Calculating Vacation Rental ROI
The real estate investment scene has been hot in Orlando for a number of years. Local industries are growing, new companies are moving to the area, and tourism continues to thrive. Many real estate investors have caught wave of the Orlando market tourism statistics, it's year-round activity, and the availability of vacation home inventory to purchase. While these investors may use the home once or twice in a year, their main focus is watching their money work for them. The most common question that we get is "What does my ROI look like?". Although the answer to this question can be long and complicated, we're going to help investors answer that question in this blog.
This is the most important piece of evaluating vacation rental performance, it's not the most simple process however. The way that some owners and managers report rental revenue in terms of gross rental revenue, net rental revenue, and net income, can vary so it's important to be able to assess rental revenue yourself. This is why we created a blog explaining how to evaluate rental revenue.
Once you've established rental revenue and your comfortable with the terms and calculating the net rental revenue, you can start to focus on taking the expenses from the rental revenue. The operating expenses most often include:
- Management Expenses. If applicable. These are usually a management commission taken from each booking, and many times a flat monthly management fee. These fees can certainly vary from management company to management company, which is why we created our blog focusing on evaluating management companies. Read it here!
- Miscellaneous Maintenance Expenses. This includes scheduled and preventative maintenance items, as well as normal wear and tear. Scheduled maintenance items may include AC tune ups before the summer, pressure washing, fire extinguisher recertification, dryer vent cleaning, etc. Wear and tear items are any items effected by normal use of the property, but not guest damages. These items may be furniture repair or cleaning, carpet cleaning, touch up paint, kitchen item replacement, linen replacement, etc.
- Utilities Check with HOA to see what utilities may be included. Electric and Water are almost never included.
- Lawn Care - Check with HOA to see if it's included
- Pool maintenance
- Pest control - Check with HOA to see if it's included
Property expenses include all fixed expenses that accompany ownership of the property. Sometimes some or all of these fees are included in the mortgage payment put together by the lender. If that's the case, simply consolidate these expenses and mortgage expenses when evaluating ROI.
- Property Taxes
- Property Insurance
- HOA/Community Fees
Many investors want to put as little down as they possibly can on a property, to have more cash on hand for other purchases or investments. While this is understandable, keep in mind that financing expenses greatly effect the cash flow of a vacation rental property. Calculating the cash flow of a property can greatly aid in determining the amount that you'd like to put down before investing in a vacation home. We can help! Click the button below to contact us today to receive tailor-made cash flow estimates from our team to help you determine the ROI of investing in a vacation rental home!
Written by Keith Wachter
Business Development Specialist
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