Perhaps the most important piece of your rental property strategy is calculating its own ROI correctly. We stress the importance of doing it because a single oversight could mean a massive headache later. This is especially true for anyone leasing or paying a mortgage.
The Variables Affecting Your ROI
Many a failed rental operation can point to bad financial projections as their undoing. Of course, this is true for any business — but the vacation rental industry is particularly tricky to predict.
So, before we get to number-crunching, let’s just lay out the most volatile industry trends that you want to be aware of whilst planning.
Finance Options
If you’re already the owner of the property in question, pat yourself on the back and go to the next section.
Financing itself isn’t something that fluctuates once payments are being made, but there’s various forms of financing to consider. Each will present its own difficulties to overcome, so it’s up to you to investigate your options.
You will need to choose a financing strategy that’s right for you and your goals. You also need to choose one that’ll ensure your vacation rental business is sustaining itself after all initial investments are paid back.
Buy-to-Rent
With real estate prices ever-rising, buy-to-rent schemes have become a popular alternative for those interested in owning. This involves a mortgage whose payments will be factored into your prices. The risk of failure here is much greater than using a lease-to-rent scenario, but the reward for your success is a valuable piece of real estate.
Some people opt for personal loans to fund their property purchase because of no downpayment requirements. No. Just don’t do this. The interest rates are higher and payment terms are shorter.
Obviously, there’s some exceptions where a creative financing strategy would work out, but in most cases you’d just be setting yourself up for failure. Please do some thorough reading before you dig yourself into a situation you can’t control.
As a rule of thumb, it is best to not enter into a buy-to-rent strategy expecting to make a living as you’re paying a mortgage. All you should be looking to do is break even or pay your mortgage back quicker to get out of the red. You want to have that property outright as rapidly as possible.
For more info on the various types of loans / mortgages that are generally used for vacation rental purchases, read on here.
Property Lease
A lease strategy will lower your investment and focus on monthly profits. If you have no interest in owning the property in question, this is where you want to be. The terms of your lease will be defined by your intent to sublet the property. You will be given a rent contingency based on your monthly revenue projections.
Location, Location, Location
In the words of every archetypical on-screen slimy real estate agent ever:”location, location, location”. Your property’s location is a huge factor in whether or not your rental business plan is likely to succeed.
With regular rental schemes, the value of your location is dependent on its most immediate surroundings. With vacation rentals, you have an extra factor to consider: tourist traffic.
Does this mean that you can’t succeed with a vacation rental business in Iowa? Absolutely not. In fact, you may perform far better in Iowa than you would in New York simply because the real estate prices are so much better.
All it means is that you have to be realistic about your location’s rates and expected occupancy. This will help you accurately project how long you can expect to wait till you reach profitability.
To help you assess your location’s viability as a short-term rental property, we have a couple tools. First of all, do some independent research to make some general assumptions about your market. Are there hotels in the area? Are there tourist attractions in close proximity? Is there an airport? This is just common sense stuff, but it needs to be said.
You want to seriously weigh the expense of your property against the average rates in your area. If you can’t sustain yourself on the average, your risk of failure is rising.
Expected Occupancy
OK, so this is a huge variable since it’s usually tied to seasonal traffic. The best way to handle this is to do your calculations with the purpose of finding out what your lowest monthly occupancy rate would need to be. That way, you’ve got a goal to shoot for as well as a realistic plan.
If you want to find out what to expect instead of being safe, you will have to do some competitor research. All that means is currently using Airbnb or another rental channel to find similar properties in your area. You’ll be able to look at their availabilities that will assist you make some assumptions about your property.