Renting out my vacation home for extra income? Sounds like a great idea, right? Well, after several years in the industry, I have come to terms vacation home investing is not for every owner. Most importantly, I am here to save you time and money because jumping into this without proper knowledge, you can find yourself in a world of pain. Financial and emotional pain and distress. Serious stuff. With this in mind, read on to avoid pitfalls and arm yourself with knowledge to make a sound investment in your financial future and happiness should you decide to buy a vacation home.
Is a vacation rental a bad investment? A tale of two vacation rental owners.
So there was Todd, a close friend of mine from college. Following a surprise bonus from his Fortune 500 desk job, he decided to invest in a gorgeous 5 bedroom in the Poconos. His first guest was fine and he earned after-tax $1500 for 10 nights in October. Not bad, huh? Well, his next guests were nightmares.
Vacation rental guests cause damages
He received a large chargeback from his credit card company and lost $2000, the guest stood in his house for free! Without resolution, he charged on and chalked that one up to a bad experience and a lesson learned. Two months later, the guests through a huge party. The damages were three broken doors, four torn pool screens, stained carpets, and smoke smell throughout; a whopping $2,000 in damages. In line with the market for damage deposits, he only collected a $350 damage deposit and could not recover his other losses. Total losses tally to $3,650. Todd was feeling the strain…
Bedbugs, a vacation rental nightmare...
In February, he received the dreaded call. Bed bugs. One of his previous guest brought bed bugs to the home meaning all guest after that one were exposed. He had to pay hospital bills to prevent a law suit and received the worst review an owner could receive, “your property has bed bugs!” His net income after expenses, mortgage, and mishaps for his first year in business totaled a loss of near ten thousand dollars.I repeat, he lost ten thousand dollars.
Renting out my vacation home? Earning money with vacation rentals is possible.
Next, there was Sandy, a local high school guidance counselor. Her and her husband wanted to make passive income, but were risk averse investors who wanted to also have a home for their grandkids to visit. Sandy, being in education, did her homework. She did due diligence on her guests, set house rules, crushed her marketing, and had a positive attitude throughout. Being prepared, her annual gross income for her 4 bedroom Disney home was $54,000 her first year and she profited $18,000 after expenses. Not all stories are nightmares, you can earn rental income with a vacation home.
Vacation rental mistakes, pitfalls, and hidden costs
Not having backup funds for hidden costs
Hiring the wrong property manager or cleaning team
Vacation rental customer service
Hidden costs of owning a vacation rental home
No one likes expenses. When I hear the word expenses,I cringe. The main hidden costs to look out for are damages caused by the guests. Stained comforters, towels, kitchen towels, furniture, you name it and they stain it. Security deposits and accidental damage insurance often does not cover these costs. Therefore, you the owner end up footing a lot of bills that add up to one big line item on your profit and loss. For example, replacing towels, sheets, and comforters can easily run you over $1000. Replacing damaged furniture? Well, you don’t want to even go there…
Bed bug covers for your mattresses and pillows are expensive! Thinking back, shopping for these items ran over $850 for a six bedroom home. Yikes! If you have a pool deck, you will have to pressure wash it twice a year and worry about torn screens, which always seem to happen. Guests tampering with your alarm system? Say hello to a bill from the Fire or Police department.
Luckily, with the right standard operating procedures and a well thought out rental agreement, you protect yourself from a lot of these costs. My advice? Budget for these hidden costs and make sure your security deposit and rental agreement is good. Another helpful resource, although most cost on the post are not really “hidden” is this Bigger Pockets post.
Vacation Rental Business Plan
I really dislike writing business plans, but guess what? You need one! Your business plan should include:
Marketing plan - Listing sites such as HomeAway, AirBnB are a great place to start. Will you do direct mail or social media? These are all points to consider.
Budget for Set-Up and Operations - How much is set-up going to cost? Will this start you at a significant loss for the year?
Revenue and Expense Projects - How much will you earn and spend? Do this neatly on a spreadsheet for your vacation rental.
Licensing and Tax - What is your tax plan and how will you make your rental compliant? You do not want to run afoul of the tax man!
Key Partners - Will you hire a property manager, housekeeper, maintenance man, landscaper, pool guy, pest control professional?
Rates and Fees - What will you set your nightly rates at?
Negative Reviews for your Vacation Rental
We all hate negativity, especially in our reviews. Do you have a concrete plan for handling bad reviews. Guests often complain and you have to have a rapid response plan to keep their experience pleasant. Guest satisfaction is your number one priority! Guests may ask for a refund if your vacation rental was not cleaned on time or properly. If your AC is not working or your pool heater clunked out, guests will ask for compensation. Handle these situations fairly, but stand firm.
Why stand firm? A lot of guests are used to traveling for free. Free you say? Well, a consequence of online booking is review fraud and extortion. Fraud and extortion are very serious words, but the threat to vacation rental owners is very, very real. I cannot count on my fingers how many times I have witnessed this phenomenon. For example, guest complains of blood on the sheets, a very dirty home, and always seems to come up with a list of problems needing handling. Next, the guest asks for compensation. If you do not comply? The guest threatens a bad review! Not fair!
To handle these situations, make sure you get in writing the demand for compensation. Listing partners do not take kindly to threats, but you need a paper trail. On the other hand, if the guests have a legitimate complaint, be a great host and respond! Guest experience makes or breaks a successful vacation rental.
Hiring the wrong property manager or housekeeper for your vacation rental
Hiring the wrong people is a sure way to create headaches and financial losses. There are many cases where property managers rent your home too cheap, or worse, keep your money. Make sure you are vetting your vacation rental property manager before hiring. Housekeepers have access to your home. Are they honest? If not, things tend to go missing…Not only that, what happens if you can’t reach your housekeeper and a clean was missed or last minute? Often, these problems surface, and by hiring the wrong help your vacation rental suffers. You can create a smooth sailing ship if you hire the right team.
Vacation Rental Customer Service
Your guests are the lifeblood of your business. Communicate often. Always be responsive! The golden rule applies here. By simply treating others how you want to be treated, you are delivering five star hospitality. Call your guests before they arrive to make sure they feel comfortable and have all of the relevant check-in information they need. Send them an email highlighting things to do in the area and things to know about your home. Leave them a welcome basket with a thank you card. When they leave, ask if the experience was pleasant and send them a thank you. Doing the small things will create loyal guests who will return to your vacation rental year after year. Great hospitality drives bookings.
How to Price My Vacation Rental
The most common question vacation rentals have is how to price their vacation rentals. This question is more common than owners asking me, "Is renting out my vacation home a good idea?" If you price your home incorrectly, you will lose money.
Competitive vacation rental rates
First step, study your competition. Use HomeAway or AirBnB to look up your neighborhood or zip code to find several properties similar to your own and write down their seasonal rates. When selecting a comparable set to compare your home to, make sure the size, bedroom count, and features are as close as they can get. For example, if you have a five bedroom home with a pool your comp set should include five bedroom homes with pools in the same neighborhood.
Know your vacation rental competitive advantage
Second step, know what your competitive advantage is. Do you have an upgraded kitchen or new furniture? Does your home backup to a lake? Your home may be worth more than homes on your comp set. This works the other way around though, if your home is less upgraded, you may have to accept lower rates. Here is an example of a comparative analysis.
Your goal should be to maximize rental income for your vacation home. By getting maximum occupancy at the most appropriate nightly rate, you will achieve this goal and end up richer for it. Beware, you may think your home is worth more than the market will accept. I have seen several owners in this trap and their home sat empty while they scratched their heads in confusion.
Seasonal pricing tips for vacation rental owners
There are different tools for pricing vacation rentals, but I believe its best to do this yourself. Pricing partners often have an incentive (just like AirBnB and property managers) to book your house at a lower rate to get more turnover, earning them more commissions. Do not fall for this trap! Here is some advice for setting the seasons.
Low Season - often May, September, October, beginning of December
Mid Season - often Jan through April
High Season - summertime!
Holiday Season - Easter, Labor Day, Thanksgiving, Passover, Christmas
Obviously, your vacation rental rates will be higher in holiday season (maybe even 2-3 times what low season commands). If you price too high in low season,you will be empty. Beware!
Overall, I recommend a professional to set your nightly rates. I can help you with this, just shoot me an email or leave me a voicemail. If you asked me, "Is renting out my vacation home a good idea?" I would respond maybe.
Vacation Home Help works with dozens of owners across the globe to make sure they are armed with tools to succeed in the vacation rental game. Want more vacation home help?