THE ROI (Return on Investment) of your vacation property is a calculation made by simply taking what monies you are able to generate from renting the property and removing the cost of generating those monies to give you an annual sum.
Long term ROI would factor in appreciation but for this commentary we will be focusing on the short term returns.
Having the numbers available makes the calculation a simple task, but what if you don’t know what those numbers are, how can you calculate in advance what your returns might be on a prospective property?
The answer to that question is one of the key questions you should ask your Realtor. If you are working with a vacation home specialist he or she should be able to summarize what you can expect by using the information below.
As you can imagine working out the ROI of a property a year in advance is not an exact science. Many of the key elements that go into the calculation are not readily available before hand and often a good result is based on knowledge, experience and historical values. Perhaps not quite the iron clad the result you may be looking for but the best educated guess given the circumstances.
Let’s take a look at what the variables are, where you can find the constants and how you can affect the end result. Finally we’ll put it all together and you can run your own ROI.
Property taxes, house payments, insurance costs, HOA fees are some of the numbers you can easily find out before you purchase.
How many weeks you will book.
Probably the most important item and also the most difficult to assess. Getting historical data from the owner is an option but sadly not something you should expect. If the property is bank owned then you can be sure you won’t be getting any data. Probably the best source is by talking to property management companies and asking them for historical values.
But property management companies want your business so getting embellished results such as their best client rather than an average is something you may have to be prepared for.
If you can’t get a qualified number then a good rule of thumb is to assume that a good PM company in a high end resort will bring you 18-26 weeks of bookings. 22 weeks is a good conservative starting point.
There are two rates.
Retail – which is the full booking rate
Wholesale – which is the fee negotiated with the travel companies
There is also what the owner is able to generate if they decide to be part of the process. But generally that comes under the retail rate.
Fees are something you can make a reasonable assumption with numbers.
Each PM company has different contracts but either knowing which company you will be working with or working with an average assumed numbers will give you a reasonably accurate return.
Property management companies can only generate so much. Generally if they can get you somewhere in the region of 20-25 solid weeks of rentals a year then you’ve found yourself a great PM company. The additional weeks rentals can only come from one other source and that is the owner.
Owners are the full spectrum of involvement. Some want to do nothing more than show up a few times a year and enjoy their property. Others want to be involved with the booking process as much as possible and spend many hours a week enjoying marketing their property and generating additional revenue.
This single item will change the annual ROI of an investment property more than any other. An active owner can as much as double the annual earnings of a property and the owners input in many ROI calculations can be the difference in a small annual loss and a large annual gain.
One final addition to the ROI calculation is owner use. If for example an owner would visit Orlando with family a couple of times a year and spends say $5,000 on accommodation then that is monies no longer paid out. That figure should be applied to the property ROI as it is an important reason for owning a vacation home investment property.
Armed with the knowledge from above you can now proceed to our unique SHORT TERM CALCULATOR, type in the numbers and you have your own ROI ready for printing.
REMEMBER the philosophy of the STR program and you won’t go wrong with your STR investment property.
If you have any questions on ROI or any aspects of owning or renting a vacation home please contact us.
We’d be delighted to give you comprehensive and detailed answers to all of your questions.