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July 2, 2012

Vacation Rentals – Huge Rents… Any Profits?

Syndicated — Borrowing from the boat owners' passel of proclamations, may I suggest: "The best two days of a vacation rental owner's life are the day he buys it and the day he sells it...."

Those who live near the shore often hear rumors about the piles of money that vacation rentals bring in. "The summer months' rental income pays for the entire year's mortgage," folks will say. That may be true, but what about the rest of the expenses?

The problem with vacation rentals is twofold:

1. Operating expenses related to vacation rentals are similar to those of a hotel - 60 percent to 75 percent of revenue; and

2. Prize vacation properties come with enormous price tags and staggering monthly mortgages, property taxes, insurance, etc. Those are fees that must be paid, whether your occupancy is 100 percent or zero.

How can revenue operating expenses be so high, you ask? Vacation rentals, even a single property, requires a lot of work. You'll need to:

  • Take calls from interested parties
  • Market/advertise the property
  • Build and maintain a website
  • Shop for furnishings/replace them when they disappear
  • Draft leases
  • Process rent payments
  • Check in guests
  • Schedule routine cleaning and maintenance
  • Schedule gardening/landscaping services
  • Pay bills
  • Obtain insurance coverage
  • Be available/responsive when emergencies arise

All these tasks take time, which is why property management companies are able to command high fees. Sure, you can do the work yourself, but either way you're going to have to fork over cash for furniture, sheets, towels, utility bills, etc. All those costs add up, so it's easy to see how roughly 75 percent of your revenue - not including your own time or your mortgage payment - is paid out in expenses.

By contrast, a moderately priced, single rental unit or apartment should have an expense ratio of 35 percent to 45 percent. That's 30 percent less than a vacation rental.

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