No long time ago, but in July 2016, I decided to buy a condo in Vacation Rental in Destin, FL. Before that, I have been long time doing my due diligance to buy a long term rental in DFW are in North Texas, however the calculations were solid that I could hardly pay my monthly payments for a 15 year mortgage, if I were lucky to have a multiple year tenant.
When a friend of mine advised me to consider a short term vacation rental, I decided to crunch the numbers and see which one maked sense. If you have bandwidth to focus on your business, vacation rental is my far more profitable compared to a long term rental anywhere.
I am not a realtor, just an amateur started the business 1.5 years ago, and now own a business Destin Rental Condos, managing my own 3 properties. I do not use management company because I am willing to manage and market my property
Here is how crunched the numbers to find the best ROI investment for a short term rental:
COSTS ( I do not include the initial investment you will make to change furniture and bring your condo to a better shape, because it usually appreciates your property at the end)
- Your monthly 30 year mortgage payment, in our case lets say property is $300,000, roughly you would pay $1150/mo assuming 20% downpayment and 4% interest for 30 year ARM. Calculator is here.
- Home owner association is a big ticket item for a condo, could be as low as $300 but as high as $800. Also understand what it covers like water, internet, cable TV etc
- Annual property tax and H06 condo insurance (most of the time, will be added to your mortgage payments as escrow)
- Monthly utility bills such as internet, water, electric
- Listing fees to be able to rent your property to such as VRBO or similar platforms. Would most probably cost you max $1000/year including your own website and some marketing
- Your trips, assume minimum 2 trips per year to check on your properties
- Supplies you will offer to your guests such as linens, towels, soaps, shampoo. Assume 2-3 full sets of linen and towels will be needed every year according to number of max guests and beds.
- Repairs and refurnishing. Hope not to have a significant repair but you will eventually have minimum $1000 per year if not more at $2000-3000
- Management companies will still cost you above expenses plus charge you 15-25% for their share.
REVENUE before sales tax and cleaning fees
Use VRBO.com, which you can search for subject community hence find the similar units. Choose 2-3 units with good reviews, some people rent for very low rates (not sure why), try to exlude those and find the realistic ones. Some of them do not update their calendars, try to avoid those too and choose 'Instant Book' options. Go to their calendar to note down their daily rates per season into an Excel. Form a table including 52 weeks of a year, make sure they have updated their summer rates.
With the same subect property, check the calendar to see how full it is. Also run a search of 1 week stay in next 3 months in the subject community and see how many % of the properties are available. This should at the end give you an indication of occupancy you will get. 50% is bad, 90% is great and so on.
Call the front desk if there is one, try to understand how much they are booked for long term snowbirds in the low season (for summer vacation, typically from Nov 1st to Mar 1st).
With daily rates and occupancy rate of your community, try to project an annual rental income. Take 3% of for credit card fees.
NOW you have the cost including monthly mortgage payments and revenue, divide the (Revenue-Cost) with Revenue. Anything above 30% is great, 40-50% is best, which means you can pay off your mortgage likely in 8-9 years instead of 30; or keep the cash for other investments per rule of Capitalizm.
OTHER IMPORTANT CRITERIA
- Closer to the beach, or even beachfront better. Amenities matter a lot. Indoor, outdoor, kiddie pools; especially heated ones are good for winter. Gym? On site cafe or bar? Beach service?
- The more people you accommodate without squeezing too much (needless to put 2 sleeper sofas in a living room), more revenue it is
- If your property is high end, less utilization you may have. Couples looking for a short break would not go with 3BR, $1m property
- Think with business ardor, not your perfect vacation. Put yourself into shoes of the guests, not your shoes while choosing the property. A pet friendly property would be good for you because you have a pet, but is it for most of your guests?
- Is there an in house maintenance crew? Any repairs would be faster, cheaper and with less headache if there is.
- Is there washer/dryer in the unit or laundomat on the same floor?
- Enough elevators for peak summer times? Enough parking spots, free parking for guests?
- Details matter. Is you unit sitting next to a big cooling compessor of the resort or pool pumps? Next to laundry? Next to elevators' ding dong all the time? Close to trash collection spot in the morning? Is it peaceful at all times? Are windows and doors sealed for noise?
- Any restrictions on your short term rental, either from HOA or Country or State?