While a growing number of investors are getting into the business, managing a vacation rental is a little bit different from a long-term rental.
In this article, we’ll look at how to manage a vacation rental property, beginning with some things to think about when investing in a vacation rental.
Key takeaways
- Advantages of a vacation rental include extra income and tax benefits that real estate investors enjoy.
- While gross rental income from a vacation rental can be higher than a long-term rental, managing a vacation rental can be more challenging.
- Steps to manage a vacation rental property include planning for start-up costs, creating a pro forma budget, and providing 5-star hospitality service to guests to generate great reviews and repeat bookings.
Vacation rental property management: 6 things to think about
Many investors find that owning vacation rental property can be a good way to generate extra income. A vacation rental can be something as simple as house-hacking by renting out a master bedroom by the night, all the way up to investing in a vacation rental listed full time in hot short-term rental (STR) markets like Kissimmee, FL, and Galveston, TX.
While the allure of making extra money may be attractive, there’s a lot of planning and work involved to have a successful vacation rental business.
Here’s a quick look at potential advantages and disadvantages to help you understand if owning a vacation rental is a good fit for your investment goals:
Advantages of vacation rental property
- Extra income: According to a report from AirDNA, the average annual revenue from STRs listed full time grew to $56,000 at the end of 2021, setting a record.
- Tax benefits: Vacation rental property listed full time provides the same tax benefits that a property rented to a long-term tenant does, such as deducting operating expenses, owner expenses like travel and continuing education, and depreciation to reduce taxable income.
Disadvantages of vacation rentals
- Operating expenses: While the average annual gross rental income from a vacation rental may be higher than a long-term rental, there also are higher operating costs to be aware of as well. Extra expenses of operating a vacation rental may include more repairs due to guests coming and going, owner payment of all utilities, booking fees paid to platforms like Airbnb or Vrbo, and higher property management fees.
- Increased vacancy: Vacation rental properties located in tourist areas may have higher vacancy rates during the off-season, such as a ski condo in the summertime or a beachfront home in the dead of winter. Overhead expenses, such as utilities, security, and management, will still need to be paid even if the home is empty.
- Time and effort: There are more moving parts to a vacation rental property than with a long-term rental. Booking calendars must be coordinated; guests need to be communicated with before, during, and after their stays; and linens, toiletries, and supplies need to be refreshed or replenished.
How to manage a vacation rental
Successful real estate investors know how to accentuate the positives and minimize the negatives, because, let’s face it: There are pros and cons to every investment. Here are the basic steps to follow to make managing a vacation rental property a bit easier.
1. Calculate start-up costs
Some of the initial start-up costs and ongoing expenses to plan for with a vacation rental property include:
- Updating the property to meet the latest fire and safety codes (if needed) and addressing any issues to maximize the guest experience, such as double-paned windows in a noisy area and a security system inside and outside of the home
- Fully furnishing and tastefully decorating a vacation rental with all of the features and amenities guests expect, in order to earn stellar reviews, keep booking full, and increase the average nightly rate
- Connecting all utilities—including reliable internet service and cable TV—and setting up automatic billing to avoid interruptions
- Establishing a capital expense and maintenance fund so money is available to quickly address issues like water damage, peeling paint, or replacing appliances
2. Budget for income and expenses
Good resources for researching nightly rates, average revenues, and seasonality include AllTheRooms, AirDNA, and the Roofstock STR Marketplace.
Important questions to ask when forecasting how much potential gross income a vacation rental could generate include:
- What is the average daily rate (ADR) for similar vacation homes in the same area?
- What is the average length of stay (ALOS)?
- Are there seasonal factors that allow a high daily rate during certain times of the year or require a lower nightly rate during shoulder and off-seasons?
- Does the vacation rental property offer features and amenities that justify the nightly rate and will lead to positive guest reviews?
Ongoing operating expenses to budget for include:
- Property management fees
- Booking commissions and fees paid to sites such as Airbnb and Vrbo
- Maintenance and repairs
- Utilities
- Cleaning
- Landscaping
- Insurance
- Property taxes
- Mortgage payments, if financed
- Care of towels and linens
- Supplies for the kitchen and bathrooms
As a rule of thumb, investors may wish to create a variety of pro forma income and expense budgets using different scenarios such as a range of nightly rates, different vacancy levels, or operating expense costs. Then, subtract expenses from income to get a better idea of how cash flows are affected.
3. Itemize property management tasks
Owning and operating a vacation rental property is similar to being in the hospitality business. Starting off on the right foot and scoring 5-star reviews can make the difference between having a vacation rental that receives consistent reservations or one that sits vacant throughout the year.
Some property management tasks that are unique to vacation rental property include communicating with guests before they arrive, meeting guests in person, having a small welcome gift, creating a guidebook with recommendations for local events and restaurants, being available to answer questions, and following up with guests after they depart and encouraging positive reviews.
4. Advertising and marketing
The ALOS for a vacation rental property is 5.6 nights for most vacation rental channels. That means a vacation rental has to be constantly marketed to create a steady stream of bookings and maximize income.
Some of the top websites for marketing a vacation rental property include:
Of course, there’s a lot more that goes into generating bookings than just listing a vacation rental online. According to a post on the Airbnb resource center, a successful listing for a vacation rental property includes writing a clear description, adding great photos, offering the right features and amenities, and setting the right expectations.
5. Track financial performance
While most online vacation rental booking sites offer basic income reports, they don’t provide a system for tracking all income and expenses. That’s where Stessa, a Roofstock company, comes in.
The Stessa program was created by and for real estate investors to automatically track rental property income and expenses at both the property and portfolio levels for an unlimited number of rentals.
Financial performance of vacation rental properties can be monitored in real time via the owner’s dashboard, and income and net cash flow statements are easily generated in just one click. When tax time rolls around, the Stessa Tax Center is a one-stop shop for resources to make filing taxes on a vacation rental property a breeze.
Stessa is also the perfect solution for investors who already own a vacation rental property. After signing up for a free Stessa account, simply download transaction history from Airbnb and upload it to Stessa, and the software will automatically categorize prior transactions in the chart of accounts.
This blog post on Stessa Support provides more detail on how to track STRs with Stessa.
