Vacation Rental Property Income
NOTE: I do not indicate a recommendation to purchase vacation rental property. The post is strictly representative of options for generating passive income through a vacation property rental. Which, is a popular source for passive income and may be a stream that interests you.
This discussion excludes growth in the value of the property. Because, growth is dependent on market conditions and economic factors.
Vacation Rental Risks
Rental income depends on the market where the property is located and economic conditions.
Leisure travel is one of the first household expenditures to be cut in difficult economic times. Consequently, this fact must be kept in mind when planning your portfolio.
If you must borrow money to purchase a vacation property the potential loss of this income stream in difficult economic times can increase impact to your ongoing expenses. Thus, becoming a significant draw on finances.
Vacation Rental Properties are in direct competition with major hotel chains in top vacation markets. Interestingly, some of these markets have seen a drop in hotel occupancy rates and an increase in vacation property occupancy rates. Possibly caused by an increase in hotel average daily rates ($$).
Scenario Details
Data used in the examples below has been taken from the most current 12-month period. As a consequence, these markets were impacted by declining economic conditions and severe restrictions on travel. Significantly, both factors impact security of your investment in a vacation property. Additionally, data from 2020 can be utilized to understand potential downside of this passive income stream.
For these reasons, these markets have been hit hard in 2020 on average daily rates and occupancy rates.
Vacation rentals are tightly controlled by regulatory bodies. For example, regulations include such restrictions as maximum length of stay, limits to owner occupancy, sales tax, income tax, environmental levies, etc.
Notably, each market varies. These implications can quickly eat into revenue.
I recommend you find a local expert to speak with before making your vacation property investment to ensure you are well informed and prepared.
Assumptions
Firstly, calculations assume the vacation property was purchased without a mortgage or other borrowing. Secondly, maintenance is performed by the owner (not a property management company). And, finally the entire home is rented.
Revenue and Expense Calculations
Revenue is based on median monthly revenue for the past 12 months excluding licensing, fees, and sales and lodging tax. Sales and Lodging tax range from 5% to 20% for these examples. In Paris the tax rate can be as high as 30% depending on the gross income generated by the property.
Net revenue and return on investment calculations do not include the owner’s income tax exposure.
Vacation Rental Selection
The examples below represent a sampling of potential properties.
These locations were selected based on high travel demand and I have a personal preference for these specific examples.
Hawaii Vacation Rental
Hawaii – Annual Return on Investment: 2.0%
Florida Keys Vacation Rental
Florida Keys – Annual Return on Investment: 2.7%
Paris Vacation Rental
Paris – Annual Return on Investment: 1.1% NOTE: Significant Economic Impact to Vacation Rentals in 2020
Another key point, if you had purchased a property in these markets before the housing markets began their steep climbs in cost the return on investment these scenarios would look much different. Significantly, more positive.
The Key: Timing Is Everything
This passive income stream is not an investment. Especially, in today’s housing markets. .
Two of the three dream locations reviewed show softening in the housing prices when comparable properties were reviewed. For instance, in the immediate vicinity of these properties.
For instance, if housing prices were to drop 30% in these locations; and, I had more money than I knew what to do with, I would consider undertaking a vacation rental business venture.
At current prices and with the high capital investment requirement the return on investment is simply too low.
One last thing, you will need to ensure your vacation rental is full of high-quality furnishings. That expense is not factored into these calculations.
Going home is a wonderful vacation from the people I share my summer rental with.
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Additionally, all of our posts in the Passive Income Series can be found here.
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