• Alan Corey

Evaluating and Investing in Vacation Rentals! - House of AC #1

Short-term rental investments are a great way to earn money. They come with more risk than long-term tenants, but you’ll make more money. As with any real estate deal, do your due diligence on a property and compute the numbers before purchasing. Here are the numbers I run through on any Vacation Rentals and how I find my back of house numbers.


Tools We Use to Evaluate Vacation Rentals before Investing

Once you know what city you want to rent in, go to Zillow and find houses in that zip code. Find a property that you like, and go to a mortgage calculator to determine the amount of money you’ll be spending on the mortgage every month.


The other tool we use is Airdna.com to evaluate comps in that area. It aggregates the data from Airbnb and VRBO to produce inclusive data. You’ll be able to view competitors’ amenities and price points. I highly recommend using this as a tool if you’re looking to purchase short-term rentals.




What Do The Numbers for Investing Say?

For example, we found a three-bedroom, two-bath home in Del Ray Beach, Florida. The house costs 600,000. With a 120,000 downpayment, you’re looking at a monthly mortgage of $3,000. According to Airdna.com, the average price for a one-night stay at a three-bedroom, two-bathroom rental is $450.


At a 71 percent occupancy rate, you’ll be making $9,450 gross a month on this rental property, which covers the mortgage and the expenses. (We multiplied $450 by 21 days to come up with this amount).


Keep in mind that if you pay a property manager, they’ll likely take 30 percent of the profits. Call a realtor in the area where you’re looking to buy a property. That realtor should be able to tell you what the property managers in that area are charging.


Also, have a budget for repairs, vacancies, and property upkeep. I recommend 30 percent of your cash flow should be going into a sinking fund for these types of things.

Expense

Amount

Mortgage

$3,000

Property Manager

$2,835

Vacancy, Repairs, Etc.

$1,084.50

Overall, your expenses on this property will be $6,919.50. And your cash flow is going to be $2,530.50.


Philosophies on Rental Units

There are plenty of strategies for Airbnb properties. Some people only do studios because they only want to deal with one guest. Others do 5+ rooms for a more corporate clientele. Everyone has their philosophy for the best rental to own. There’s no right or wrong answer here.


You also want to determine what kind of rental home you want to be. If you were to do longer rentals, ensure that a 2-week stay covers your expenses. You’ll make more money if you’re doing shorter rentals but have a higher turnover rate.


All real estate investing comes down to two factors. The more difficult it is to finance, the more lucrative it is. The more difficult it is to manage, the more money you’ll make. More risk also makes you more money.


Finding Funding

Banks are skeptical about AirBnBs since there’s more risk. If this is the first rental home you’re purchasing, you should consider making it your second home. Live in it six months out of the year and then AirBnB it for the other half of the year. Do this to ease into full-time AirBnB. It will make the banks more at ease than if you were to start just renting the property out as a vacation spot.


If you’re looking for funding, look for hard money lenders. Hard money lenders have higher interest rates. You’re looking at between 5 and 7 percent interest on the property. The bank is taking on more risk when they lend you the money, so they have to offset that risk with higher interest rates.


To show the banks that you’re serious about short-term rental properties, you need at least two years of tax returns showing it is a viable business. Once you do that, you’re more likely to get a loan with agreeable terms or even a commercial loan.


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