AirBNB and VRBO, and do it well, have the best returns. Some PM's in my area take up to 50% of the gross rental income. When getting an 80% loan, I don't see people cash flowing. While property dependent, at around a 50% loan, you can start to break even. There are a lot of variables, but for pure investors, I direct them to Denver, a major metropolitan area with long term renters where cash flow properties exist. The vacation property is an emotional purchase, and most of my investors are banking on appreciation on their exit strategy.

[Kevin Grinstead]

Hi Amy, great post. Now I know who to send my vacation rental clients to. Sounds like your experience and knowledge of the areas would do thrm good.

[James Carlson]

Interesting discussion @Amy Nakos . The people I consult with on Airbnb here in Denver are woking with short-term rental management companies charging 20-25%. (Sidenote: Of course, the Denver market is not your traditional vacation rental market like Frisco, Breckenridge, Keystone, Vail, etc, especially now with Denver's new Airbnb laws restricting STRs to only your primary residence. But Denver is still one of Airbnb's top markets. I'm an Air Ambassador with Airbnb, and what they tell me is that Denver is actually untapped in terms of host numbers.) 

Because of that, I don't think a lot of people are looking to Denver as a vacation rental investment area. But if you're shopping for a primary residence in Denver or are a house-hacking type, there are still opportunities. The Denver law allows you to rent a carriage house or basement apartment full-time. In the right area, with the right space, Airbnb renting can bring in 2-3x the revenue of a conventional long-term rental. So if you're a house-hacker who can find a place with a basement apartment -- especially with a separate entrance -- then you can do quite well.

@Kevin Grinstead  When you say vacation rental clients, are you working with buyers looking in the mountains? I have people asking me about that a lot and I'm always interested in knowing people doing that work. 

[Jeremy Baker]

@Amy Nakos and @James Carlson it's funny as my wife and I have done the total opposite!  We keep trying to invest in either long term or short term rentals here in the Denver metro, but every time we think about it, we find a great condo on Maui and invest there.  With the short term laws and home prices here, the numbers never come out near as good as our investments on Maui. 

[Scott Myers]

 @Jeremy Baker, I'm interested in how you find deals in HI.  Do you frequently vacation there or have you previously lived there and have local contacts.... how do you find your deals with good returns from long distance?  Feel free to PM me or start a separate discussion, thanks!

[Jeremy Baker]

@Scott Myers, it's not easy since home prices have gotten quite high there, however, I look through daily listings and run numbers on at least 10 properties each week even if I know that it may not work out.  This way I can stay on top of the numbers game and get a good idea of any variations in the market.  I do have some great local contacts on Maui  (real estate agent, property manager, lender, housekeeper, etc...)  I'd be happy to share them along with any other info you may like.  Just PM me with any questions and I'll be happy to answer them! 

We visit there each year (which is a huge perk of owning vacation rentals there!) for 17-21 days.  Some say using your properties is a bad thing since you are not going to be generating any rental income while you visit, but it's also not thousands of dollars leaving my pocket for hotel expenses.

[Amy Nakos]

@Jeremy Baker - I love that you are making money on vacation rentals in Maui!!  Maybe I can be one of your renters in the near future!

[Rogers Smith]

@Account Closed you mentioned you got a VR spreadsheet from another BP member. Would you mind sharing the name of the BP member?

[Frank Kosiba]

@Account Closed Doing some research on Portfolio Lenders and saw your post. My wife and I live in Boston and have a second home/vacation rental on the Cape. We self manage as this is our first VR property and we wanted to learn as much as we can before we even think about using a PM. It's 1:10 door to door so we're able to get there easily if need be. For our first investment in VR, I wouldn't even think about doing it somewhere I couldn't get to in under 2 hrs, my $.02.

We've found the Cape to actually be a decent place for VR properties as they command a high rate in season and you'll get it, as long as the place delivers value for guests be it location, amenities, uniqueness, etc. We use VRBO as the main advertising source, along with the occasional FB Marketplace or Craigslist ad. We also offer it at a discounted rate in the off-season and for our first year, have gotten some good traction from prospective renters. 

We'll be cash flow positive at the end of the year and plan to re-invest in the home (new floors, tiling updates) during the off-season. If there's enough left over we'll look to get another one and diversify as this one is a 3BR that sleeps six. We'd like a 1 or 2BR for smaller partys. 

Feel free to message me if you'd like to chat! We're by no means experts but with the help of BP we literally just jumped in and the experience has been amazing. 

FK

[Bill Cereske]

We have a 5 bedroom VHR at Lake Tahoe and summer is definitely the season.  It's very heavily booked from mid May through September, then the weekends book during ski season.  One thing to keep in mind is that you're now a hotelier, and have to think that way to keep guests coming back.  I always change at least one thing during the slow season, so guests see something new for every visit.    I have a full management company running the day to day operations, but new projects and improvements are up to me.

[Preston Roach]

@Account Closed I noticed that both of you mentioned an analysis spreadsheet. Would either of you mind sharing the name of the member?

[Angelo Wong]

@David Faulkner

Agreed. I personally do long-term SFH out of state and that is fine, and I've investigated trying to do remote VR in Las Vegas. I called up a bunch of Airbnb hosts and basically the lot of them were saying "you should really not do remote VR since it's a lot more work than just managing a long-term rental."

@Account Closed

$2K repairs seem really, really cheap, and HOA generally doesn't allow VRs I thought?

I guess VRs also depend on area and so on. Some places run into extremely high vacancy and is very seasonal; some not. I personally do not like dealing with 2-3 day turnovers and just generally get business travelers that stay for a month or longer (avoids some short-term rental laws and taxes here). The 1-3 month stays are perfect balance between not too much turnovers and increased income for me.

[Barry L Hohstadt]

@Kyle H. you say that your VR are one bedroom units, but you do not have a HOA. I am curious what kind of properties are these? Thanks

[Kyle H.]

@Barry L Hohstadt

Barry I live in a small town vacation destination at one of the entrances to the Great Smoky Mountain National Park (the most visited national park in the country). There are basically no condo's here and we stay out of develpments that have HOAs, we are building our units on property that we have acquired in and around town. We have found that the smaller footprint not only costs us less but the ROI is much higher than units that have more bedrooms. Our units are 500 sq/ft or less, we have found a local bank willing to refinance us at the end of our construction and to finance our construction when we are not using private funds.

[Barry L Hohstadt]

Kyle that is fascinating, and  I am thinking pretty unique. Thanks for sharing.