June 26, 2012

Vacation rentals – huge rents ... any profits?

By Zillow.com

Borrowing from the boat owners' passel of proclamations, may I suggest: "The best two days of a vacation rental owner’s life are the day he buys it and the day he sells it…” 

Those who live near the shore often hear rumors about the piles of money that vacation rentals bring in. "The summer months' rental income pays for the entire year’s mortgage,” folks will say. That may be true, but what about the rest of the expenses? 

The problem with vacation rentals is twofold:

1. Operating expenses related to vacation rentals are similar to those of a hotel -- 60 percent to 75 percent of revenue; and 

2. Prize vacation properties come with enormous price tags and staggering monthly mortgages, property taxes, insurance, etc. Those are fees that must be paid, whether your occupancy is 100 percent or zero. 

How can revenue operating expenses be so high, you ask? Vacation rentals, even a single property, requires a lot of work. You'll need to:

  • Take calls from interested parties
  • Market/advertise the property
  • Build and maintain a website
  • Shop for furnishings/replace them when they disappear
  • Draft leases
  • Process rent payments
  • Check in guests
  • Schedule routine cleaning and maintenance
  • Schedule gardening/landscaping services
  • Pay bills
  • Obtain insurance coverage
  • Be available/responsive when emergencies arise

All these tasks take time, which is why property management companies are able to command high fees. Sure, you can do the work yourself, but either way you're going to have to fork over cash for furniture, sheets, towels, utility bills, etc. All those costs add up, so it's easy to see how roughly 75 percent of your revenue – not including your own time or your mortgage payment – is paid out in expenses. 

By contrast, a moderately priced, single rental unit or apartment should have an expense ratio of 35 percent to 45 percent. That’s 30 percent less than a vacation rental. 

Want another comparison? Vacationers come and go frequently, which means the property manager may face two to three crises each week, all of which are "urgent" because the renters are on vacation and want everything – the grill, the hot tub, the window locks – to operate smoothly for the short time they're with you. 

On the other hand, a typical non-vacation rental unit should need attention five to seven times per year with, perhaps, one of those problems being urgent. 

Simply put: A dollar of vacation rental income is really worth about a quarter (25 cents of net operating profit on each $1 in income), while a dollar of rental income on a non-vacation property is worth 55 to 65 cents. (Those figures, again, are before the mortgage is paid.). 

Look at the cash on cash returns; a vacation rental may have a negative cash-on-cash return of 10 percent or more.

And be warned: When the economy sputters, so will your rental revenue stream. People will cancel vacations and bargain hard on weekly rental rates, while you must continue paying all your monthly bills. 

Finally, remember that there is little independent, unbiased information available that will allow you to do your due diligence on rents, vacancy and expenses. That lack of information means “pass on that investment” for most property investors who have “already learned that lesson!”

Were you interviewed for this story? If so, please fill out our accuracy form

Send question/comment to the editors




Further Discussion

Here at PressHerald.com we value our readers and are committed to growing our community by encouraging you to add to the discussion. To ensure conscientious dialogue we have implemented a strict no-bullying policy. To participate, you must follow our Terms of Use.

Questions about the article? Add them below and we’ll try to answer them or do a follow-up post as soon as we can. Technical problems? Email them to us with an exact description of the problem. Make sure to include:
  • Type of computer or mobile device your are using
  • Exact operating system and browser you are viewing the site on (TIP: You can easily determine your operating system here.)


 
Latest Mortgage RatesCurrentLast Week30 Year Fixed15 Year Fixed5/1 ARM
Mortgage CalculatorAffordability Calculator
Refinance LoansFHA Loans
Loan ModificationsHome Equity Loans

Mortgages, Home Loans, and Mortgage Quotes at Zillow Mortgage MarketplaceSee local rates