How To Evaluate Vacation Home Rental Revenue
"How much will I make from this vacation home?" This is a question we get ALL the time, and it's not an easy question to answer. Many inexperienced vacation home buyers are just looking at what their ROI would be. What they don't know is that many vacation rental owners and management companies report gross revenue differently. This is all before you get into operating costs such as utilities, property tax, insurance, HOA fees, maintenance expenses, and management fees. Our goal in creating this blog is to help buyers and real estate agents evaluate rental revenues to eventually determine the ROI they can earn from a vacation home.
Gross Rental Revenue
Gross rental revenue is defined as the total amount of sales prior to any deductions. While this is certainly interesting when evaluating property performance, it's not the best way to do so and can many times be misleading. To understand Gross Rental Revenue, we first need to understand the booking. The booking is usually comprised of:
- Rental Revenue (Number of Nights x Nightly Rate - Discounts applied here usually)
- Cleaning Fee
- Damage Deposit
- Sales Taxes (County and State required to be paid in most FL counties)
- Processing Fee (Sometimes included, sometimes not.
The gross rental revenue is technically the sum of all of these revenues, and this is the gross rental revenue that many homeowners or managers share when a property is for sale, to make the rental revenue look AMAZING. The problem? Owners don't actually receive all of these revenues, even if they self manage the home. To accurately determine ROI, we need to look at Net Rental Revenue.
Net Rental Revenue
In a vacation rental home, net revenue can be calculated by taking the rental revenue and subtracting the expenses that are paid out of each booking, such as the cleaning fee, damage deposit (if it is refundable), and sales taxes. The net rental revenue should be the rental revenue, before any operating expenses, property expenses, and financing expenses. So, if a vacation rental is reporting $50,000 in annual gross rental revenue, but $10,000 of that are expenses taken out of the booking, the property should report a net rental revenue of $40,000. More simply, it is the number of nights booked times the nightly rate charged for each of those nights.
*Pro Tip: If you're requesting rental revenue history from a sales agent for a vacation home you're interested in purchasing, make sure to ask if the gross rental revenue includes items such as cleaning and taxes.
We'll get into the importance of this pro tip in the next section, where we break down the true payout that an owner receives.
After examining gross rental revenue and net rental revenue, now it's important to look at owner distributions, or the amount that actually gets sent to the owner as profit. Obviously, if you self manage a property, owner distributions will look much different than if you have a property manager doing rentals for you. Your taxes will also look different, but self managers quickly find how much work is involved in managing a vacation rental. We'll dive into this a little deeper, discussing pros and cons in detail in our next blog: Vacation rental self management vs. hiring a property manager.
In most management scenarios, the owner receives the net rental revenue minus the property managers commission each month. For instance, if a property is rented for 7 nights at $100/night, the net rental revenue would be $700. The owner's revenue for that booking would be $700 minus commission. 20% commission is standard here in the Orlando area, so the net owner payout would be roughly $560.
Calculating the ROI for the property should include taking the net rental revenue and subtract the management fees, operating costs, financing expenses, and property expenses. The breakdown should look something like this:
Net Rental Revenue
- Commission & other management expenses (i.e. monthly management fee or marketing fee)
- Estimated Utilities
- Misc. Maintenance Expenses
- Pool Service, Pest Control, & Lawncare (depending on HOA)
- Property Tax
- Property & Liability Insurance
- Mortgage Expenses
We've made this easy by creating a free pro forma to give to our real estate partners and their clients, looking to purchase a vacation home. Get in touch with us today to get your free pro forma.