Owning a vacation rental sounds like a wonderful idea. You own a gorgeous property, perhaps next to a lake, ocean, ski mountain, or hunting land, where you can escape whenever you want. When the property is not being used by you personally, it’s rented out to high-paying guests who turn the property into an income-generating asset.
Sounds like a perfect option.
But it may not always be a good idea to own a vacation property, even one that is bringing consistent income to your bank account. To understand rental properties, you need to understand how to calculate the profits from these assets. It may sound complex, but it’s actually quite simple…
How to Calculate the Profits of Owning a Vacation Rental
If you are considering ownership of a vacation rental, you need to make sure it’s a good deal. That means calculating your potential costs and revenues to determine your future profits.
Step 1: The Cost of Owning a Vacation Rental
Owning a vacation rental will cost money. Depending on the size of the house and property, local and state taxes, and quality of the house, the costs can range into the tens of thousands of dollars, and even hundreds of thousands in certain situations.
Typical expenses for a vacation rental include…
Monthly mortgage payments
If you used a loan to purchase your vacation home, you will have a mortgage payment on the property, which can easily cost thousands of dollars, especially for luxurious properties in high-demand locations. For most owners of a vacation rental, this is the single-biggest cost.
If your vacation rental is a condo or a townhome in a specific community, you may have fees from the homeowner’s association or “HOA.” These fees are usually only a couple hundred dollars a month, and if they exist on your property it may mean that other costs are not required. For example, paying HOA fees may cover yard care, so you won’t have to hassle with this cost.
Costs of landscaping and upkeep
Most owners will hire a company to handle this aspect of ownership, but if you are close enough, you can maintain and upkeep the property on you own. Either way, it will cost money. Obviously doing it yourself is cheaper, but it will eat up time and there are still expenses for equipment and fuel.
Utilities generally range from about $100 to $500 a month, depending on the house. It can include gas, electric, water, pool service, pest control, and other expenses that come with owning a property.
Property management costs
Many homeowners will find it more convenient to hire a professional company to manage the property. These all- encompassing groups can help with maintenance, yard keeping, booking guests, processing payments, and all the various aspects of a vacation rental.
No matter where you live, you will have property taxes, which are generally based on the value of the property. Taxes are often high for vacation homes for a variety of reasons. Many states have additional taxes for areas around waterways and lakes; these additional taxes help support the upkeep and cleaning for the body of water. Vacation homes also tend to be high-value properties, so taxes will inevitably be higher.
Altogether, these are the costs that come from owning a rental property. They can be significant, but they are usually easy to calculate. To make matters fast and easy, you can often talk with the current owner to compile these numbers. But remember, a vacation rental will likely have higher utility costs, as guest will be less likely to worry over wasted energy.
Step 2: The Incomes from a Vacation Rental
Now that you know the expenses, it’s time to estimate how much money you can earn from the property. In general, this number can be a little more difficult to estimate, as various factors can impact the demand for your rental.
Ask a few questions from the current owner or property manager of the property to get things started. Ask about the rental history first; did they have a hard time finding guests, or were people knocking down the door to book a reservation? You’ll also want to know the nightly or weekly rental rate, and determine how much annual income the property generates.
Many management companies handle the booking of homes. If this is the case, they can provide information on the previous 12 months of rental activity.
You’ll also want to compare the current rates to other rental properties in your area. A good resource for this is VRBO, HomeAway, or AirBnB. These websites show you how much a comparable property is going for every night, which can help you estimate the income from a vacation rental.
Vacation rentals usually have peak seasons and downtimes. Places near water, for example, tend to thrive in the summer, while places near ski resorts will bring the highest income during the winter. You have to take this into account; you can’t just assume 12 month of peak-season income.
Income Minus Costs Equals Profit!
Once you have calculated the two numbers (costs and income) you can begin to estimate whether or not the vacation rental will be profitable or whether it will be a drain on your finances. Simply subtract the costs from the income and you’ll have the profit.
Even without Profit, Owning a Vacation Rental May be Worthwhile
Many people own a vacation home and never earn a positive annual profit from the property. Even if the total cost is even, they still have a property that they can enjoy when they please, and renting it out to guests is simply seen as a way to reduce or balance the costs. It also helps reduce the cost of the purchase, meaning you have an asset that is paid for (all or in part) by someone else.
So even if the costs are more than the income, it may still be worth the purchase.
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