Thanks to websites like airbnb & vrbo people around the world have taken to buying real estate with the goal of turning those properties into vacation rentals. But when taking a deeper look at the net figures as well as return on investment (ROI), vacation rentals often do not perform as well as long term rentals.
Vacation Rental vs. Short Term Rental
Over the last year short-term vacation rentals have been very popular especially in cities like San Diego, Las Vegas, and Phoenix. This follows the success of companies like Airbnb, VRBO and Homeaway in many cities around the world. These sites do a great job of connecting property owners with travelers from all over the world.
But there are problems, and not just with bottom line figures:
- Screening: Every long-term rentals managed by a landlord or professional company will perform a tenant screening to include background, credit, and an eviction check. The average short term rental property doesn’t peform any checks. Many rely on the previous reviews of from the online vacation hosting site, and even less actually demand any form of ID.
- Community PushBack: In spite of the popularity of short-term rentals, some cities are starting to ban rentals less than 30 days with many communities (HOAs) imposing 6 month or 1-year Heavy fines are being levied when neighbors turn in other neighbors for not following the community vacation rental policy. And lets be honest, it only takes one unruly guest to turn your neighbors into your biggest opposition.
- Guest Experience: Short term rentals are expected to provide “Concierge Service” to would be hotel guests. This takes a lot of time and energy and has increased (which equals dollars) with ever growing competition. If you haven’t hired a third party firm, you are left on your own to do everything from checking the guests in and out; arranging cleaning, repairs, restocking and inspections. If you don’t have the best in wifi, upgraded cable, perfect pillows, or soft beds, you will hear about it online.
What Is your “Real” Return On Investment With A Short Term Rental?
If you were to ask the owner of a typical short term rental property about their profits they may tell you that their gross revenue is high, and they are loving the profits, but their P&L statement will tell a different story and their net income will usually be equal to or less than long term rentals. Here’s why:
Management Costs – Property management companies specializing in short term rentals charge roughly 20% with fees ranging as high as 30 and 35 percent in some areas (Vail, Co for example). This is usually double to triple the fee that you would pay for Long-term management (7-10%).
Even if you self-manage, you still have to find “guests” using VR sites like HomeAway, VRBO, Airbnb. These sites now have base fees equal to at least 10% per booking with additional charges like credit card and international fees, etc.
Utility costs – Tenants in long term rentals normally pay all utilities, with the possible exception of Landscaping or Pool service. Vacation rentals not only have the landlord pay the basic utilities, to be competitive, Landlords must also force pay for the internet, phone and more than just the basic cable to be competitive. At $300 – $500 per month, this is another 4-6% of a rental that grosses $100k per year and 8-12% of one that grosses $50k.
Cleaning costs – For LTR, the Landlord pays to have their home get a detailed professional clean before the 1st Tenant moves in and then the Tenant normally covers this expense when they move out. But for vacation rentals, it can be anywhere from $75-$150 after EVERY rental. Sticking with the standard 50% occupancy rate (talk about that more in a second) that’s 26 times a year for a weekly rental…or roughly $3000. Even if you have the Short term rental guests cover the basic cleaning costs, most managers will tell you that you will need a “Deep” clean done at least once per quarter. This is above and beyond what you may push onto your guests and is something you wouldn’t do with long term rentals.
Restocking – Vacation rental Landlords and management companies at a minimum provide Toilet paper, paper towels, laundry detergent, soap, coffee, paper cups, towels, and if you include annual repurchases of kitchenware (people break bowls and glasses all the time) you can spend another $50 per month on average ($600 per year). For higher end vacation rentals, there are other amenities provided including “welcome gifts” such as wine, champagne, food, flowers, car and maid service, shopping services, etc…
Getting Down To Reality
When focusing simply from a profit stand point, choosing to vacation or short term rental your home, whether that be by the beach in San Diego, near The Strip in Las Vegas, or near Old Towne in Scottsdale, may not always be the best course of action.
For example: let’s say that you own a short term rental property in San Diego and it brings in about $100k per year in gross revenue at 50% occupancy (at 26 weeks and average of just under $4k per week). Although the profit sounds exciting, you have to think about the cost and fees associated with this short-term rental property including:
- 20% management fee = $20k
- $5000 for utilities
- $3500 in restocking and cleaning fees
Net profit is rough $71,500.
Consider a conservative long term monthly rental at $6k per month, (usually 1.5 of the average weekly rent) is $72K gross, but you still have to think about your fees and other expenses which come with this rental property including:
- $4000 management fee
- 1 time cleaning $150
Net income is $67,500
Notice that we use conservative numbers for the long term and the net difference without factoring in the cost to furnish the property or any local rules or prohibitive ordinances. There is a 4% difference.
If your VR rental occupancy figures dip or bring in less in rental income you can quickly see that 4% disappear. Example, year two your rental only brings in $90k, and your expenses don’t change, now you net $63,500, or 5% deficit to the long term.
This is all before the cost to “furnish” and maintain your residence that will undoubtedly absorb more in wear and tear via short term vs a long term rental.
Owning a Long Term Rental Property Makes More Sense
Another reason to think twice before owning a short term rental property is volatility either in the economy or marketplace which could impact the profits you were enjoying from your rental property.
It’s also important to think about natural disasters and or terrorist events because either scenario could affect your long-term profits. What once was a profitable vacation rental could send your finances in the red, very fast.
Why own a vacation rental? Unless you and your family are going to spend more than 1 full month at the property per year, or the home is located in such an area where the gross vacation rental revenue beats the long term rental revenue by more than 35%, it makes no financial sense to choose short term/seasonal/vacation rental over the steady and stable long term option.
Learn More about Vacation Rental vs. Long Term Rentals
To learn more about vacation rentals vs. long term rentals, or to speak with us about our property management services, contact Goldenwest Management today by calling us at (866) 545-5303 or click here to connect with us online.