Of all the questions we are asked about the purchase of a vacation home investment property probably the question that is asked the most and is usually the most important to our clients is “how many nights will it rent and for how much?”
It’s also one of the most difficult to answer because it’s different for every situation.
Understanding Occupancy and Rate.
Occupancy is the amount of nights per year your property will be occupied.
Rate is the amount of dollars your property will rent for.
The Math
The combination of rate multiplied by occupancy = gross revenue.
Gross revenue minus expenses equals net return.
Net return divided by purchase price x 100 equals cap rate or loosely known as your ROI or Return on Investment.
That’s the easy part.
The potential occupancy and rate are dependent on many factors. In theory you could have two identical houses next to each other in the same resort and they could have a huge difference in annual returns because of the rate and the occupancy.
The two most significant factors in the differential is the property management company and the owner. These two variables affect the marketing and potential revenue of any investment property.
Rates
Is is usually agreed by the owner in conjunction with the management company. Rate is not a fixed amount because it varies depending on type and time.
Seasonal changes in Florida determine whether it is:
Holiday Rates (Christmas, New Year, Easter, Thanksgiving, Spring break)
Peak (Summer and anytime the kids are on vacation)
Off Peak (Sept, October, May)
So for example you may have a retail rate of $350 a night for Holidays, $300 for Peak and $250 for Off peak.
Rate Type
Is divided into Wholesale and Retail. It can also include special owner rates for friends and family and owner bookings.
Retail is direct bookings taken by the management company or the owner.
Wholesale rate is a reduced rate given to tour ops and discount sellers. These rates are usually used to “fill in” the quiet times of the year and may be as low as 40% off of Retail.
Occupancy
Occupancy is the amount of nights you rent your property for.
Past rental records.
A lot of buyers ask if they can see the previous booking records for a property. This might be possible although you’ll find that sellers are not very willing to hand out their records to everyone and anyone. They usually want to know if a buyer is serious before offering up confidential information so bear that in mind.
I am more of a believer that it is more important what potential a property has to generate revenue under the right circumstances rather than relying in past records – working to bring the parts together to create the right environment for a successful rental program. That is something we can assist you with.
We also find that really successful programs are rarely for sale – many times we find sellers are selling because they have not run the program correctly or have lost interest in the business and that’s why you have the opportunity to own this particular property.
If it comes with a great business with a track record that can fully convey – then great. If not then we’ll assist you to make it so through our excellent partners and associates.
Here is the good news.
Through our experience with management companies, historical returns and feedback from our owners we are able to give you a very dependable estimate on how many nights you can expect to rent for and an average rate for those nights. Se we can predict within reason what you can expect to see in returns from your vacation home.
What we can do is assess all of the information above and give you an average – for example, “you should expect to be able to rent approximately 28 weeks at an average rate of $300 a night”.
It’s a very simple answer that takes a lot of knowledge, experience and research – all without the use of a crystal ball!
