How To Calculate Your Vacation Rental Return On Investment

Calculating the return on investment (ROI) before deciding to invest in a vacation rental property will help you determine the possible profit margins to be made on your vacation rental business. These figures are integral for establishing the viability of a business prospect within the vacation rental industry. It will also help you to determine budgets for maintenance, upkeep, and amenity upgrading. 

Overall, your vacation rental ROI may be calculated differently depending on the route you take to purchase the property. Essentially, you will need to conduct different calculations if you purchased the vacation rental property in cash or through a financing scheme. This article will take you through everything you need to know about how to calculate return on investment for rental properties. 

Calculating your vacation rental ROI

You can start calculating your ROI by following a few simple steps: 

1. Pinpoint the total cost of the property: This includes the buying price of the vacation rental. It should also include the costs for any renovations or modifications you plan on making to the property.
2. Produce a forecast: Estimate the amount of income you’ll generate monthly from the vacation rental.
3. Monthly running costs: Running the vacation rental, including maintenance, amenity replenishment, marketing, and listing costs, as well as utility bills like water, wifi, and electricity all contribute to your profit deductions.
4. Taxes: Depending on where the property is located, you may also have to look at certain taxes or licenses into these costs.

Working out your ROI

To get the ROI percentage, simply divide your annual net income (monthly net x 12) by the total cost of the property. Multiply this by 100 to get the ROI percentage value. 

If you’ve opted for a financing option, you’ll also need to consider the interest rates on your mortgage or loan. This is typically 5% of the vacation rental’s selling price charged per month over 25 years. 

Considerations to make before calculating your vacation rental ROI

For an even more accurate ROI prediction, there are additional considerations to think about before reaching the final figure. These additional considerations include the following: 

• Pricing trends and seasonal adjustments. Although your calculation needs an estimated monthly income, this may vary depending on seasonal pricing trends, special offers you may wish to implement, and periods when the property is unoccupied.
• Service and maintenance costs. When renting a property for vacation makers, you’ll need to ensure the property is well-maintained and fit for use before occupancy. You’ll therefore need to consider things like cleaning fees, housekeeping costs, garden maintenance (if applicable), and possible management fees if you’re running the property remotely.
• Marketing and listing fees. Online platforms are a great way to boost the visibility of your vacation rental and encourage guests to book their stay. However, not all platforms offer free listing services and usually charge a commission for accepting payment and bookings on your behalf.
• Software subscriptions and financial management. Some vacation rental owners may look to property management software to help manage bookings, align booking dates, and manage the property’s finances.
• Adhoc property expenses. To accurately determine your vacation rental ROI, you need to leave a bit of room for unexpected expenses that may impact how the property is run if left unattended. For example, a malfunctioning boiler, device replacement, or structural repair may pop up from time to time. These should be factored in to ensure there are no surprise costs you’re financially unprepared for.

By going the extra mile to factor in additional possible expenses, you can determine a more accurate ROI for a robust business plan. This allows you to determine whether the vacation rental will be lucrative for you, and will also allow you to put together a proposal for possible other investors like banks, credit providers, or private investors. 

Factors Influencing Vacation Rental ROI

When running a vacation rental, certain external factors may influence the price of your listing, thereby ultimately impacting your vacation rental ROI. Below are such factors that could potentially impact the listing and pricing of the vacation rental: 
 

Property Location

Different locations have different levels of demand depending on the attractions nearby and the general appeal of the area. For example, if an area is well-known for beach holidays, you’ll be able to charge guests more for a beachfront vacation rental. If the appeal of the area has more to do with attractions in a city, then a central location will drive the prices up more. To determine a fair yet competitive price, you can look at what similar properties in the area are charging. 

The Type Of Vacation Rental Property 

Naturally, you cannot charge the same amount for a luxurious villa as a two-bedroom apartment, especially if they are located in similar areas. Therefore, you’ll have to consider what perks the type of vacation rental brings to the table and justify why guests should pay the rates you’re asking for. 

Demand According to Season

The seasonal changes throughout the year will also help you determine your vacation rental listing price. Implementing dynamic pricing strategies that fluctuate according to seasonal demand will assist you in determining what you charge guests. During peak seasons is often the best time to maximize profits. Whereas low-season deals often ensure that the property remains occupied throughout the year. 

Competition In The Area

Highly competitive vacation rental areas drive up prices significantly, therefore ensuring that your pricing remains competitive and that your offerings stay ahead of the rest of the environment is essential in determining your overall ROI. It’s important to conduct thorough market research and competitor analysis before proceeding with your vacation rental ROI calculation. 

Amenities of Your Vacation Rental Property

Many properties increase their unique selling points by offering guests unique or luxury amenities. To drive sales and accelerate occupancy rates, consider including something in your property that guests will struggle to find elsewhere. Amenities like pools, hot tubs, saunas, home theatres, or catering services are some suggestions you can capitalize on. 

How quickly can you expect to earn a return on investment on your vacation rental?

Aside from establishing the figures of your ROI and profit income profit margins, you should also consider how long it may take for you to start seeing the rewards of your initial investment. Typically, vacation rental owners start seeing their ROI between 4 to 12 months after investing. These timelines, however, also depend on the initial expenditure versus the monthly or annual income you can expect to generate. It’s common for vacation rentals to run at a loss in the first few months after investment, however, this loss will decrease over time, and become profits after the property breaks even. 

How to Maximize Your Vacation Rental ROI

If you believe that your vacation rental can be a successful and lucrative addition to your business portfolio, then there’s no reason you can't get a decent ROI on the property. Attaining your ROI goals is completely doable if you understand how to maximize your ROI by understanding your vacation rental’s unique selling points, main drawcard, and the overall market in the area. Below are three practical tips you can use to ensure you get the highest ROI possible. 

Establish Your Vacation Rental’s Brand 

Every home has a story and the same goes for your vacation rental. Branding is about establishing why the property is significant and what makes it stand out among competitor properties. When it comes to branding, start by thinking about what makes the property special to you, and try to carry that story through all marketing campaigns and media you put out into the world. 

The property’s brand should be reflected in everything from written text such as listing descriptions or website content, social media posts, and customer service approach to visual assets. Telling your story and the significance of the property is highly appealing to prospective guests. 

Encourage Guests To Book Directly With You 

Although listing platforms offer fantastic opportunities for your property to be seen, they often charge a premium or commission when managing your booking on your behalf. Therefore, one of the ways you can ensure you get the most out of each booking you accept is by encouraging guests to book their stays by contacting you directly. To do this, ensure your contact information is very clearly visible wherever you advertise your vacation rental, and ensure you are responsive to those who get in touch. 

Make Use of Property Management Software

Manually running your vacation rental can be tough, especially during busy seasons when the bookings come flying in. To make your life easier and to streamline the overall booking and letting process, consider using property management software such as Hospiria. These platforms allow you to manage bookings, track security deposits, track pricing trends, and implement maintenance and cleaning schedules. 

Key takeaways

Calculating your vacation rental ROI is a relatively straightforward process if you know how to do it. After reading this guide, you should now have a good understanding of the general costs you need to consider before making the initial investment, as well as some of the other factors that can affect your pricing and therefore overall return. Maximizing your ROI is also easy when you know and understand the avenues available to help you do so. By following these tips, you’ll soon be running a successful vacation rental business.