The rental market is a hot topic these days. Rates are skyrocketing and the desire for generational vacation rental properties is at an all-time high. It’s the dream, isn’t it? Having your own lakefront cottage or ocean front condo to enjoy yourselves and then earning money on it when you don’t want to be there. When we talk about long term real estate investments, the debate between purchasing a vacation rental vs a long-term occupied rental is an interesting one. Most people view the vacation rental as the slam dunk. After 16 years of owning and operating my own vacation rental I might have some advice which you may want to hear before diving in. Here is a real number case study on the advantages and disadvantages of both options along with some pro tips in case you are thinking of investing.
I love numbers. Hold onto your seat because you are about to geek out with me. Here is a simple income statement which reflects the same 2 bedroom, 2 bathroom beachfront townhouse in a desirable, quaint beach town on Vancouver Island. It’s simplified for your viewing pleasure. It is only the income vs the operating expenses. I have not included a mortgage or mortgage interest expense as that would be different for everyone depending on the size of the mortgage. These examples are also self-managed. If you wanted to hire a property management company you would be looking at additional expenses. I will break down each category and explain the differences you see in the numbers.
Let’s start with the good stuff. For this specific vacation rental it has a 9 week (summer) peak season in which it rents for a top dollar price of $2400 per week. The remaining months are a mixed bag of snowbirds, locals needing a weekend away and month long retirees looking for a good deal off season. The $35,619.74 accounts for renting the unit 36 weeks in 2022 which is 70% occupancy and averages out to $989 per week or $3950 per month. Compare that to the long-term numbers of $31,200.00 which equates to a conservative $2600 per month for a more traditional full time yearly rental.
The numbers will vary depending on how you run your rental. I’ll break down some of the main points.
Accounting and Legal – We run this vacation through an incorporation so arguably this expense is higher due to those fees. You could simplify the costs here however if you want to hire a bookkeeper to track your rental you would easily be looking at this cost.
Advertising and Promotions – The vacation rental requires quite a bit more money devoted to this. Your typical VRBO yearly fee is around $700 for the flat rate or you can pay by booking with a higher percentage rate. For a traditional rental you would need minimal advertising dollars when posting on free (or close to free) platforms such as Craigslist and Facebook.
Credit Card Charges – Part of the expenses through vacation rental booking companies such as VRBO and Airbnb is credit card charges. They will charge the guest and you reimburse them the cost of processing the transaction. This fee is non-existent with a long term rental as you would likely be looking at etransfers.
Insurance – Another big factor in expenses. Operating a vacation rental can prove tricky on insurance. Many insurance companies do not want to deal with season properties or high turnover locations. Rates are significantly higher and may be limited to a certain maximum number of months in which you are allowed to rent your property. Insurance for long term rentals is still prudent however you would also require each tenant to carry their own insurance so as the owner your expense is minimized.
Interest and Bank Charges – Similar across the board for monthly bank fees and etransfer fees.
Supplies – You are responsible for basic supplies for a vacation rental in order to make everyone feel at home. You don’t want your guests to have to buy the necessary items. Everything from toilet paper to laundry soap and even a little welcome gift of wine and chocolates to set your rental apart. Remote batteries, lightbulbs, vacuum bags, replacement dishes, another set of salt and pepper shakers (because the last ones were stolen again)… the list goes on. These costs can add up over the course of the year. For long-term rentals the tenant is responsible.
Property Taxes and Strata Fees – These will be the same expense for either type of rental.
Repair and Maintenance / Cleaning – Another large expense to consider is cleaning. Vacation rentals get professionally cleaned each time they turn over which could be every few days. The cost of the cleaning is passed onto the guest and in this example would be included in the revenue however it does come off your bottom line. Reliable cleaners can also be challenging to find, especially in small resort destinations. If you don’t live near your vacation rental you need to find a strong support team to help you with any emergencies and maintenance. This can come at a cost. Long-term properties also present some maintenance needs but significantly less. As the landlord you are still responsible for major appliance repairs and replacements so they would fall into this category. In addition to that we code security under this expense. With a short term rental you would want some type of an alarm system to ensure the property is secure during off peak season and between guests.
Telephone – We still have a land line in our vacation rental for emergencies. This is not a necessity however we think out of town guests appreciate being able to call locally if needed. Again this would not be a requirement for a long-term rental.
Travel and Entertainment – This is one of the perks of a vacation rental. You can visit the property and write off your travel as an expense. You can get away with this a bit easier since you are running a small business essentially. You will need to physically go to the property to maintain it and check on it periodically. I haven’t included this expense in the long-term side. You would not need to go to the property nearly as often. It could be years between each tenant.
Utilities – Short term guests need internet, TV, power and heat. Long-term tenants pay their own.
So with all that said, we can see from this example that although the income is higher on the vacation rental we would potentially do better running it as a long-term unfurnished rental due to the operating costs.
Additional Food For Thought
Personal Use – This is both a pro and con. Pro, you get to use it! Con you don’t earn money when you use it. Keep in mind that you will always want to visit your own vacation rental during peak season. It is the most desirable time to be there and after all you bought it to use it yourself. This can impede on the profitability.
Cleaning and Maintenance – You will hire cleaners in between each guest however there is always a list of things which need to be addressed on a yearly basis and as the property starts to age. Minor repairs, maintenance and supply restocking is unavoidable. You may find that on your ‘vacation’ at your personal vacation rental you suddenly find yourself working.
Taxes and Bookkeeping – Vacation rentals have become so popular that even the government has gotten in on the fun. Many municipalities now require you to collect and remit taxes, PST and MRDT, on short term rentals. You could also be required to register for a GST number, once your rental starts to earn over 30k/yr, and start collecting GST. There is also the addition of the Vancouver Empty Home Tax and the Vacancy/Speculation Tax. Both of these require homes to be rented out for more than 6 months per year with 30 day minimum terms. If you own in specific areas, you will be charged taxes on the rentals due to the fact it is short-term. This adds a much more labour intensive element and penalties can be hefty. If you are not fancy with numbers you will need to hire someone to help you.
Long-term Tenants – I will say a positive to the Vacation Rental is that you are not locked into a long-term rental rate. You have the option to adjust your rates whenever you like. Long-term Tenants can stay for years and with the government yearly restrictions on rental increases, you might be locked into a rate which you cannot change for a very long time. Rates can quickly get outpaced by inflated expenses and increased mortgage rates. One way around this is to opt into renting the location as a furnished long-term rental. Typically tenants stay for shorter periods because they are in a transitional place in life, (ie: divorce or new to town) and you would have the option to increase the rental rate in between each tenant.
Pro Tip to Maximize Revenue - My pro tip is to choose a Vacation Rental property with a longer desirable rental season or two seasons. Two examples of this are Whistler and Maui. Whistler has two distinct peak seasons in which it attracts guests but the off season is also desirable. Maui is very rentable most of the year. In the summer months the weather is fairly consistent all year round and with summer vacations in the summer, many families still choose to take the trip.
You can absolutely make money at this. I am by no means ‘anti-vacation rental’. We love ours! We could market it more aggressively or even raise the rates to squeak out more income. There is potential for growth for sure. I will say, however, if you think you will be the Instagram Guru who is making 1 million on his vacation properties you might be disappointed. He is likely bringing in decent revenues but he won’t be keeping it all.
What I love about vacation rentals is that they provide a generational place for memories. There is certainly a difference in returning to a family vacation home over and over vs visiting a new rental each year. The connection which is created with the location and all of the years of happy memories is one of the most magical reasons to invest. You can also use the income earned, mainly other people’s money, to pay off the investment. In the end, making it possible to pass your little piece of paradise onto the next generation so they can enjoy it as part of your legacy.