Investing in a vacation rental home certainly won’t guarantee that you’ll get rich quick, but it can be a lucrative source of income. Just how much money can you make from a vacation rental? The answer to that is as varied as vacation rental homes themselves.
As a rule of thumb, John Banczak, executive chairman of TurnKey Vacation Rentals, says that for every $100,000 you spend to purchase a vacation home, you should target yearly rental income of $10,000 to $12,000 if you’re buying it purely as a cash-flow investment. So, as an example, a home purchased for $500,000 should command annual rental revenue of $50,000 to $60,000.
If you plan to use it often or if you think the home will appreciate in value, you might not need to be within that same range, Banczak says. But clearly, the more you stay at your home, the less revenue it will make.
A survey by short-term rental marketplace HomeAway found the average owner who rents out a second home collects more than $33,000 a year in rental revenue. At HomeAway rival Airbnb, the average host on that platform makes about $11,000 a year. But these owners often are renting out their primary residences, renting out only one bedroom or renting their homes out only sporadically, and are not treating them as true vacation rentals.
Will Edmond, a Realtor and Airbnb host in Atlanta who owns three rental properties with his partner, says they pull in at least $2,500 to $3,900 in monthly revenue for each of their three rental homes in Georgia. However, many owners of vacation rental homes report generating well beyond that amount per month.
“With the strength of the housing market where it is today, I do believe vacation rentals are a good investment,” says Nick Winikoff, co-founder of Vuepeer, a search engine for vacation rentals. “Many people use vacation rental platforms to at least break even on their investment on a yearly basis while they wait for the home itself to appreciate.”
In fact, Winikoff says short-term vacation rentals in sought-after markets now outpace long-term rentals for potential cash flow.
Figuring out much money your vacation rental can make
For example, Airdna provides an online tool that enables you to calculate average daily rental rates, occupancy rates and revenue. Using those projections, you then can subtract items like principal, interest, taxes, insurance, maintenance expenses and management fees to come up with a cash-flow forecast, says Realtor and property management specialist Denise “Deni” Supplee, co-founder of Snap Landlord.
Investors also can turn to a tool developed by rental platform HomeAway to gauge potential income from owning a vacation rental.
When crunching the numbers, make sure you don’t overlook IRS rules regarding tax write-offs for rental properties, Supplee notes. For example, if you occupy your vacation rental for a certain share of the year — either 10 percent of the days you rent it out at a “fair” price or more than 14 days in total, whichever is greater — then you lose many of the tax advantages of owning an investment property, she says.
Location location location!
Regardless of your tax situation, a number of variables affect how much income you can produce from a vacation rental. Chief among them is location.
Is your vacation home in or near a popular destination, such as a beach community or a ski resort? If so, then you’ll likely generate a generous amount of money from rentals.
“A good location near a year-round vacation attraction or a major airport will have the greatest impact,” says Christian Bryant, president of IRC Enterprises, whose specialties including residential and commercial real estate management.
Bryant says he’s known of investors who’ve made two to five times more on a well-located property that’s a short-term vacation rental instead of a traditional long-term rental.
“On the converse side, I have seen people lose a lot of money by not being in a desirable area, especially if it’s somewhere that has only three months of sun and happens to only attract travelers during the summer months,” he says.
According to VRM Intel, “34% of investors purchased vacation home properties in a suburb or subdivision, 24% in a small town and 19% in an urban area or central city. 33% of buyers purchased in a beach area, 21% purchased on a lake front, and 15% purchased a vacation home in the country.”
Bottom line: A vacation rental requires more market research than a typical real estate investment does, Bryant says.
Assessing where to buy your vacation rental
Aside from the popularity and accessibility of a destination, you’ve got to consider the setting. For example, a vacation home in the mountains might cost less than a beachfront property, but it might not bring in as much rental revenue, Supplee says. Or a vacation home on the Jersey Shore might draw high-paying renters during the peak season, but it will be mostly vacant the rest of the year, she says.
The average peak season for vacation rentals lasts 12 weeks, according to HomeAway.
“The trick is to try to rent the home during those off-peak periods, or when you don’t want to be there,” says UrHip, a marketplace for short-term rentals in the Philadelphia area. “Find the answer to that equation, and you could pay for your entire home and still visit when you want. Imagine your own sweet retreat — and it costs you nothing.”
Decreasing short-term rental vacancies
Occupancy rates for vacation rentals can be all over the map. For instance, a vacation rental home in a big city might create more demand than a rental property at a seasonal location like the beach. To gauge occupancy rates in a certain area, consult local Realtors or check out availability calendars on booking sites for vacation rentals in a specific region. Or, better yet, seek input from a property management company that handles vacation rentals. No matter where your vacation rental home is, you must strive to keep it occupied as often as possible.
“Nothing is more costly than vacancies,” says Jeff Miller, co-founder of AE Home Group, a residential real estate agency.
To help reduce vacancies, it’s important to keep your vacation home rented consistently during the busy season, with as little downtime as possible, says Adham Sbeih, CEO of Socotra Capital, a real estate investment and lending firm. To successfully pull that off, you’ll have to juggle some logistical challenges. For instance, he says, if a renter is leaving in the morning on a Sunday and another renter is coming that afternoon, you’ve got to make sure someone is there to clean the home between the departure and the arrival.
To ensure your vacation home isn’t losing money due to vacancies, you also must advertise your property on platforms like Airbnb or HomeAway, or through a vacation rental management company like TurnKey Vacation Rentals that can market your property on many vacation rental sites. Listing your property on as many websites as possible is “a great way to diversify your potential renter pool,” Miller says.
Setting the price of your vacation rental property
The best way to maximize your occupancy and avoid vacancies is to price your property well. Many homeowners struggle with this and don’t always think about it the right way.
“We hear all the time that they don’t want to price their home too low because it attracts the wrong kind of guests, or that if the property is rented out too much that it adds more wear and tear,” Banczak says.
But what many homeowners don’t realize is that by increasing the price, they’re attracting the kinds of renters that they’re actually trying to avoid.
For example, think about a three-bedroom property with four beds in North Lake Tahoe, Nevada. If you price that property at $3,000 a week, that’s $428 a night. Most families of four can’t afford this property. However, you can get four young adults to chip in $100 per night each. It can be counterintuitive, but if you’re worried about wear and tear, you might not want to bump up your pricing.
Speaking of wear and tear, some homeowners are overly concerned about this. With the right marketing and pricing strategy, a property might attract one additional four-night booking per month, generating $12,000 more in annual revenue. Even if you had to deep-clean your property more often or buy new pots and pans sooner, the revenue you’ll produce far outweighs the costs of additional wear and tear.
So when you’re pricing your property, you might want to consider pricing it slightly under competitive properties so that it’ll be rented out more frequently.
The goal of revenue management is to maximize total reservation value and not nightly rate. In other words, a three-night reservation at $400 per night is better than a one-night reservation for $1,000, especially if your vacation rental is near large events or theme parks.
Additionally, you’ll want to monitor major events like conventions and festivals that take place near your vacation rental. If you don’t take advantage of high demand by capturing that audience and adjusting your rental rates accordingly, then you could miss out on revenue.
“You have to know your market and what your competition is charging,” Edmond says.
In order to compete with similar vacation rental properties in your area, you’ll need to take into account such things such as indoor and outdoor amenities, access to transportation, proximity to attractions and neighborhood safety, experts say.
Cleanliness — or lack thereof — is another factor that can affect the revenue potential of your vacation rental. Guests will write about how clean your home is— especially if it is unclean— in their review after their stay. According to PhocusWire, the considerations of cleanliness are at an all-time high, as well as the preference for vacation rentals over hotels.
For guests, arriving at an unclean home can ruin a vacation before it even begins and it may also cause anxiety at a time when vacation rental cleanliness is connected to feelings of health and safety. For hosts, the clean of your home will greatly affect your property reviews.
Considering the consequences
When it comes to bookings, remember that vacancy rates — and, therefore, revenue and profitability — are likely to fluctuate from year to year. As such, you should invest in a vacation rental only if you can afford to keep it for personal use without relying on rental income, UrHip says.
In light of the presence of “a gazillion home-sharing websites and apps,” the vacation rental market is more competitive than ever, UrHip notes.
“A vacation rental home is unique in that it’s not just an investment but also a lifestyle upgrade,” Miller says. “While it may perform equally as well as a traditional rental property, the benefit is that you have a place you can use for your own vacations.”
Still, a vacation rental can yield a healthy return on your investment — if you’re able to attract and maintain a steady flow of renters.
“If you hold the property for the long run, then you will make a return comparable to, if not greater, than if you had purchased stocks,” Miller says.
Appreciating the lifestyle value
Aside from the investment value of a vacation rental, there is, of course, the lifestyle value — a value that’s priceless to many owners of vacation homes. Plus, it’s a value that you’ll never gain from stocks and bonds or even long-term rentals.
Simply put, you can extract that priceless value from a place you can call your second home — at the beach, in the mountains or anywhere else you love — when it’s not being rented out.
Most owners can’t afford a vacation rental without generating some income from the property, so offering short-term rentals enables you to enjoy your dream of owning a vacation home. Turning over management of your vacation home to a third party adds even more to the appeal of a owning a property that lets you — and your guests — get away from the hustle and bustle of everyday life.
What you should know before purchasing your first vacation rental home.
- For every $100,000 you spend to purchase a vacation home, you should target a yearly rental income of $10,000 to $12,000 if you’re buying it purely as a cash-flow investment.
- Be sure to research IRS rules regarding tax write-offs for rental properties. For example, if you occupy your vacation rental for a certain share of the year — either 10 percent of the days you rent it out or more than 14 days in total, whichever is greater — then you lose many of the tax advantages of owning an investment property.
- The goal of revenue management is to maximize total reservation value and not nightly rate. In other words, a three-night reservation at $400 per night is better than a one-night reservation for $1,000
- Aside from the popularity and accessibility of a destination, you need to consider the setting. For example, a vacation home in the mountains might cost less than a beachfront property, but it might not bring in as much rental revenue.