Thursday, 10 October 2019
Purchasing a vacation home can promise years of fun for you and your family. But if you also aim to receive income from the property, it's important to determine how much you can expect to earn.
Getting an idea of your rate of return can help you make an informed decision about whether the purchase will be a good investment. To do that, you'll have to do some research and take time to consider exactly how you plan to use the property.
Online tools such as AirDNA's Rentalizer can estimate how much you can expect to earn on your vacation rental. But you can also determine a ballpark capitalization rate on your own. If you want to estimate the cap rate you can expect from investing in a vacation home, consider these variables.
The first variable to determine is how much you can charge for rent. Research other vacation rentals in the area or in similar locations and of similar sizes to get an idea of what the market will pay. You may choose to adjust higher or lower based on how much you're putting into the property or how interested you are in keeping it rented, especially at non-peak times.
If you or your family members plan to use the home frequently, it will not be available for rent during those times. If rental income is important to you, consider restricting personal use to non-peak times and keeping the home available for peak times, such as holiday weekends, to increase your income potential.
The amount you earn on your investment obviously depends on how much rent you are able to charge as well as how frequently you keep the vacation home rented.
HomeAway research shows that most homeowners who post vacation rentals on its website earn more than $33,000 per year in rental revenue, but the average Airbnb host earns about $11,000 per year, according to a rental industry blog. One reason for the discrepancy is that many Airbnb hosts rent out their personal homes, so they probably rent them for fewer nights in a year than those who list on HomeAway, which draws more properties that are strictly rental investments.
Look at the vacancy rates available for other vacation rentals nearby to determine about how many nights each month you can expect to keep your home rented. Multiply the number of nights per month by the approximate rental rate to determine your average monthly revenue (before expenses).
When you have a basic idea of monthly revenue, subtract your total monthly expenses. As you figure expenses, remember to include insurance, property tax, mortgage payment, utilities, management costs (if applicable) and any other expenses. By subtracting your monthly expenses from your projected monthly revenue, you can estimate your average monthly income from the investment.
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Purchasing a vacation home can help you secure a special place to get away from it all, and serve as an investment property that will earn you income. But before you can start reaping the benefits, the first step is to find the perfect vacation home in the ideal location for your enjoyment and your investment.
Renting out your vacation home for extra income can turn into a lot of work. Ask yourself these four questions to decide whether to do it yourself or hire a management company.