How much can a vacation rental make? This is often the fist question I get asked by prospective owners and it is also one of the most difficult to answer. The short answer? It depends.
A General Rule of Thumb
Vacation rentals typically make around $10,000 in yearly gross income for every $100,000 spent to purchase the home. So a property purchased for $300,000 should generate around $30,000 in yearly gross rental income.
This is nothing more than a general observation based on my experience. There are outliers of course. I have seen 2 bedroom condominiums worth less than $200,000 make significantly more than $20,000 and 4 bedroom properties worth way more than $400,000 that didn’t make anywhere near $40,000 annually.
I still think this is a good baseline and should be a conservative number. You may see better ratios quoted by others in the industry, but I tend to err on the conservative side. Under promise and over deliver is my motto.
Location is Important
Obviously your potential rental income is highly influenced by the location of your vacation rental.
The median yearly rental income on a 2 bedroom property in Galveston, TX is just above $23,000 according to Evolve Vacation Rental. Galveston is what I would consider to be a middle-tier vacation rental location.
Purchasing a vacation rental in a prime destination is going to increase your annual revenue. A 2 bedroom property in Breckenridge, CO can earn upwards of $52,000 per year.
Do the Math
I suggest coming up with a realistic average daily rate and multiply that by the number of days you project to rent. Your average daily rate should be fairly simple to calculate. Take a look at the websites of local property management companies or get on a major vacation rental website like Homeaway. Then just find a few similar properties and use these as comparables to set your rates throughout the year. This is also a decent way to determine how your calendar will fill up, but it will be trickier to map out a full year of projected occupancy unless you are very familiar with the area.
Consult a Professional
When in doubt consult a professional for assistance. Your real estate agent will typically be able to provide you with any rental history the vacation rental might have. I also suggest engaging with a knowledgeable local vacation rental manager. An experienced manager can provide you with insights that simply can not be learned from spending a few hours online doing research.
Other Considerations
Factor in your usage
Every time you use your vacation rental property for personal use you are taking it “off the market.” I always recommend that owners use their property during the off season or when there are breaks in the calendar. Make sure you account for any potential lost revenue when calculating how much your vacation rental will make.
Consider your expenses
Too many times I have seen owners become enamored with sky high average daily rates or lofty gross rental income numbers. Don’t look at these numbers in a vacuum. Remember the idea is to hopefully cover your yearly operating expenses with rental income. You can justify lower gross rental revenue if your expenses are lower.
How much competition will you have?
The vacation rental industry can be extremely competitive. Certain categories of properties may be saturated. Finding a property in the right niche can give you the best bang for your buck.
For example, my area has seen a boom in the building of large 5 and 6 bedroom homes with private swimming pools. This area of the market is now highly competitive whereas there is a serious demand for smaller, more affordable 1 and 2 bedroom condominiums.
Some years will be better than others
2018 was a banner year for hospitality. 2019 looks to be on par or better, but there are hundreds of external factors that you have no control over and can affect your rental revenue. Sometimes even luck can play a role. One unfortunate last minute cancellation can transform a great year into simply a good one.
I recommend owners have a separate bank account for each vacation rental property. Make sure to leave a healthy chunk of operating money in that account for future repairs and unexpected downturns in rental revenue.
