First rental property - vacation rental?

Question

A bit about me:

I currently live in possibly the most expensive area on the planet. It is cheaper for me to keep renting instead of buying here, so I do not own my own residence. I have a high salary day job which I enjoy very much. I am more interested in generating wealth and maximizing tax incentives than cash flow because I love my day job.

What I am looking for:

I would like to invest in real estate as hands-off as possible with professional property management. I need to look outside of my general area because there is no way to make the numbers work here. Because I would have to do long distance investing in general, I am considering purchasing a vacation rental. If the property is going to be far away, it might as well be in a place that I would actually want to go visit! This would be my first property.

Anyone get started with vacation rentals before buying their own house?

Michael Baum · Answer

Hi @David Goldenberg, vacation rentals are not for you. You should look at long term rentals with management. Vacation rentals do best when you manage them yourself which can be time consuming. LTR's are much more hands off once you have your systems in place.

STR management usually kills the profitability of the investment. 20-40% of gross is pretty typical.

Now if you are looking to lower your taxable income, a vacation rental that loses money each year due to expenses can help with that. You should contact a CPA with real estate experience and get some advice. Depending on what your tax bracket is, it will be something you need to really look at.

Joel Hutchinson · Answer

Hi David Goldenburg,

I have not purchased a vacation rental yet, but I think it is reasonably to buy an investment property out of state before your personal residence. Just make sure to do your homework.

Some resources you might find helpful include:

• Out of State: A Practical Guide to Long Distance Real Estate Investing

• Airbnb website, airdna for estimating vacation rental income
• 
• Mashvisor allows you to directly compare vactation vs traditional rental income estimates. 
• 
• NeighborhoodScout.com for researching neighborhood Rent/CMV ratios & crime rates, etc.

Best of luck!

Brian Hatcher · Answer

@David Goldenberg vacation rentals bring great returns even with a 20-30% management fee. For those that don’t have access to real revenue data through a system like AirDNA they may find it hard to believe but it’s possible to gross 60k+ on an STR In a 12 month period when ran by a solid management team.

Even with a 20% management fee and a 15% expense rate you’re looking at ~40k in net profit once the property is on autopilot. Your LTR would need to rent for 3300 a month at minimum to give you the same returns.

It’s all about due diligence, and understanding your market. In mountain towns, beach areas, and domestic destination areas it’s very possible to do more.

Jimmy Woodard · Answer

@David Goldenberg I might have an opportunity for you in South Lake Tahoe. Happy to send over more details, feel free to DM me if there’s interest.

Michael Baum · Answer

Ok, I see, you are using it as intended. Thanks

Brian Hatcher · Answer

@Michael Baum I use AirDNA for comps, it typically serves as a good gauge as to how well a property can perform in a market based on the performance of similar properties within a nearby distance.

For example if a 2-2 condo in your area is grossing 35k average (some more some less) based on the revenue from the last 12 months, taking a look at most of the comps, comparing amenities, fixtures, finishes to your property can give you a pretty solid ballpark of the returns you could make.

The full version of AirDNA also gives you links to the direct listings of these comps on both Airbnb and VRBO so it’s fairly easy to see what your top performing competitors look like in the market.

Michael Baum · Answer

Hey @Brian Hatcher, thanks for the reply and I agree that 40% is nuts. The management company is nationwide and the CEO reached out to me on here saying that it shouldn't have been that high. Until I send him the paper quote. Then no response after that.

So if you are using AirDNA to verify their current revenue vs probable revenue?

Brian Hatcher · Answer

@Michael Baum I understand your personal experience may be where your information is coming from, however I nor any STR manager operator I have run across charge a 40% management fee. That is pretty ridiculous and it would be hard to be profitable at that amount. I as well as many other managers in my network charge around 20-25% at max.

When it comes to AirDNA I have been able to cross check a listed property from the owner to the revenue on they have listed on AirDNA and it matched their last 12 months. So in my experience the data is reliable.

I agree with much of what you said, it comes down to due diligence as with ANY investment, I just wanted to point out that it is possible and can be very profitable to own a vacation rental STR which is what the original post was asking.

Michael Baum · Answer

Ok, so I have to disagree with @Brian Hatcher on some points. One AirDNA isn't a place for real revenue data. It really varies a ton and all results need to be taken with a grain of salt. I haven't seen one set of data points that is accurate enough to be relied upon 100%. It can give you a vague idea of what you can do but it is not to be solely relied upon.

Two is that even in the best place to do STR's like Pigeon Forge, management eats up too much revenue to be really profitable. The more popular the destination, the easier it is to get bookings through the standard AirBNB and VRBO channels. That area specifically is geared towards vacation rentals and is a 4 season rental area.

I looked into management for our lake house, but it was 40%. At that rate, there was no way we could turn a profit. Self management takes time and I really enjoy it so we do well. Even though we are very seasonal we are 60% booked for 2021.

Of course it will depend on the area, the home etc. For example, professional management makes sense for a lake front in Tahoe. You spend about 15 million on a place. 12k sqft, helipad, 200ft lakefront, 8 bedrooms 10 baths, you use one of the boutique property managers that book these places in Tahoe or Breckenridge etc. They book them out for 8k a night or more, they have a select list of very high end clients and manage to keep those places booked all year long. Of course, 15 million dollars...

Just do a complete run down on the properties you are considering. Use @Luke Carl's Enemy Method to scour the landscape. Find a place you like, then check it against all the other places nearby that are close in configuration. Look at their calendars and their nightly rates. That will give you the best estimate on how your chosen place will do.

Now, then you need to calculate the costs of self management. Compare them to what a professional property management team offers. There aren't many in my area that go out to our place. I would suspect that the 40% we were quoted was due to the distance. It was full service. They handled everything and sent us a check. We would be in the hole a looong way every year if we used them.

Just my 2 cents. I want to make sure you have info from someone who has no skin in the game.

Nancy Bachety · Answer

Your margins will likely be the slimmest if you end up purchasing a turn-key LTR from some of the popular players in the good LTR markets, which it sounds like something that would appeal to you based on your hands-off desire.  A short term or vacation rental house can offer you the hands-off approach you want while affording you the most favorable tax benefits, potentially. A well chosen cabin in the Smokies or Disney area can be managed by some of the folks on this forum. Make connections and do your own research. And post your question on the LTR forums too.

First rental property - vacation rental?

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