Vacation rentals can generate a tremendous yearly income in the tens and hundreds of thousands of dollars. As such, many individuals think that it could be a good investment opportunity. But how much can they really make? Let’s find out.
On average, vacation rentals can make between 10 and 15% of the property’s value per annum. 1% per month on its cost is considered good. This could be between $40,000 and $300,000 per year. Consider that deductions like mortgage, taxes, etc. will play a role in yearly income
This article will look at how much money vacation rentals can actually yield, taking into account many factors that will play a role in its yearly generated revenue. If you think that perhaps a vacation rental is a good investment, then read on to see what all the pros and cons could be.
How Much Do Vacation Rentals Make?
Many elements will determine the income of a vacation rental, but on average, one can expect to see a return of between 10 and 15% per year on the initial rental purchase if all the applicable conditions are met.
According to Patrick Harvey, Associate Broker at West USA Realty, since 2007, it’s not uncommon for a good vacation rental to make 1% of the cost of the property per month.
To put this into a monetary value, earnings can be between $40,000 and $300,000 per year. Factors (which we will detail later) like the property’s location, size, condition, etc., will determine how much it will generate.
How Is The Income For Vacation Rentals Determined?
Any vacation rental will generate a yearly fixed rental yield (gross income). The gross income will be determined by elements such as peak and off-peak season prices, location, property size, etc.
The yearly gross income can be between 10 and 15% (as stated), but deductions will have to be made for the rental due to incurred costs (overheads).
Vacation Rentals Net Income
The net income will translate to the total amount left over after all the overheads (costs) of the rental have been deducted.
Consider that costs (deductions) would include;
- Mortgage
- Insurance
- Taxes
- Utilities
Even though these are the main deductions that should be noted, there could be additional costs such as employed services from various companies, which could include;
- Garden services
- Cleaning services
- Property repair and maintenance
What Is The Rental Income For A Four-Bedroom Property?
The average price for a night’s stay in a four-bedroom vacation rental can be between $130 and $800. Consider that the price per rental (once again) will vary dramatically, even for a four-bedroom property, depending on many factors. However, we can use this as a basis because these prices are common.
If we have to factor in bookings, the average yearly generated income can be $37,000 for properties (four-bedroom Kissimmee house) booked for approximately 280 nights at $130 a night.
Other four-bedroom vacation rentals (Breckenridge houses) charging approximately $800 per night and booking only 116 nights per year will generate $93,000 per annum.
What Is The Rental Income For An Upmarket Property?
You may think that upmarket vacation rentals will not exceed the $100,000 mark, but some luxurious vacation rentals can only generate up to $50,000 per annum, while others can exceed $300,000.
Take into consideration the Kissimmee four-bedroom that yields almost $40,000 per year. An upmarket six-bedroom of the same variation could potentially only generate $50,000 yearly, averaging 218 bookings at $230 a night.
However, an upmarket six-bedroom Breckenridge vacation rental can go for as much as $2,000 a night, and with only 159 bookings a year, these vacation rentals can earn in excess of $300,000 per annum.
What Factors Influence The Price Of Vacation Rentals?
Numerous factors will determine the price and possible yearly revenue that a vacation rental property can generate. Consider that even two identical vacation rental properties in the same building may earn different revenue totals and get booked more frequently if one property has a view and the other does not.
Thus many elements need to be considered to determine what the price should be; however, some major factors play a big role, and these will include;
- The property size
- The quality (condition) of the property
- The location
- Peak and off-peak seasons
- Customer demands
- Short-term vs. long-term rentals
Vacation Rental Property Size
The property size will be a major determining factor for how much a vacation rental can charge and therefore make. For example, a vacation rental in Miami, Florida, with two bedrooms (two queen beds) is double or even triple the price of one with a single room (one queen bed).
Take into consideration that depending on where you plan to stay, a fully furnished home out in the countryside may be as cheap as a condo located beachside with a view.
Vacation Rental Property Condition
It should go without saying that the better condition the rental is in, the more money it can make. Fully furnished contemporary rentals with en suite bathrooms and fully equipped kitchens with modern appliances will generate more revenue than ones without.
We will touch on this factor later but remember that the more welcoming, safe, comfortable, and memorable you can make a vacation property, the more money a customer will be willing to spend. This can’t be done with outdated furniture, leaking faucets, and stained carpeting.
Vacation Rental Property Location
Besides the property’s size and condition, the most important factor separating a vacation rental from making $50,000 per year or $300,000 per year, is its location.
Consider that a property located close to “attractions” such as the beach or amusement park will generate significantly more income. That being said, vacation rentals situated in a location that appeals to vacationers all year round will maintain profitability in the off-peak (lean) season.
Peak And Off-Peak Seasons
We just touched on the fact that vacation rentals that can maintain profitability all year round due to their location being desirable throughout the year could potentially generate more revenue than ones that are considered to be peak and off-peak rentals.
For example, a vacation property in Miami could potentially attract customers all year round due to its aggregable weather, with temperatures not typically dropping below 50 degrees Fahrenheit or exceeding 92 degrees Fahrenheit.
However, a similar property by the beach in the Hamptons may have trouble attracting vacationers in the winter seeing as it has 50 to 90 centimeters of annual snowfall.
Customer Demands
Customer satisfaction is key and can raise the price of rental homes by a staggering amount if enough amenities and some luxurious ones are included.
It is not enough to just provide free continental breakfast, coffee, and Netflix. Vacation rentals that offer what others can’t provide can almost charge what they like to a degree. Some amenities that will raise the price of a vacation rental, increasing its yearly earnings, will include;
- Keyless entry
- WiFi
- Smart TVs
- HVAC system
- Thermostat
- Safety and Security
- Dishwasher, microwave, washer, tumble dryer
- Fully furnished
- Indoor fireplace
- Smart lighting
- Universal adapters and chargers
- BBQ
- Pool
- Jacuzzi
- Underfloor heating
It will help if you remember that renters are looking for a memorable experience that they won’t forget, and typically, the more features and “wow” factors a vacation rental has and the more comfortable you can make them feel, the more memorable the experience. Hence, the cost to rent will be more.
Short-Term Vs. Long-Term Rentals
The last factor to take into account is the duration of the lease that a vacation rental can have. When it comes to vacation rentals, short-term typically refers to daily and weekly, while long-term will refer to monthly leases. This is in contrast to normal renting, where a long-term lease is typically 12 months.
The difference between long-term and short-term vacation rentals will sometimes be broken down into time, and other determining factors (that we discussed) that could influence price will not be considered.
Depending on what strategy is best to maximize cash flow (earnings) and sometimes the owner’s personal preference, one of these will be considered and prioritized over the other.
Consider that short-term rentals will, in essence, make more money than leases taken over longer periods because long-term rentals (especially in the off-peak) season will often come with a discount.
Conclusion
We discovered that vacation rentals could make between 10 and 15% of the property value per year, and 1% per month is considered quite good. However, this will depend on specific factors like property size and location (among others).
These factors play such an important role that, if not carefully considered, upmarket vacation rentals will generate a lower yearly income than their moderate counterparts. Considering all the elements involved a vacation rental can typically make between $40,000 and $300,000 per year.