Thread: Home rental or vacation home rental?

There are pros and cons to both.

There is a lot more work involved with vacation rentals- however, the pay off can be much higher.

Here are the top 8 reasons I love vacation rentals over different types of residential real estate:



-regular access
-credit cards
-all personal info
-you are not dealing with renters but vacationers
-good excuse to take a vacation
-rarely 100% vacant
-potential for greater income
-tax benefits of RE and a small business



Here is probably more info than you wanted to know on examining a property to determine if it would make a good vacation rental:

Some of the first pieces of info that you’ll need to gather is information on the real estate market in the vacation area that interests you, as well as what the estimated income and expenses will be for an average property. So let’s start out by looking at some data points to consider when analyzing the stability of different real estate markets (these tips go for any market, not just vacation areas.) First you’ll need to speak with a Realtor in the area who can give you certain MLS data. What you are looking for is:
-The average days on the market for homes in that area over a 6 month period

-The list price (what comparable homes are listed for) to sale price (what they actually sold for)

-The number of homes currently on the MLS in that area


*All of this information you will want to see for a consecutive period of six months (give or take.)

The reason that you will want to see a six month or so period of time, is so that you can see if there are any trends in the market. You will also want to make sure that the same data points are being tracked, such as price range and area of homes. Data that is outside of these points can dramatically skew your results, so review them carefully. If even in doubt of what you are looking at, ask your Realtor.

So now you’ll need to analyze this data. Are there more homes on the MLS now then there were 6 months ago? More homes on the MLS can mean that supply has flooded demand, which generally leads to more of a buyer’s market. This is helpful information for you to know, as it may impact the offer that you make. Have the average days on the market decreased or increased? If the average days on the market have increased it may be a sign that the real estate cycle in that area is turning into more of a buyer’s market as properties are sitting longer. Are sellers getting close to their asking price for their home? This number generally appears in the form of a percentage such as 93.5%. What this means is that of the homes in the price range that you had your Realtor research, the sellers are getting 93.5% of their asking price. If this number starts dropping every month, then this is also another signal that it is a buyer’s market.

As a general rule of thumb when considering if a rental property is a good investment or not, a property should ideally be able to cash flow (meaning that your rental income should cover your mortgage and all other expenses associated with the property) as well be in an area that is appreciating. If pressed to chose one or the other, choose a property that cash flows, as we all know that the real market fluctuates, and if it does, you want to make sure that the property can support itself.

If you are looking at all possibilities, then here are some basic facts you’ll need to gather first:
-When is peak season?
-How long is peak season?
-What are the rental rates for comparable properties out there?
-How many days a month (and days a year) are comparable properties renting?
-What are the upkeep, taxes and utility costs of the property?

In a nutshell, your goal is to try to gather as much info on your projected income and as much info on your expected expenses in order to make the most informed decision possible.




Hope this helps! Keep us posted.

Excellent post, Yves.

Our first vacation rental (back in 2003):

-Cost us $2900 a month (mortgage, prop tax, prop insurance)
-We had ads everywhere (or so we thought, we were noobs)
-First six months of operation, brought in . . .

$0.00 (and after 12 months, had grossed less than $3,000.00)

Sold that house in 2005, at the height of the RE boom, for 53% more than we paid for it 2 years earlier.

*************

Fast forward 5 years.

Vacation rental we opened one year ago, to handle overflow for our B&B:

-Costs us $3300/mo (mortgage, prop tax, prop insurance)
-We piggybacked on the ads for the B&B (did increase ad budgets somewhat)
-First 12 months of operation brought in . . .

$162,354.15 (this is gross, before expenses)

Moral of the story:

Experience, and a steady supply of guests (from an up and running feeder property) can make this a cash machine.

But the sad truth is there are LOTS of folks who do vacation rentals who are "hobbyists"-- they just want to bring in a few grand a year to offset their prop taxes.

Yes, there are more aggressive ones that spend thousands on advertising and bring in more $$$$. Most still don't break even, but they do help pay their mortgages.

And then there are the pros-- like Yves-- who do this for a living. They can make it cashflow.

Listen to Yves. Some excellent advice.

I would only add:

1. LOCATION-- buy in an area of lots of resort type properities, where millions of people go on vacation, and you have your market

2. EXPENSES-- know what you're getting into. You will be shocked at how much simple things like housekeeping cost.

3. MARKETING-- Be prepared to spend some $$$ to get your word to the people that want to rent.

4. STAFF-- Realize that good people (like housekeepers) are very , very hard to find. Pay them well, and take care of them-- or someone else will.

-Russ H.

Originally Posted by Nathan

Russ, was your problem on the first one with advertising or location?

It was 4 things:

1. LOCATION-- First house was not close to our B&B. Also, before we had the B&B, it was not needed by anyone (low visibility, no demand). This is key.

2. EXPENSES-- We had no idea what costs were, so how to price rooms?

3. MARKETING-- Thought we could be internet savvy and do PR instead of ads. We were wrong.

4. STAFF-- There is a LOT of work to maintaining a vacation rental vs a monthly rental. I cannot emphasize this enough. I got into this business b/c the numbers were so much better than anything else-- but the reason for this is that you have a LOT of coordination and expenses to run a good vacation rental-- or, you need to do everything yourself (not our model, and not fastlane).

-Russ H.