What is a good ROI on A vacation rental property: 10%?

What is a good ROI on a vacation rental property? Is it 10%? 20%? Somewhere in-between? Before investing, you need to understand the expected return. Otherwise, you may end up with a disappointing or underperforming asset.

Running a successful vacation rental requires effort and capital. While the income potential is high, expenses like maintenance and cleaning can eat into profits. Marketing and managing bookings also demand time – as I’ve learned from my hotel business.

In this article, I’ll explain how to calculate ROI for vacation rentals. You’ll discover target ROI and strategies to maximize returns through smart investing and operations.

You’ll learn to determine a good ROI and feel confident pursuing vacation rentals as a wealth-building investment or side business. Let’s dive in: what’s a good ROI on a vacation rental property?

What is a Good ROI on A Vacation Rental Property?

Return on Investment (ROI) serves as a crucial barometer to assess the performance of your vacation rental property. It represents the return on your invested capital. To calculate ROI, divide the net profit by the total investment cost. The formula looks like this:

ROI = (Net Profit / Total Investment Cost) * 100%

The main source of income for vacation rentals is short-term rental revenue. This revenue is generated by renting out your property for brief periods, usually less than 30 days for short-term rentals or between 30 days and less than one year for medium-term rentals. To determine rental income, consider factors such as occupancy rate, average nightly rate, and seasonal trends.

This is just an oversimplified version. Real-world calculations must include additional elements, such as cleaning fees and security deposits, that can significantly influence your final numbers.

For a more in-depth analysis, use the ROI calculator below to get real-world calculations that factor in additional elements like cleaning fees and security deposits, which can significantly impact your final numbers. 👇👇👇👇👇

Longer Stays and Peak Seasons

In general, longer stays are better for vacation rental owners. They reduce the turnover of guests, which can, in turn, lower your management and cleaning costs.

Peak seasons are another factor that can sway your ROI. Vacation rentals typically experience high demand during peak travel periods, leading to increased occupancy rates and the potential to charge higher rental fees. For instance, during the summer, my properties in Arizona have low occupancy rates. It appears that people prefer to avoid the scorching heat of 120 degrees. 🔥 🌵🔥

Strategically manage your bookings to favor longer stays and peak season visits, and you can optimize your ROI. For example, setting a minimum stay requirement during peak season or offering discounts for longer stays could help increase your overall profit and improve your ROI.

These aspects do add an extra layer of complexity to calculating ROI for vacation rentals. Therefore, it’s essential to use comprehensive vacation rental property management software or work with a professional who understands the details of vacation rental investments.

Factors Influencing ROI on Vacation Rental Property

As you look at real estate investments, various factors can affect ROI. This is especially true for vacation rentals, where high returns rely on specific circumstances and strategic management.

Location and Property Management Fees:

Your vacation rental property’s location and management fees impact ROI. A strategic location in a popular tourist destination or near key attractions can lead to higher occupancy rates, ultimately increasing short-term rental revenue.

However, not all locations are equal, and thorough local knowledge is vital. Different neighborhoods within sought-after areas can offer varying returns, making your location a multifaceted decision.

Property management fees should also be considered if you use professional services. These fees can range from 20% to 50% of your rental income, depending on the level of service provided. While property management can improve your booking rates and guest satisfaction, weigh the costs against the benefits is to achieve an accurate ROI assessment.

Market Research and Booking Platforms:

Use market research to analyze average nightly rates, seasonal trends, occupancy rates, and competitor pricing.  You can use tools like Mashvisor to give insight into how short-term rentals perform in your area. Also, market research is used for more than just income projection, as it can also uncover regulatory challenges in specific areas that might affect your rental’s profitability.

Diversify your property’s presence across various booking platforms like Airbnb, VRBO, and Booking.com to increase ROI. The exposure across multiple platforms enhances visibility and attracts a broader guest base, leading to a potentially higher return. Use property management software to handle bookings and communication across these sites.

Tips to Optimize Your ROI on VRBO or Airbnb:

Dynamic Pricing Strategies: Implement dynamic pricing tools to maximize your earnings by adjusting your rates based on demand and seasonality.

Enhanced Visual Content: Use high-quality images and detailed property descriptions to attract more guests and stand out in listings.

Guest Satisfaction Matters: Encourage excellent guest reviews, as positive feedback can improve your search rankings on VRBO and Airbnb, leading to more bookings. Also, consider implementing a loyalty or incentives program to encourage repeat bookings.

Offer Attractive Amenities: Consider offering additional amenities like hot tubs or pet-friendly options to allow you to charge higher rates and cater to a broader audience.

Factors to Consider for a Good ROI

Achieving a strong Return on Investment (ROI) in vacation rentals involves a balance of income potential and expense management. Consider these factors before investing:

Predicting Income Potential

To accurately predict income potential, research comparable properties in the area. Analyze their rental rates, occupancy levels, and seasonal trends.

Calculating Expenses:

Understand all potential expenses and costs associated with running a vacation rental property. These may include:

Management Fees: If you plan to hire a property manager or use a property management company, factor in their fees.

Maintenance Costs: Regular vacation rental turnover cleaning, repairs, and updates are needed to keep your property attractive and functional for guests.

Marketing Costs: To attract guests and bookings, you must invest in property marketing. This could include professional photography, listing fees on rental platforms like Airbnb or VRBO, and creating a website for your property (which I highly encourage!)

Make sure that your predictions for income potential are grounded in market realities. Then, manage expenses effectively. This will help you achieve a healthy balance between income and costs and lead to a good ROI.

Understanding Tax Benefits and Liabilities

Owning a vacation rental can bring tax benefits, such as the ability to deduct business expenses. However, it also comes with liabilities like income tax on your rental income. Consult with a tax professional to understand all the tax implications of owning a vacation rental.

Financing Options

Consider different financing options for your vacation rental investment. These could include traditional mortgages, home equity loans, or DSCR loans.  Each option has advantages and disadvantages, so choose the vacation home loan that will best impact your ROI.

Negotiating Property Acquisitions

Don’t underestimate the power of negotiation when acquiring a vacation rental property. Whether it’s negotiating the purchase price, terms of the deal, or even items to be included in the sale (like furniture), every bit can have an impact on your ROI.

Benefits and Drawbacks of Investing in Vacation Rentals

As with any investment, there are both benefits and drawbacks associated with vacation rental properties.

Benefits

• Income Generation: Well-managed vacation rental properties have the potential to yield substantial income from short-term leases, making them an attractive option for investors.

• Property Appreciation: Over time, vacation rental properties may experience an increase in value, leading to higher returns upon resale.

• Personal Use: As an owner, you can also use the property for personal vacations, which can result in savings on accommodation costs.

• Tax Benefits: In the United States, you may qualify for property maintenance and depreciation deductions.

Drawbacks

• Seasonality: Rental demand often fluctuates with the seasons, which can affect the consistency of rental income.

• Management Intensity: Compared to long-term rentals, short-term vacation rentals typically require more hands-on management, including frequent cleaning and guest communication.

• Regulatory Changes: Many regions are introducing or modifying laws that regulate short-term rentals, potentially impacting the profitability and operation of vacation rental properties.

Stay Informed

Keep updated on current trends and predictions. The ongoing impact of factors like remote work, changing travel preferences, and local regulations means that the vacation rental landscape will continue to evolve.

How to Choose a Good Vacation Rental Investment

The selection process involves much more than just picking a location you enjoy. Here are some criteria to help you select a profitable investment:

• Location: Consider areas with high tourist traffic, low property taxes, and favorable short-term rental laws.
• Rental Income Potential: Research similar properties to estimate potential earnings.
• Property Condition: Look for a property that requires less maintenance and repairs to minimize costs.
• Vacancy Rates: Areas with lower vacancy rates typically indicate higher demand for rentals.
• Real Estate Resources:
  • Real Estate Websites and Apps: Use platforms like Zillow, Realtor.com, and Trulia to access comprehensive property listings.
  • Real Estate Agents: Seek guidance from industry professionals who can provide expertise and access to off-market listings.
  • Real Estate Auctions: Consider property auctions as an opportunity to find properties below market value while being mindful of potential risks.
  • Real Estate Wholesalers: Connect with wholesalers who specialize in finding discounted properties.

Wrap-Up and My Experience with Rental Property ROI

What is a good ROI on a vacation rental property? By now, you should know how to determine the ROI potential of a short-term rental investment.

Before you buy a property, realistically estimate income and consider how you can minimize costs through smart financing, negotiations, and tax planning. Track market data, model different scenarios, and run the numbers to find your magic ROI.

As a hotel investor, I am well aware of the unpredictable nature of the dynamic hospitality market, which is very different from long-term rentals. To succeed, you must know your market and identify potential strategies to increase ROI given ever-changing factors such as laws, competition, and other dynamics.

Arm yourself with these ROI fundamentals before pursuing vacation rentals. Then, optimize operations to maximize returns on your property over time – the financial rewards are worth it!

Vacation Rental ROI FAQs

What is the 2% rule in real estate?

The 2% rule in real estate is a guideline that suggests a rental property is a good investment if the monthly rent is equal to or higher than 2% of the property’s purchase price. For example, if you bought a house for $100,000, it would need to bring in at least $2,000 monthly in rent to meet the 2% rule.

Is vacation rental property profitable?

Yes, vacation rental properties can be profitable. However, profitability depends on several factors, including location, rental rates, occupancy rates, property management costs, and maintenance expenses. Make sure to conduct research and financial analysis before investing.

How do I make my vacation rental pay for itself?

To make your vacation rental pay for itself, your rental income must cover all costs, including mortgage payments, property taxes, insurance, maintenance, and management fees. You can do this by setting competitive rental rates, maximizing occupancy through marketing, and managing expenses.