I have looked into vacation rentals for a long time now. I have never pulled the trigger on one because the numbers have never made sense. During my research I’ve found a few interesting things that I’d like to mention here.
Many rental sites use classifications to rank their rentals. As an example, Resort Quest uses Bronze, Silver, Gold and Platinum. They have certain criteria for each category and your rental must meet them in order to be designated in that category. For example, to get your rental into the Gold category, you may need at least a 42″ Plasma TV in the living room, A 19″ TV in each bedroom + DVD player, etc… To get to Platinum you need all of Gold plus granite countertops and a newer style kitchen.
The interesting thing is that the difference in price for a vacationer between a Bronze, Silver, Gold and Platinum rental is not that much. A Platinum rental may only rent out for $20 more a night than a Bronze. As an investor, if you do a simple ROI analysis it doesn’t seem worth it. Why spend $5,000 on a plasma TV and granite counterops to get an extra $20/night? It would take 250 nights to recoup that investment.
What we didn’t take into account is the number of nights your vacation home gets rented when its categorized a Platinum vs a Bronze. People on vacation will gladly pay that extra amount to stay in a “Platinum Rated” home. I know that we only look at Platinum or Gold when we rent from Resort Quest. According to vacation rental managers I’ve talked to, the highest rated rentals get rented twice as much as the regular rentals.
Imagine if you had 2 identical vacation rental condos located next to each other. One is Bronze rated and the other is Platinum rated. The owner if the Platinum rated one has spent $5,000 in upgrades to get the rating. So what does that mean on your return?
Here’s an example:
Bronze = $100/night X 75 nights = $7500/yr
Platinum = $120/night X 150 nights = $18000/yr
So if you factor in the additional nights rented the investment to upgrade the condo is well worth it.
This was a factor that I definitely did not consider when I was initially researching vacation rentals. I just took the property manager’s average rental nights for the year when calculating our returns. If I decided to get a regular vacation rental, I would have to discount the number of rental nights in my numbers.
In part 2, I’ll mention two interesting stories about vacation rentals.