Whether you are a first-time buyer or a seasoned real estate investor, the potential rental income of a property is an important factor in your decision. Some owners want to enjoy their vacation homes more and just supplement with a little rental income, while others want to rent more and profit as much as possible. But whatever your goals are, you must attempt to determine the potential rental income in a vacation home before you make the purchase.
Can I rely on rental numbers from property management companies?
No, the numbers reported by property managers are not always a realistic picture of the full rental potential.
Property management companies often don’t achieve the home’s real potential, because they are not investing in marketing.
Many owners have realized that property management companies will spread out their marketing efforts over the dozens homes that they represent, giving very little effort into advertising each property. This results in only some properties thriving with a lot of bookings while the rest go empty. If the property management company does not put it a maximum amount of time and advertising dollars into each of the owners’ homes, they are unlikely to be rented frequently. That means the income potential could be far better than the numbers a property manager reports!
Are they reporting gross income or net income?
Remember, property managers are not free. Commissions and fees vary from 15% to as much as 60%.
Turnkey Vacation Rentals reports:
“National commission rates for property manager services average roughly 35% and we have seen them as high as 60% depending on the type of home and market.”
If the vacation rental income statement came from a property management firm, it is possible that the numbers are skewed. It is important to ask if the numbers are before or after fees and commissions were deducted.
Compare With Other Properties in the Same Area
Luckily, we have many accessible tools today that help us determine what kind of rental rates to expect. Besides More Nests premium data, rental advertising sites like Airbnb and Homeaway give us the ability to search for other homes in the same city and determine what they are currently charging.
First, you want to perform some searches that match the same criteria as this vacation home you are considering.
In this example HomeAway search, we specified the number of bedrooms and the location. You can get specific down to the neighborhood or street for accuracy.
Keep in mind that you do not need to enter dates. Just leave the dates blank, so you can get the most results of properties in that area. (Otherwise it will just filter out the booked properties.) When you find similar properties, be ready to click and jot down some notes about the rates and booking activity.
- Write down the rates they charge per night.
- Look at the availability calendar and see how popular the property is. (How many days / weeks were booked during the year?)
Create a list or spreadsheet with the collection of rates and amount of bookings. Then, you can determine the average rates and typical booking frequency for similar homes.
Add Up the Potential Rented Weeks Per Year
To break even or make money on a short term vacation rental home, the home usually needs to be rented between 10 to 17 weeks a year. If you have figured out the average rental rates for the area for a home of the same accommodations, you can multiple this rate to determine how much the total rental income could be. To be on the safe side, you can determine the lowest possible income. Just multiply the average rate by about 10 weeks.
$[average nightly rate] x 70 days = $[total rental income before expenses]
Use the projected number to determine if the numbers make sense for your goals.
In a helpful book How to Rent by Owner, author Christine Karpinski describes a detailed formula you can use in your planning. If the data demonstrates a busy rental market that is likely to offer at least enough rentals to cover your costs, the investment could be lucrative.
Evaluating the Vacation Market
Other sources may help determine rental potential.
Sometimes the amount of bookings you saw in the comparison search is enough validation, but you may need to consider the likelihood of the receiving good rentals. Here are some other sources that are helpful for profiling the market:
- Local chamber of commerce
- Visitor and tourism center
- Local real estate agency
- The city’s website, population and visitor data
- Major tourist attractions near the home
If the home is in a sleepy town with a small number of visitors each year, that could impact your ability to produce high rental income. However, if you are an owner who prefers to enjoy the home with your own family more than rent, it may still be attractive to you.
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