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Real Estate Investing

Vacation Rentals: How Profitable Are They?

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In the past, vacation rental owners had to perform the necessary maintenance tasks and market the properties to find guests or pay someone in the locality to do so on their behalf.

Bookings were low and the cost of maintaining the vacation homes was high. Thankfully, the firms that manage vacation rentals are using new technologies to eliminate these issues and deliver a comprehensive service on a high level that the vacation rental industry has not seen.

Many travelers are avoiding staying in hotels in favor of vacation rentals.

Why Vacation Rentals?

Some of the benefits of vacation rentals include:

  • Variety – Vacation rentals offer different decor, amenities and views among other things. Travelers select their own vacation rentals and preferences based on their budget and how they want to define their vacation such as close to the beach or a golf course among other locations.
  • Additional space – Vacation rentals are more spacious than hotels and are therefore popular with people traveling with their families.
  • Comforts of home – Vacation rentals provide the comforts of home and some of the things that a typical home does not have. There are multiple bedrooms, comfortable living rooms and adequate space to sprawl out. Vacation rentals are more comfortable than staying in the bedroom of another person like with Airbnb.
  • Privacy – Vacation rentals have private entrances and private balconies. Therefore, patrons do not have to walk through the lobby after returning to their unit.
  • Cost effective – Since vacation rentals are spacious, families often rent them together. This makes the homes more cost effective than hotels.
  • Easy booking and check out – Technology such as online payment platforms enable guests to save time. They do not have to wait in line to check in or out.

Improving Vacation Rental Technology

Technology has played a huge part in making the short-term rental market grow. Online listing firms such as Airbnb make it easier for guests to book the home they want to stay in.

New technology-driven management firms are also making it easier for homeowners to maintain and market their vacation rentals. As a vacation homeowner, you can easily manage your property by using vacation rental management software.

With this software, you can manage rental channels. These include HomeAway, Expedia, and Airbnb using one app or platform to reduce management time and increase profits. This means that you can manage your property without having to enlist the services of a professional management firm.

Are Vacation Rentals Really Profitable?

Investing in vacation rentals is an excellent way to earn passive income.

A survey done by HomeAway, which is a short-term rental marketplace, found something interesting. People who rent out second homes earn more than 33,000 dollars annually in rental revenue. On the other hand, at Airbnb, the average vacation rental owner collects yearly rental revenue of about 11,000 dollars.

Most of the vacation rental owners using the Airbnb platform don’t perform as well. They may only rent out only a single bedroom or rent out their homes irregularly. They do not treat their homes as true vacation rentals.

These figures are an indication that vacation rentals are profitable. They are popular with people renting properties for a short period. They can also outpace long-term rental properties when it comes to potential rental income. To increase your chances of earning higher rental revenue, you should do the following things:

Do the Math

It is not that straightforward to figure out the amount of money your vacation home can bring in. However, online tools can enable you to calculate the potential cash flow to your property.

You can use these tools to calculate the average daily rental rates, revenue, and occupancy rates. By using these projections, you can then subtract items such as interest, PITI, management fees and maintenance expenses. Then you’ll get a cash flow forecast.

Evaluate the Location

The other factor that will determine the amount you will earn as rental revenue is the location. If you buy a vacation home, which is close to a popular destination like a ski resort or beach community, then it is likely that it will bring in a higher rental income. An excellent location close to a major airport or a vacation spot that people visit year round will have the best impact.

Assess the Scene

Apart from the accessibility and popularity of a destination, you also need to consider the setting. For instance, it is more cost effective to invest in a vacation home located in the mountains compared to a beachfront vacation home. However, such a home is not likely to bring in as much income as a beachfront property can.

The peak season for vacation rentals lasts about 12 weeks.

The trick is trying to rent the vacation home during the off-peak periods or when you do not want to live in the house. Try your best to keep your vacation home occupied by advertising it on platforms like HomeAway and Airbnb. You can even seek advice on the best ways to keep a property occupied from a property management firm that manages vacation homes.

Set the Price Right

To maximize occupancy, you should price your vacation home well. You can price your propertyslightly lower than similar properties so that it will be occupied more frequently. Furthermore, you should keep an eye on events like festivals and conventions that occur close to the location of your vacation home. When the demand is high, take advantage of it and adjust your rental charges accordingly so that you will not miss out on revenue.

Vacation homes are unique in that they are both an investment and a lifestyle upgrade. While they perform equally as well as conventional rental properties, they offer the benefit of having a place to stay for your own vacations.

A vacation home can bring in a good return on investment if you can keep it rented out most of the year. If you hold the vacation rental for many years, then you will make a return, which is comparable to or greater than you would have made if you had invested in stocks.

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

Real Estate Investing

Cap Rate, Explained

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Whenever you’re pitching, shopping, brokering or hunting deals, one of the first terms you’ll come across is the “cap rate.”

Short for capitalization rate, at its most basic form, the cap rate indicates the annual yield on a real estate property.

But that’s not all it’s good for. It can also indicate valuations, feasibility of a deal, and what you should pay for a property. Here’s WealthLAB’s Cap Rate, Explained.

What is a cap rate?

The basic formula of the cap rate is the property’s net operating income (NOI) divided by the purchase price. It basically means the yield (return) of the property without considering debt or anything else. Or, in layman’s terms, it lets you know (an estimate of) your cash flow in advance.

Cap Rate Example

Let’s take a 20-unit property in Atlanta listed for $2 million. The rent roll for the year comes out to $300,000 with operating expenses totaling $100,000.

$200k divided by $2M = 10% = a 10% cap rate. (In everyday lingo, you’ll hear people call that a “10 cap.”)

How can I use it?

Quite a few ways. The most basic one is to compare the cap rate of a property you’re considering investing in vs. the average cap rate for the market. This would let you know whether you’re getting a good deal or not.

Pro forma

You can also use it when projecting income against a property you plan to upgrade. Then it would be a “pro forma cap rate.”

Find your price

You can also use it to find the price you’re willing to pay. But perhaps your strategy says you’ll only buy properties at a 12% cap rate. So now you can use the cap rate to calculate what your offer should be.

Using example above, if NOI is $200k, simply divide by your desired cap rate offer price (12%) = $1.66M = your offer price.

What’s a good cap rate?

It all depends, really.

Depends on the market, the state of the property, the cost of capital. In so-called gateway markets (think New York City, London, Tokyo etc.), the cap rates are lower because of the idea that — just like bonds and other “safe” instruments — investing in big markets is a safe play.

In addition, properties in big markets traditionally trend upwards—thus offsetting the lower cash flow.

In smaller markets, where there are less job, less people, and therefore less rental demand, the value doesn’t trend upwards as much; they remain stagnant.

For that reason, they’re deemed more risky and you’d seek a higher cap rate to get higher cash flow to mitigate that risk.

And valuation?

Yes, cap rates are also used to value properties. Again, going by the average cap rates for a given market, once you recapitalize (refinance), the lender—vs. the free market—will set a value of your property.

So the value would be found like this: NOI divided by cap rate. Let’s use the Atlanta 20-unit as an example. That particular type of property in that particular market has an average cap rate of 8%.

$200k NOI divided by 8% = $2.5M = your property’s value.

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Real Estate Investing

Is The 1% Rule Garbage?

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There’s a lot of “rules of thumb” floating around out there related to real estate. The one I hate the most is the 1% rule.

It’s wrong. It doesn’t work. Period.

Let me explain…

The 1% Rule Explained

Let me take a step back and explain the 1% rule first.

In a nutshell, it says that the monthly rent for your rental property should be at least 1% of the property value. If you can meet this goal then you can make some good money in real estate.

So, if you find a property that rents for $1,000/month and you can negotiate a price of $100,000 then you’re in good shape.

…at least according to the people pushing the 1% rule.

Image result for rules of thumb

Breaking Down the 1% Rule

Let’s say that that you find a property that is $100,000 and rents for $1,000.

We know around 5-10% goes straight to vacancy. So, that leaves you $900.

And 50% of that goes to expenses. Leaving you with $450.

And a 30 year mortgage on an $80,000 loan (I assume 20% was put down) is around $429.

So, that leaves you around $20 – $70 (depending on vacancy) each month.

…not very sexy is it?

The Break Even Ratio

Traditionally, the 1% rule was considered the break even rule. Where you would most likely cover your debt when rents are 1% of your purchase price.

So, what happened?

I don’t know for a fact, but I think a couple of things happened.

Turnkey Real Estate Companies

House, Building, Key, Plan, Turnkey, Catchment

First, I think that turnkey companies started pushing it as a solution. A turnkey company finds a distressed property, rehabs it, puts a tenant in there and sells it to you for at or above market price.

There is definitely some value to what turnkey companies do, but often they based their prices on the 1% rule and not necessarily on market value. That allows them to get higher prices in generally low cost markets.

They justify it with free education. They teach you that if you can get 1% of the value as rent, then the deal is great and you can make a ton of money…

To people on the west coast or other high-cost areas, this seems awesome because the ratios there are closer to 0.5%. So, relatively speaking, they are “great deals” even though they are overpaying.

Inexperienced Gurus

There are a ton of new gurus out there pushing all kinds of different ideas. Some are good and some are not, but the 1% rule keeps popping up, especially with online education.

Often, these are run by people who own a few properties and have done really well since the recession. It makes sense if you think about it. If you bought at 1% back then and rents and prices have almost doubled, then you are way above 1% based on what you purchased it for.

But, that is buying based on speculation that the market will improve, not based on the fundamentals of the deal.

Another common guru you see out there now is someone who’s only been investing for a few years. Even if they are doing great but they haven’t really been around long enough to see and understand the nuances.

They don’t realize that the 1% rule works when there are massive rent growth and appreciation but could never work in a sideways or downward trending market.

What About Using it As a Filter?

People will suggest using the 1% rule as a filter to go through hundreds of deals quickly. Here’s how they suggest you do it:

list all the prices, list all the rents, then calculate the ratios. Anything under 1% toss out and anything over 1% keep and look at deeper. So, a spreadsheet might look like this.

Based on this, you should consider buying the first, third, and fifth property on the list because the ratios are all above 1%.

But, this is missing a HUGE amount of detail. What is most important is not what it’s receiving for rent today, but what it could be receiving after you own it. So, you should based your numbers on potential rent not current rents.

Based on the new spreadsheet, the best potential deals are the 4th and 6th. While others may have potential as well based on the 1% rule, you see some really good ratios on deals you would have previously discarded.

That’s why the 1% rule is kind of silly. It leads you to discard potentially great deals in favor of more marginal deals.

Focus on The Numbers

The rent to price ratio is an important ratio to consider before purchasing anything. Just remember, it is a rule of thumb. Also, remember what it truly means:

The 1% rule is the break even rule not a rule to earn you money.

Rules of thumb are designed as a reality check. Things like the 50% rule to expenses or the 1% rule are there to act as a guide. If you are running the numbers and you’re rent is 1.5% while everyone else is at .75%, then you should think twice.

Or, perhaps your expenses are at 25% and everyone else is running at 50%. Then you should double check.

They are not and should never be used to make a buying decision.

That’s why I give away simple calculators like this one, to point you in the right direction.

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

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Real Estate Investing

The No. 1 Strategy To Build A Rental Property Empire

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It’s impossible to buy enough rental property to retire with, right? It simply takes too long to save up, buy property, and a little rent over years

You just need too much money for down payments to keep buying.

Wrong.

It’s true that buying rental property is a very capital intensive process and it’s true that you generally need 20-25% down for your purchases (except your first few which can go FHA or VA).

It’s also true that most people don’t have unlimited funds and can’t keep putting 20-25% down.

But here’s the thing – you don’t have to keep putting money down.

There’s this really simply strategy that allows you to avoid doing all that. You guessed it, it’s called the BRRR strategy and I’m going to go into that in a lot of detail. But first…

A quick story about how I retired using the BRRR real estate method.

BRRR Strategy During the Great Recession

A long time ago I started using the BRRR strategy before anyone ever called it the BRRR strategy.

In a nutshell, it’s a way to buy property that allows you to preserve capital in order to buy more and more properties over time.

I’m going to get into detail on it in a minute, but I want to take you back to 2009 through 2013 during the deepest part of the great recession.

No one had jobs. No one could afford to pay rent. Housing prices dropped like a rock and flat lined like a hospital patient. There was no bounce.

It was just despair everywhere.

They call it the great recession, but in historical terms, it was clearly a depression.

…and I decided to get into real estate.

Everyone said I was crazy, and I was a little crazy. A lot of people had just lost everything, tenants weren’t paying, evictions were happening all over. It was rough.

But, deals could be found everywhere. The other benefit was since no one had work contractors were easy to find and would work for 1/3 what they charge now.

The hard part was finding money to invest and finding banks to lend.

I bought my first 3 family in 2009, then bought a 4 family a few years later in early 2012. This is a picture of the 4 family, sexy isn’t it?

By 2015 I had over 20 units. By 2017 I had around 35, and now in 2018 I’ve moved up to apartment complexes and have over 470.

This is the strategy I used to keep buying more property while continuously putting more money in my pocket.

Here’s how brrr investing works in real estate.

Using the BRRR Strategy to Build a Rental Property Portfolio

The overall Gist of the BRRR method is to add enough value to a property that when you refinance it you will get most, if not all of your capital back. This allows you to take your money and use it over and over again to buy deals.

Just in case you aren’t yet aware, BRRR stands for Buy, Rehab, Rent, Refinance. Alternatively, some people call it the BRRRR method which stands for the exact same thing, except the last R stands for “repeat.”

So, BRRRR method is Buy, Rehab, Rent, Refinance, Repeat.

Step 1 – Buying

There are 3 basic parts to buying any property – finding, analyzing, and closing the deal.

Finding a Deal

The most important part of the BRRR real estate strategy is to find great deals. Without an amazing deal, it simply doesn’t work (but that’s kind of true about making money in real estate anyhow).

In general, people refer to deals as either “off-market” and “on-market.” An off-market deal is essentially every sale that is not listed with a real estate salesperson on a listing service such as the MLS, LoopNet, or CoStar.

There are a ton of ways to find great off-market deals. These includes:

  • Starting an Investor Website
  • Direct Mail
  • Knocking on Doors
  • Bandit Signs
  • MLS
  • Bird-Dogs

…and a couple dozen more methods. The only thing limiting you is your imagination!

Analyzing Rental Property

It’s important to have a couple different calculators to get this job done. The most important is your “back of the napkin” calculator.

The reason why a calculator like this is so important is because you will literally look at hundreds of deals. It’s impossible to use an advanced calculator and cull through dozens of deals a week.

Instead, it’s best to use a very simple calculator, toss in the basic numbers, and just see if it’s even remotely close.

Once you do that, you can take the deal and do a deeper analysis. If it’s not any good, just toss it aside and you’ve saved hours of your time.

I put together a free BRRR calculator for you to use to screen deals.

Closing Deals

The most important part of closing a deal is….financing it.

We’ll talk a bit more about financing at the end when we talk about the third R – Refinance, but it’s important to know that your financing up front will be different than how you refinance the deal.

Up front, you are generally using cash or some kind of private or hard money. Banks don’t like risk, and deals that need work are considered risky.

By using cash or private money, you’ll be able to purchase something with a bit of risk so you can add value.

The other reason is because distressed properties often need to close quickly. Banks are anything but quick.

So the key here is to use private money to purchase, then refinance into something longer term such as a good conventional or long-term commercial loan.

Step 2 – Rehab

You don’t want to rehab a BRRR rental property the same way you would fix a flip.

When you analyze a project for a flip, you look at the cost of the work vs the increase in value. If a kitchen costs 10k and increases the value by 15k, then it has a 50% return (15k – 10k = 5k return. A 5k return divided by 10k invested = 50% return).

That same kitchen may add value to your rental, but since you aren’t selling it, it’s the wrong way to measure value.

That $10k might add $15k in value, but add barely anything in extra rent. Since we are looking for cash-flow, I’d rather focus on renovations that add to the amount of rent I can charge.

BRRR Step 3 – Renting The Unit

Finding great tenants that will pay market (or higher) rents is key to your strategy. The 3 key steps are to findscreen, and retain.

Step 4 – Refinancing

The goal is to get your money back so you can repeat the process, which makes this step the most crucial.

because the rules for commercial lending are slighting different than personal lending, let’s take a quick step back and go over the rules/requirements for commercial lending:

  • You will need around 2 years of “experience.” This can be rehab experience, landlord experience, or even experience as a realtor if you can convince the bank that it’s directly applicable.
  • Most banks require 6+ months of “seasoning” before they will finance it at the market price rather than the purchase price. This means the property has been stable, fixed, and rented for around that period of time. Basically, they need you to justify the higher price with some evidence of stability and improved rents.
  • Banks lend 75-80% of appraised value on this sort of deal.

It’s not hard to see the “trick” once all the criteria are laid out.

  • Banks will lend around 75% of the appraised value after 6 months of seasoning.
  • House flippers are looking to be “all in” for around 75-80% of the property value.

So, buy a rental property like you’re going to flip it, then just refinance it – you’ll get all your cash back plus long-term rental income.

But, in order for this system to work well, you need to be able to be “all in” for around 75-80% of value.

Step 5 – Repeat and BRRR More (aka brrrr)

Once you have most or all of your money back, it’s time to find another real estate deal to BRRRR! The extra R stands for Repeat.

You’ll have your cash back and a new stream of income. Could life get any better?

Have you ever used the BRRR Strategy? Tell me how it went in the comments below.

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

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