Vacation home rental is an income opportunity with perks. You get to have a vacation home and generate passive income. But before diving into the investment, you must practice prudence and do your due diligence in studying and calculating the costs including maintenance and repairs; as well as Return On Investment or ROI. For new investors ROI is the projected amount you will be getting from your property after deducting expenses. Calculating this goes beyond just looking at your bank statement after revenue from rental bookings.
Experienced and new property owners are either amazed or confused on the details that may positively or negatively affect the ROI from vacation house rental. Here are key details or elements you must take into consideration before calculation:
● Gross Rental - For vacation house rental, annual booking/rental before expenses is an important base measurement. When you project your ROI for the first time, research on rental rates in the area - in and offseason. If you are thinking of renting out daily, set a weekday and weekend rate. Compute your annual projected rental revenue based on the rental rates.
● Total Vacation Property Expenses - Your total property expenses include property and income tax, marketing/listing costs, maintenance and cleaning should be recorded with receipts and other supporting documents.
● Net Rental Revenue - It is the difference when total expenses are deducted from Gross Rental. For property owners, this is the core of the bone, so to speak, in computing the rate of return.
These are the fundamentals in computing ROI for a vacation house rental. After your first year of owning the property, you have actual revenue and expenses to calculate a more accurate ROI and can formulate strategies to increase ROI in the coming years. Here are certain aspects to look into when you want to increase revenue and your ROI:
● Seasonal Rental Booking - Determine the on and off seasons of the market - from your actual revenues as well as a general overview from the area. How close is your actual income with that reported in the area? You can set goals like adding new photos or videos on listings to increase awareness on the availability of the property.
● Rental Rate Trends - aside from offering different rates for weekday and weekend, research on actual rates of neighboring properties to see what other pricing opportunities fit your objectives.
● Listing Fees: You can improve your revenue generation by observing which listing works hard in bringing in clients and the amount you pay for marketing your property.
The volatile nature of the vacation house rental market makes it hard to predict. Particular trends must be looked into and studied while you are still on the drawing board. You'll have fewer problems if the property is already yours and paid for. But if you are opting on financing the investment through a loan or mortgage then that’s another story.
Determine the best financial strategy that will ensure the enterprise is self-sustaining even after the primary investments are fully paid.
Computation of ROI can be as simple as 1, 2, 3; if you paid the property in cash. It is a straight-forward calculation of dividing the yearly Net Rental Revenue by the Total Investment.
● Gross Rental Revenue is 24,000 annually (2,000 x 12), deduct property expenses; including rental listing, utilities, and maintenance, say, 5,000. Your Net Rental Revenue is 19,000 per annum.
● Total Investment comprises of initial investment - the price of the property; add initial costs such as renovation and closing costs. If the price of the property is 150,000, add renovation costs of 10,000 and closing expenses of 2,000. Total Investment amounts to 162,000.
● Divide 19,000 by 162,000 ● Your Rate of Investment is 11.72% per year.
Computation of Rate Of Investment for a mortgaged property is different and more complex. So like the example with the cash transaction, you purchased the property by taking out a mortgage @ 150,000.
● You paid 20% down payment for the mortgage - 150,000 x 20%. Your cash out is 30,000.
● For financed/mortgaged property, closing costs are higher; say, 4,000.
● Renovation costs is still 10,000
● Your total investment cash out is 44,000 (30,000 + 4,000 +10,000)
● Aside from the total cash out, you also have to factor in the loan with a fixed 5% interest, for 25 years, 420 per month (120,000/300months + 20).
● Add the expenses of 5,000/12 months, amounting to 416.67; 836.67 total monthly payments.
● Net Revenue per month will be 1,163.33 (2,000 - 836.67); this sums up to 13,959.96 per year.
● To compute the ROI; divide the annual net revenue by the cash-out investment;13,959.96/44,000 to give you 31.72% Rate of Investment. Remember, when computing the ROI, look into the details that will affect your calculations. Determine the elements, fundamentals of vacation rental properties including rate trends, seasonal fluctuations, and fixed expenses as well as rental listings that maximize revenue.