I’ve been a student of early retirement since the fall of 2014. During that stretch, most of my focus has been on long term rentals. We own four single family homes that generate a decent return of 15% and $500 profit each month. What if there’s another real estate option that can yield even higher returns, with just a little more work involved? Enter, the Profitable Vacation Rental Property.
We’re talking Airbnb and VRBO today. A 10,000 word comprehensive guide!
This definitive post will show you how to establish a profitable vacation rental. Real estate investing can be a very lucrative means to help you reach your very own financial independence, and/or early retirement goals.
Building Wealth With Profitable Vacation Rentals
The real estate rental business has been a winning wealth-builder for us. It felt like going out on a limb at first, but we had an experienced mentor to help us get started. This gave us enough confidence to buy our first rental: a short-sale single family house.
We weren’t flush with cash. I had to take out a home equity line of credit on our primary residence to afford the down payment. Once we closed, the list of improvements grew to a tally of almost $5,000. What had we gotten ourselves into?
Long story short – this first house got rented out within two months of closing. Rent checks started flowing in. We closed on our second rental just six months later, right around the time we welcomed our twins into the world. Rentals three and four followed in 2015 and 2016.
Ultimately, each of our four long-term rentals have paid off handsomely. Thanks to a strong market here in Minneapolis, we can command good rents. Plus, the tenants we attract have been great to work with. Never a late payment, and often they’ll put their own money into small improvements.
How Airbnb Came into the Picture
By 2017, the housing market had not only recovered, it had started to become overheated! The pickins were slim. Houses that once sold for $150,000 were now going for $200,000.
In my quest for our fifth rental, I kept running into windmills. Cash-on-cash returns just weren’t adding up on the overpriced dumps that were available.
About ready to give up, we visited my folks in Charlevoix, Michigan. I was perusing the local paper and decided to take a peek at the real estate listings on the back page. I noticed a condo for sale in the same development where my parents spend their summers. The condo was “bare bones”, with zero updates since having been built in 2005.
I figured, at $125,000 list price, what could it hurt to have a look? This area is a great summertime destination. A new vacation rental option started to dance around in my head.
A profitable vacation rental carries a more risk, and more reward than a similar long-term rental. You’re not locking-in rent for up to a year or more, as you would with a long-term rental lease. Instead, you’re relying on market demand to fill a vacation property week after week, particularly during “high season”.
The thrust behind this is our own Airbnb experience as guests. We’ve stayed at Airbnbs only a couple of times, but in each instance we enjoyed our stay and felt welcomed by our hosts.
For my money, Airbnb beats the pants off just about any hermetically sealed hotel. What can I say? It’s just plain nice to stay in a place with windows that open to fresh air.
What is Airbnb?
Wikipedia: Airbnb is an American company which hosts an online marketplace and hospitality service, for people to lease or rent short-term lodging including vacation rentals, apartment rentals, homestays, hostel beds, or hotel rooms. The company does not own any lodging; it is a broker which receives percentage service fees from both guests and hosts in conjunction with every booking. In January 2018 the company had over 3,000,000 lodging listings in 65,000 cities and 191 countries.
For a company that started nine years ago, that’s a pretty impressive number of lodgings. How long did it take Hilton to build that many rooms? All Airbnb’s founders had to do was harness the Internet, create the marketplace, and take their 3% cut from each booking. Genius.
As we worked through the offer process and closing on the condo, I was also digging into my research. We’d stayed at a couple of Airbnbs, but we sure as heck hadn’t hosted any. Pinterest, and a very helpful book, Get Paid for Your Pad by Jasper Ribbers and Huzefa Kapadia were vital references.
Why a Profitable Vacation Rental is a Smart Investment
Our Airbnb condo is the fifth rental in our portfolio and the first vacation rental. The intent is for all of these properties to position us well for early retirement.
Using my handy rental property evaluation spreadsheet, I’m projecting a return on investment of about 20%, year over year. That projection assumes very minimal use in the low season (winter).
The key thing to recognize is that the forecast return on investment (ROI) does not factor-in the tax advantages of rentals. With those bonuses added in (depreciation, business expense write-offs, and the new small business 20% deduction), overall ROI (or “cash on cash”) rises to a very healthy yield of about 33%.
The financial analysis – summarized:
Consider *All* of the Variables
Historically, 4.75% is very good rate for a 30-year fixed mortgage on a rental property. Keep in mind: if you’re new to rental investments, there’s a half a point premium added to your rate. As of the writing of this post, I’d be looking at a rate of 5.25% on a property closed in late 2018.
We were fortunate to have my parents living in the same complex where our vacation rental is located. They know the drill. For instance, how the utilities are billed, seasonal factors, disposition of neighbors, association nuances, awareness of existing vacation rentals and how they’re performing, etc.
All of this inside information helped immensely. I’m not certain it’s required for a profitable vacation rental, but having trusted, knowledgeable people nearby is an asset that’s a huge plus.
Key nugget of wisdom! Unless you’re buying auction properties or distressed properties for cash, be sure to use bank financing to fund your vacation rental.
I’m reading more and more about folks in some kind of death race to pay off the mortgage on their rentals. DON’T DO IT. Let the bank hold the risk, while you reap the cash flow reward.
The idea behind “other people’s money” (i.e., the bank’s) is leverage. Your money will work harder for you if you put it into more rentals as down-payments, or at least into stocks.
Profitable Vacation Rental Forecasting
The big unknown with any long-term rental is how quickly you can sign up a tenant and start getting cash flow. With an Airbnb, particularly one located in a popular vacation zone, you’re often competing with other Airbnbs, VRBOs, traditional B&Bs and hotels — all in the same general area.
For our vacation rental in northern Michigan, the high-season runs from June through September, with a bit of action in May and October. November through April could see some snow-shoeing types or cross-country skiers, but I’m not counting on them as much.
Market research is VITAL.
Use your Airbnb traveler account to scout out a location of interest and analyze a number of rentals’ seasonal pricing variation. You’ll find many hosts simply “fire and forget”, i.e., they set a high season rate and leave it locked all year round. Or, they only rent out during high season.
In our case, we wanted to be able to maximize the return on our vacation rental, and that means year-round guests. Sure, the pricing is lower during those cold, snowy months. But people like weekend retreats all year round. Why not make money vs. leaving the place shut down and empty?
Keep track of your projected returns and vacancies in a spreadsheet. After your first full year, you’ll be able to tweak projections and get a feel for seasonality. Your ability to predict bookings (profits!) will increase as you go.
When I first estimated the set up costs of our vacation rental, I estimated a start-up cost of $12,000. The final tab? $14,696.13. That’s an increase of 22% over forecast.
The main areas I didn’t account for were travel, meals, gratitude gifts for helpers, and the professional painter’s bill.
My advice is to add 25% to whatever estimate you come up with, when figuring your forecast returns. This will give you a more realistic indicator of cash-on-cash return.
Don’t get disheartened if your target ROI suddenly gets flattened. Year one is always the hardest. After that, it’s all (mostly) gravy.
Setting up a Profitable Vacation Rental Online: The Easy Parts
Setting up your vacation rental, whether it’s a spare room in your house or the entire dwelling, is pretty straightforward on Airbnb’s interface. I give them credit for creating a highly intuitive experience.
However, there are a LOT of variables that come with hosting. You don’t just set your nightly price, upload a bunch of pics and wait (and hope!) You’ve got to figure out check-in and check-out times.
There are house rules to set and amenities to list. Tax and payment information are required.
And there’s more. Do you want to set a strict or flexible cancellation policy? Do you want to include a security deposit? How much will you charge guests for cleaning?
For anyone just starting out, it’s important to be flexible with your booking policies. Remember, you don’t have a reputation yet. Without reviews, your listing won’t catch many eyes from the start.
Being flexible with the following variables helped us generate bookings at the outset:
- Keep prices well below your competition. We went as low as 50% below the going area rate. (e.g., $50 per night, v. $100)
- Offer 2 or even 1 night minimum stays.
- Don’t require a damage deposit. Airbnb has a $1M host protection policy, so you’re ultimately covered.
- Be willing to accept booking requests from new Airbnb or VRBO guests.
- Offer a flexible cancellation policy. You can make your policy more strict after 5 or more reviews have been attained.
Once you do get everything all set up, there’s a certain amount of apprehension that sets in. You have ZERO ratings. Who in their right mind would rent from you? This is why it’s super important to channel your inner marketing skills.
Study your Airbnb market and see what other successful, similar rentals have posted. Use the best photos you possibly can. Make sure your prices are fair, and account for seasonality and local events.
Even then, be prepared to wait a bit for that first booking. It WILL happen!
The good news is that Airbnb is an easy outfit to work with. Signing up to be a host was a breeze. It reminded me of Turbotax with its friendly step-by-step flow.
Having a system to manage the reservation calendar is very convenient. The platform is built on trust between traveler and host. You can certainly turn down guests, but because Airbnb sets the bar fairly high, it’s rare that you’d ever have to turn anyone away.
Airbnb offers a Smart Pricing feature that adjusts nightly pricing based on seasonal, market competition, and other factors (events, for example). However, I’ve found that BeyondPricing is more in-tune with the local market and does a better job of ensuring we get top-dollar for our rates, without outpricing ourselves.
Making Your Vacation Rental SHINE
Getting your vacation rental ready for prime time requires a good eye for design and lots of elbow grease. Learn what good interior flow is and how to make a space welcoming for a majority of guests.
One tip I can offer: Spend a night in a newly-built quality hotel. Even the newer Holiday Inn Express hotels are super nice. The rooms are minimalist and modern, with the right blend of colors and textures. The spaces flow.
When we bought our condo, the place had been used over the previous decade as a Coast Guard rental. The carpet was original, and the walls were beaten up all to hell. There weren’t any improvements made since its construction.
As a result, we had to essentially remodel 80% of the space to bring it up close to Holiday Inn “par”. New flooring, new light fixtures, re-painted walls, doors, and ceilings. You name it.
The following are highly important for making a profitable vacation rental look and feel amazing:
- Floors. I highly recommend wood flooring throughout the living spaces. Laminate works great if you buy a quality product and install it with precision. Linoleum is fine in baths and kitchens, so long as it’s a neutral color that doesn’t distract. I like linoleum because things tend to bounce off when dropped on them. Ceramic tile? You’re looking at a lot of broken dishes and glasses.
- Walls. Go with a lighter beige or “greige” (a combination of light gray and beige). Avoid anything dark and avoid primary colors. Use large and interesting art pieces, sparingly. Large mirrors are very important, especially in small spaces. Place them to maximize outdoor light.
- Use area rugs to dampen sound and tie rooms together. You don’t need anything fancy. Walmart has decent rugs for cheap. Be sure to get the no-slip pads for underneath to keep the rugs in place.
- Look for furniture that’s modern but timeless. I like Ikea to get ideas. And then I use Wayfair to find a similar style. I like Wayfair because of their free shipping and superior customer service. If anything is damaged or defective, they’ll replace or refund, no questions asked!
- Don’t go crazy with the kitchen. If anything, the cabinet doors and drawers should have pull handles or knobs installed. I tend to think white cabinets and drawers offer a clean, open look. But you don’t need to buy all new stainless appliances. Maybe a new goose-neck faucet to provide a focal point is nice. But overall, just make sure the kitchen is sparkling CLEAN.
Don’t forget that you want this place to be a getaway for YOU! A profitable vacation rental can certainly be one that your family can use for its own vacations, virtually free of charge. We get excited every summer to visit our condo in northern Michigan.
Being with family right on the great lakes is incredible fun. There’s so much to do and see. Advice? Find a vacation rental that’s a dream getaway location for you and your family, above all else.
Be Ready to Spend Some Money
There was a ton of work that went into getting our place ready to shine. Heck, it was a decent deal ($120K) because it was worn. The carpet had to go. The walls, ceilings, and doors needed patching and painting.
And of course, any vacation rental needs to be FURNISHED.
That’s right, vacation rental investor. You’re on the hook for beds, bedding, chairs, couches, TV, kitchen utensils, toilet paper, lamps, towels, etc. Your shopping list will be longer than any list you’ve ever seen before.
Interested in starting your own profitable vacation rental? Click Here
In the case of our new vacation rental, since we closed in late October, we knew there wouldn’t be much action for several months. That is ulcer territory right there!
Each month of vacancy costs $718 in PITI (monthly principal, interest, taxes, and insurance.) Pronounced like “pity.” The moral of the story is to be prepared to get your new property ready as soon as possible.
Our opportunity cost of not getting the vacation rental until three months after closing:
- PITI @ 2 months x $718 = $1,436. Since we started booking in February, and the bank doesn’t start billing until after the first full month of financing, we only lost two months of PITI. Whew!
We also had association dues to pay, each and every quarter. The association isn’t about to give me any “free months” like U.S. Bank is.
- Association dues @ 2 months x $133 = $266.
- Gas, Electrical. Not much @ 2 months x $65 = $130.
Much like a house flip, the clock is ticking. Each month that passes without rent is sunk cost and a big fat ding against your return on investment.
For us, there wasn’t all that much opportunity cost at play. The high season was well over with, and with a few long weekends of hard work in November and the following January, we could have this place ready for some winter ski action.
Remodeling, Furnishings, and Beyond
Typically on most long term rentals, you’ll fork over about $5K – $10K (or 5 to 10 times that for rehabs) to get a place ready for tenants. With a vacation rental, you might as well add about $10K to factor in the cost of furnishings and supplies.
Our 1,000 square foot condo required about $7,000 in remodeling work. I hired a pro painter and it wasn’t cheap, but I don’t regret it. I’ve painted countless interiors over the years and don’t mind the work, but it is time consuming. Add in vaulted ceilings, and game over.
I did sign up to DIY the floors. To give a sense of what our unit looked like before we got our hands on it, have a look at this pic:
Without a healthy face-lift, our place wouldn’t have made very many bookings. Vacancies in high season, or, renting at low rates would’ve made for a dud of an investment. That carpeting in the photo above is the original nasty nap from 2005. The walls and trim were abused and dull.
Easy gadget upgrades that didn’t take much time to complete:
- New goose-neck style kitchen faucet ($243)
- New kitchen cabinet hardware (we went with brushed nickel handles for $32 on Amazon)
- NEST thermostat ($177)
- Schlage Sense door lock ($243) – This allows guests to tap in a code for easy check in. No keys!
- Google Wifi Station ($124) – Elegant and easy to set up
There are some tactics you can use to mitigate the upfront costs. A very handy Home Depot credit card offer allowed me to defer the Pergo, Faucet, and Schlage Lock for 24 months at zero percent interest.
I ended up paying it off in full within a few months, but it was nice to have the flexibility.
Remember second hand options! My parents still have a lot of stuff from their recent downsizing. Our unit benefited from a rarely used toaster oven, coffee maker, and other kitchen essentials. All of this adds up.
Even though your up-front costs could be fairly significant, if your forecast and market research pan out, you’ll recoup those costs in no time. For us, a typical summer month generates over $4,000 in net returns.
Given five fully booked months from May to September, our condo will return $20,000 before the low-season arrives in November.
Talk about a stack of receipts! Home Depot, Costco, Sam’s Club, and Walmart. Kohl’s too? Basics like towels and linens are good buys at Costco. We filled an entire shopping cart with bath towels.
I recommend stocking enough towels for three turnovers, in case a towel or two goes missing or gets wrecked.
Here’s the ledger and checklist we used to get our place ready. There were a bunch of things that came later, but you don’t need everything under the sun right out of the gates. But man, a lot goes into to furnishing even a basic 2BR condo!
Here’s the master checklist:
How to Establish a Profitable Vacation Rental in Hell’s Kitchen??
God bless my mom. When we took possession of our unit after closing, she volunteered to deep clean the kitchen. That means getting behind the range and fridge, where years of crud, dust, and spills had built up over the course of 12 years.
I don’t believe the appliances in our unit had ever been moved for cleaning. A little advice if you didn’t know: It’s really important to keep good airflow underneath a modern fridge. It doesn’t take much in the way of dust bunnies to clog up the vent and cause your compressor to fail.
The main kitchen light fixture was a haven for dead flies of all species. Congealed with cooking grease to fossilize in fluorescent glee…
With any vacation rental, be ready to invest time and energy to make that kitchen spotless. And then, make sure your cleaning crew is programmed to keep it spotless.
New Flooring: DIY in a Weekend
Two determined people with some knowledge and experience can replace 700 square feet of carpeting with Pergo laminate in a single weekend.
Removing the tack strips from concrete padding? That sucked. Thankfully, we got a hold of some serious pry-bars and were able to pop those strips out. It was a work-out though. Fortunately, the padding wasn’t overly glued down, so scraping up bits of it was no big deal.
By the time we were finished, we had filled up the entire cargo capacity of my step-dad’s Silverado with dead carpeting. Don’t ask about the complex’s dumpster. I am not a friend of the earth after this past weekend…
Let’s have a look at some before and after, to give you a little DIY inspiration:
One thing you’ll realize while in the midst of remodeling a vacation rental: It’s NOTHING like setting up a long-term rental.
Vacation rentals are a never-ending list of to-do’s to get ‘er ready for that first booking. Hone your planning skills, keep checklists, and enlist HELP. You will get there!
After our remodeling weekend, we had another month and a half to online shop for furnishings (Wayfair.com, Sams Club for mattresses). Like I mentioned earlier, Ikea provided the inspiration for the style, while the goods came from Wayfair.
Interested in starting your own profitable vacation rental? Click Here
Putting it All Together
After the painting and flooring, the bedrooms were empty. The living space didn’t have any tables or stands. No beds, no lamps, no towel bars in the bathrooms.
A lot of work lied ahead. You get your first mortgage bill in December and realize you can’t host until February, and you get a little nervous.
We got it done though. A long weekend of concerted effort in mid-January allowed us to prepare the place for its very first guest. Those checklists come in handy. And I had a lot of boxes to unpack and furniture to assemble from Wayfair.com.
Did I mention how much shopping is involved? After I went into Costco and bought a 40″ LED television, I packed it into the trunk and proceeded to go back in for more.
The shopping carts at Costco are relatively huge, so you should be fine. Of course, if your experience is anything like mine, you’ll wind up in the pain reliever section with a cart like THIS:
It’s important to score deals and use coupons wherever possible. Every little bit helps. We used a 30% off Kohl’s coupon to procure all of the bedding (sheets, pillow protectors, mattress covers, duvets, etc.).
Hopefully, setting up a home is the kind of work that turns your crank. I put in 12-18 hour days for three days over that chilly January weekend to complete our set up.
Starting out, you might be faced with a similar situation as this (boxes, boxes, and more boxes to unpack and assemble):
NOTE: Those boxes in the photo above were placed there by kind friends who live in the same unit. Friends of my parents. It’s a worthwhile endeavor to get to know your neighbors. If you ask for favors like I did, be sure to demonstrate some real gratitude. I sent two gift cards of $100 each for dining establishments to this couple during the course of our vacation rental set up. Money well-spent!
One of the last stops I didn’t mention was the grocery store. It’s important to save money where you can, and avoid dining out during the set up process. Unless you’re in the middle of remodeling, your kitchen should be able to handle it.
Besides, this is the time when you can put your pad through its paces. Cook your own meals and do your laundry. Be sure that the appliances are in fine working order. Going out to grab food all the time would’ve cost me precious time.
The Big Reveal
After emptying and breaking down countless cardboard boxes, and after assembling every solid piece of furniture, and hanging mirrors and prints and towel bars, you get something like THIS: (before and after)
Profitable Vacation Rental Setup Tips
- Avoid social media for a few days so you can FOCUS.
- To speed things up and spare your energy, assemble your furniture with a power drill. I spent the first two days using just the screwdriver and man, that got OLD FAST.
- Take photos of the model/serial labels in all of your appliances. You never know when you’ll need to call in service.
- Use two nails or hanging posts for all wall coverings. There’s nothing worse than off-kilter art and mirrors on the walls.
- Set up the bed first, so you have a nice place to sleep that first night.
Bookings – They are REAL!
Within a month of our planned “go live” we got our first two bookings. In our case, waiting until after the holidays was all it took. We had the place painted and new floors put in by now. Shortly thereafter, the new sofa and chair combo with an area rug arrived, and that allowed at least a couple of pictures in the listing to attract attention.
Remember that list earlier in the post? Here is a similar one with a few repeats, but with elaboration. Point is, BE FLEXIBLE when first listing your vacation rental! You want to get a healthy number of bookings under your belt to acquire good reviews. Those reviews will then drive new bookings, and then you’ll have the credibility to raise rates.
Here’s just a sample of the changes I made to my listing, based in large part on the advice in the book Get Paid for Your Pad:
- Eliminated the security deposit. Apparently, deposits can be a turn-off for guests who might fear nitpicky things being charged back to them.
- Removed cancellation fees. I’m too new in this game to be restrictive with cancellations. My main focus needs to be getting guests in there and giving positive feedback. The more reviews I get, the more my listing will rise up in the search. Just like a new product trying to elbow its way into a crowded market, you gotta come in low to get noticed!
- Enhanced descriptions. It’s much better to evoke emotions when describing your space. Don’t simply say, “There’s two bedrooms and two bathrooms, nice hardwood floors, and a balcony to watch sunsets on.” An improvement might be, “Come back from a long day enjoying the white sandy beaches and relax on the sun-filled balcony with a glass of wine. Retire later to a master suite appointed with luxurious bedding and plenty of space to stretch out after a day of Northern Michigan adventure!”
- More flexible length of stay. I had my listing limited to one week minimum stays. But Airbnb is built on the idea of a quick stopover. Maybe one or two nights for most guests. In order to generate traffic, and more reviews (key for a profitable vacation rental!), and ultimately more cash flow, I changed my minimum stay to one night. The book advises a maximum stay of seven nights to promote turnover and more reviews, when starting out. After about ten bookings / reviews, we went back to 2 night minimum stays.
- Accommodate parents with infants. What great advice! I remember when our twins were at that stage. It sure was nice to arrive at a hotel and have pack-and-plays already setup in our room for them. Along those lines, I plan to buy a pack-and-play for the condo, so little visitors can sleep safe and sound.
- Cut prices, at least initially. This is a key one. The book suggests undercutting the local competition to get those first few guests and some reviews coming in. Discounts of 20-30% are suggested. Whew! Now that that’s taken care of, I doubt you’ll find a better value until summertime rolls around.
- Lower the cleaning fee. I originally had a cleaning fee of $75, about enough to cover three hours of clean-up work. I’ve lowered it to $50, and will eat the $25 if there’s an extra hour needed to clean up. I’ve also offered my cleaning lady a $25 bonus for each 5 star review we achieve. Can’t hurt to offer incentives to ensure a super clean pad. If nothing else, the “Get Paid” book is clear on the importance of a super clean, spick-and-span experience.
- Over communicate, and respond quickly! I’m now poised to get back to all inquiries within minutes of receiving them. My phone goes nuts now with each one – notifications come through via the Airbnb app plus SMS text messaging and email. Bases are covered. So when I get an inquiry, I’m quick to respond, and respond with enthusiasm and detail. The more gracious you are throughout the process, the more likely you are to receive great reviews.
- Review your guests right away. This is a tactic that makes sense. Basically, put the onus on your guest to give YOU a good review, by beating him to the punch. Right after checking out (assuming the cleaning lady doesn’t find piles of empty champagne bottles, half eaten pizzas, and a stray tiger in the bedroom), give him 5 stars. And then, send a very nice note of appreciation for choosing your pad.
Pricing is Hard Work (Therefore, I recommend you use BeyondPricing.com and skip this section!)
Airbnb puts forth a good effort to automate as much of your listing as possible, if you let it. They have a newish pricing engine that sets your nightly rate based on your local competition and, apparently, seasonal factors. Sadly, as I found out through experience (backed up by the “Get Paid” book), Airbnb tends to low-ball listings when using its Smart Pricing feature.
I ran into a bit of a wall trying to manually set seasonal rates. Airbnb is a bit limited in this regard. You can set a price by week and by month, but those rates only apply for 7 plus nights and 31 plus nights, respectively. My only option was to set prices day by day, in the booking calendar. Onerous defined.
Thankfully, this process isn’t too bad, once you figure out the sliders. For a while, I was updating day-by-day and thinking, “There HAS to be an easier way to do this!!!” Not so intuitively, Airbnb puts little handles on each side of the date window, which you can “grab” and stretch to cover a range of days and weeks. Whew!!!
And of course, you must use those “9”s as part of your “Most Significant Digit Pricing” strategy! “Get Paid” does a nice job of explaining the psychology behind the appeal of something that costs, for example $29.99, vs. $30. It seems our brains are subconsciously wired to believe that extra cent is actually more appealing. Okay, then!
Vacation rentals aren’t really geared for stays longer than one month. It’s possible, but I don’t personally recommend it. That said, I would consider longer term rentals of one to three months when you’re at the start of the race.
Having just a single tenant to look after for a long duration allows you to catch your breath, and capture some rent while you plot your high season strategy.
Keep in mind that for longer term rentals of up to a year, you’d have to take the conversation offline and work through a lease agreement. Airbnb and VRBO are good at restricting hosts’ ability to make “back door” arrangements. Email addresses and phone numbers will be blocked out in their message exchange system.
In our case, we were able to rent our unit for a month before high season arrived. The booking was made through Airbnb, and we fetched a cool $1,200 for the month of March. Not bad for a typically dreadful month demand-wise.
Managing a Profitable Vacation Rental
Airbnb makes it pretty easy to manage everything. I use BeyondPricing.com to price the unit, and it integrates seamlessly into Airbnb and VRBO, both of which I use. What’s also great about the two platforms, you can sync calendars between them with ease.
Remember that there’s much more to this than endeavor than the online experience. If you want to build and keep up a reputation for excellent customer service, you’ve got to communicate early and often with your guests. That means sending a note before they arrive:
“Hello, Jane! I’m looking forward to hosting you and your group this weekend. Please let me know if I can be of assistance for anything you need. I’m happy to offer suggestions on activities, dining, and sites to see. You’ll receive your entry code the day of check-in via a special link from Airbnb. Best!”
It’s not much, but you need to remember to do this every time. And with Airbnb, you might have 3 or 4 different guests in a given week.
Thankfully, both Airbnb and VRBO have a templates feature that allows you to reuse common messages over and over again. I use this feature for new bookings, pre check-in, post check-in, pre check-out, area activity ideas, and review reminders. Simply swap out the names and the rest of the content can be sent off as boilerplate.
There’s also a bit of back and forth that can happen during a guest’s stay. Some guests you’ll never hear a peep from. Others, you’ll get texts with selfies showing what a great time they’re having. I prefer somewhere in the middle as a host. Just be sure no matter what, to be RESPONSIVE.
One of our very first guests couldn’t stop gushing about how awesome the place was, which was music to my ears (eyes), but after a few more messages asking “where did you buy this piece or that piece?” it started to get old.
Still, you have to take the time to respond, and treat your guest with respect. That extra effort pays off, especially when you get those 5-star reviews rolling in!
On Checking-out and Cleaning
Near the end of a guest’s stay, I’ll send another message as a friendly reminder to prepare to check-out. I set 10AM as the check-out time, in case I get new guests arriving the same day. This allows the cleaning person a healthy window to reset the place.
TIP: Be sure to emphasize the importance of check-out time with guests! If you’re renting the entire unit, they’ll often figure that they can linger until someone kicks them out. I’ve had a few issues our first summer where the cleaning person couldn’t get in, and she has a busy schedule in high season. Be friendly, but be firm and clear, when reminding guests of your check-out rules.
“Thank you again for choosing to stay at our cozy pad! Check out time is 10AM sharp! Please remember to do what you can within reason, to leave the condo the way you found it. Take any food you brought, and drop your garbage in the dumpster in the back of the parking lot. Our cleaning person will handle the towels and linens, etc. Feel free to stay an extra hour or two if you’d like, but be sure to turn off all lights on the way out. Please come back again soon, and safe travels!”
Finding a reliable cleaning person is essential. Get references from locals or simply ask other hosts in the area who they use. You’ll want your cleaning person to be able to manage same-day turnovers. So it’s best if he or she works with a partner, in case of illness or other conflicts.
Since we live in a different time zone from our vacation rental, it’s important that our cleaners get in and assess for any damages or theft before the next guest. This is very rare, but I have had lights left on, front door left unlocked, and dirty dishes left piled in the sink.
In one instance, a guest decided to help herself to an entire bulk pack of makeup remover wipes. We know leave out a handful at a time per guest.
Compensation is important. Cleaning crews should make a living wage. The beauty with vacation rentals is that the guest is ultimately the source of pay for your cleaning person.
This is a fee you add to your listing. We charge our guests $89 for cleaning fees. All of this money is simply passed-on to our cleaner after the cleaning is performed. It’s a fairly high amount for such a small unit, but I’d rather pay well and keep a good crew dedicated, than to be cheap and hope the place is being cared for.
TIP: Be sure you wait until your cleaning crew performs a walk-through, before leaving a guest review! With one of our first guests, I jumped the gun and given a 5-star review, before my cleaning person informed me of the lights being left on, wipes swiped, and the electric fireplace being left running. You can still give good reviews, and include comments and feedback for guests to help future hosts.
Just like all guests aren’t equal, neither is the cleaning that ensues after each stay. Sometimes it takes my cleaner two hours, and other times three. Not a big deal. We simply make an agreement that every single cleaning is $89 and it’ll average out.
A lot of vacation rental owners pay by the hour, but you have to trust the cleaner is tracking hours honestly. It’s just a lot easier to agree on a flat rate I’ve found. With the higher flat rate, we also agreed that it’s up to her to help me maintain a 5 star “Cleanliness” category. Regression to four stars could mean less pay or termination.
It’s simply the price you have to pay to make sure your place is ready for a steady stream of guests. Cleanliness is something you can’t afford to go cheap on. I’d rather pay a bit more, and offer an incentive, than to get reviews that mention sticky floors, hairs in the tub, or soap scum on the shower walls. It’s really non-negotiable.
My cleaning crew is also on task to keep track of cleaning and toiletry supplies. Simple things like toilet paper, paper towels, tissues, soap, and what-not get used up fast as you churn through guests.
TIP: Help your cleaner keep track of multiple listing turnovers with TurnoverBnB. It’s a free app, and as far as I can see, it does a nice job of integrating both Airbnb and VRBO calendars. My cleaner can accept turnovers and mark them complete as she goes.
TIP: I have my cleaning lady put a bottle of Chardonnay in the fridge for each new guest. It’s these small gestures that yield five star reviews (and return guests!)
Interested in starting your own profitable vacation rental? Click Here
Your Own Home as a Profitable Vacation Rental
The Super Bowl was a bonanza this past February for Twin Cities residents who rented their homes on aggregators like Airbnb and VRBO. Wherever there’s a major golf tournament, the market for vacation rentals surges (see the Masters).
Having a positive experience with renting a second home or condo or Airbnb to complete strangers is one thing, but renting your own home can be a daunting proposition.
Let’s take a look at the market for Airbnb homes in Minneapolis. By the looks of things, we could pull in some really good coin here.
Most of the homes available within the city limits are averaging around $200+ per night. SOLID.
If we were able to fetch, say, $199 per night, over seven nights, that’s $1,351 in revenue (after factoring in the 3% Airbnb fee.) Times two weeks, that’s $2,702. This is about what we would budget annually for vacations.
TIP: The “Masters Rule” allows you to rent your premises for up to 14 nights, tax free. This rule literally stems from a lobbying effort in the 70s by a powerful groups of homeowners, many of whom hailed from Augusta, Georgia.
In truth, renting out your entire home for use on Airbnb could have some major consequences, if you don’t take precautions.
Airbnb “has your back.” They offer a $1M insurance guarantee for damage claims.
The best defense?
One, don’t use the Instant Booking feature when renting out your own home. You’ll want to screen carefully before accepting guests into your home.
Two, don’t rent your own home to guests who are verified, but are lacking positive reviews (ideally, more than 1 or 2.)
Be sure to Facebook stalk, LinkedIn stalk, and any other kind of stalk you can muster, to make sure prospective guests aren’t planning a Wolf of Wall Street free-for-all.
Listing Photographs 101
Staging any profitable vacation rental for photos is probably the single most important factor for generating bookings. You’ve got to make the place shine in order for the listing to get some traction.
1.) Rely on natural light. Earlyish AM seems to work well. You want the sun to be present, but not glaring too much through the windows.
2.) Take your photos at waist-level. This is what real estate pros do when staging a home for sale. From the waist, or roughly three feet off the ground, you create a larger feeling space. I used this tip to excellent effect in the “after” images earlier on in this post.
3.) Put the clutter away. Simple things count, like getting rid of a second trash can in the kitchen used for recycling. And putting away extra charging cables.
4.) Apply a good filter to enhance the photos. I love the Camera Plus app on my iPhone 6. After I snapped all of our vacation rental shots, I applied the “Clarity” filter to really bring out the contrast and brighten all of the shadows. It’s worth the couple of bucks for the pro version of this app.
5.) Don’t overdo it on photos. Just pick the best dozen and leave a little to your guest’s imagination.
The wonderful thing about the sharing economy is that it’s providing incredible opportunities to make money that weren’t there before. Airbnb, VRBO, Lyft, Uber, DogVacay, GetAround, you name it.
VRBO (Vacation Rentals by Owner) has been around for a while under the parent brand, HomeAway. They’ve established themselves as the go-to portal for week-long plus summertime rentals.
The interface has always been pretty clunky and bare-bones, with a 90’s web design feel. I’ve used VRBO as a traveler. It’s not a very intuitive experience. But you get used to it.
Over time, VRBO has upped its game. The interface has been upgraded, but as a host, I still struggle with where to focus my attention. Human-centered design remains elusive for this vacation rental stalwart.
Unlike Airbnb’s 3% cut per booking, VRBO requires either a $499 one-year flat-fee (“subscription”), or, an 8% cut per booking.
The math says you’d need to book at least $6,238 in reservations per year, to make the $499 subscription break-even with the “8% cut” option. If you can book $10,000 or more on VRBO, then the effective cut to VRBO is 5% or less with the $499 fixed fee. We currently go with the fixed option.
Airbnb vs. VRBO
Airbnb is my preferred platform, but I use both and bookings are about 50-50 between the two. I appreciate that Airbnb’s take is just 3% per reservation.
Airbnb has a much more intuitive hosting platform than VRBO. Also, Airbnb also handles all of the occupancy taxes owed by guests. These taxes vary by state. In Michigan, it’s 6%. Traditionally, these fees are collected by hosts, who then turn around and pay the state.
VRBO requires that you either use a third party service, or register with the state where your vacation rental is located. It is quite a hassle to do the latter, especially if the state’s online registration process is byzantine, like Michigan’s.
VRBO hasn’t been charming the socks off its travelers either. A couple of years ago, on the heels of being purchased by Expedia, VRBO began imposing guest “service” fees of 5-9%. Apparently, Expedia is “banking up” to compete with Airbnb in the vacation rental aggregator wars.
What upsets many VRBO owners is that they’re already paying a hefty subscriber fee. Before 2016, you could simply rent your property for a higher fee to offset some of the subscription costs. But now that VRBO is taking a bite out of the guest’s wallet too, the owners have to be mindful not to over-price their listing. In effect, the guest service fee comes out of the owner’s pocket.
Head to head:
VRBO (Home Away) has long been the leader in the long-term (one week or more) family vacation rental space. Think of Airbnb as the metropolitan, night or two stay, last-minute arrangement. But over the last few years, these two have really started to encroach on each others’ turf.
Look no further than our own profitable vacation rental. It’s tailor-made for VRBO week long stays, but Airbnb has been a savior by filling in the shorter gaps in the calendar.
- User interface: Airbnb wins. Hands-down. So much easier. Breath of fresh air when compared to VRBO.
- Fees: Airbnb wins. Also hands-down. I only pay 3% to Airbnb, vs. the 5-8% I’ll wind up owing VRBO. Guests pay about the same with either platform.
- Occupancy taxes: Airbnb wins. They collect from the guest and then pay the state / local authority. With VRBO, all you get is a calculation of what you need to pay out of what’s collected from the guest. Pain in the ass.
- Guest vetting: Airbnb wins. With VRBO, I feel compelled to use their Instant Booking feature to get visibility to my listing. Sadly, their Instant Book feature doesn’t come with the same level of safeguards as Airbnb provides. I’m always a little more nervous with unrated VRBO guests.
All that said, we are happy to use BOTH platforms to maximize the exposure of our listing. With 50% of bookings from one vs. the other, we really couldn’t afford to gamble on vacancies just to avoid the hassle of using two systems.
Another fascinating thing? You can generally charge about 10%-20% more on VRBO than on Airbnb. This is super helpful, especially considering the higher share of the take from VRBO.
It’s pretty easy to sync calendars between VRBO and Airbnb. Each platform allows you to cross-sync, so that each time a guest books on one platform, the dates will appear as taken on the other. It’s not instantaneous. Generally within 30 to 60 minutes the syncing will complete.
Calendar syncing is absolutely crucial for managing two booking sites with a single door. The worst possible scenario is having to cancel a new reservation that overlapped an existing one. Cancellations by owner are frowned upon by both Airbnb and VRBO, and they can negatively affect your listing’s place in search results!
A few tools I’ve mentioned already, that really do a fine job of consolidating everything for me: Beyond Pricing and TurnoverBnB. BeyondPricing charges a fee of 1% of all bookings. It’s a nominal fee, and well worth it. They take into account seasonality, weekends v. weekdays, and local events, among other variables.
When I need to tweak my pricing, I can do so for both platforms straight from BeyondPricing and not even bother having to go into VRBO.com or Airbnb.com to change anything.
Our cleaning crew has really taken to TurnoverBnB. It’s a free app that collects booking information on new guests ahead their visit, to ensure cleaners can block time to get in and reset the place. This app puts your cleaner in the driver’s seat, and saves you (the host) from having to constantly email and text about new guests.
Remember, being a host is like a part-time job. Thankfully, these tools help immensely to automate some key tasks.
TIP: VRBO bills hosts for guest credit card transaction fees. A little bit of nickel and diming there. Airbnb does not pass this fee to the host (or guest, as far as I’m aware).
Managing Your Return on Investment
Our expectation after year one was to break 15% cash on cash or higher. That means a monthly cash flow of $475 or more. Next year, we aspire to reach $900. It’s very much a stretch goal.
For comparison, our four local long-term rental units yield about $500-$600 in cash flow each month. That’s after all expenses and mortgage payments are factored in. It’s a primary driver for enabling an early retirement goal.
At this point in our first full year, there are only a few unbooked days on the calendar the rest of this summer.
In the fall, there are festivals and brilliant fall colors to be had. September and October are where I hope to make more hay. It’s entirely possible we’ll make another $3,000 or more during the prime autumnal months. Time will tell.
The Importance of 5 Star Reviews
The first couple of bookings were hard to come by for us. A ski weekend here, a retreat weekend there. I was charging maybe $60 a night during late winter and early spring. Nowhere near a high enough rate to meet our first year ROI goals.
Then things started to pick up. A combination of winter latency prompted people to book their summer vacations early. And good reviews kept streaming in.
Before long, we had achieved ten 5-star reviews out of ten possible tries. Airbnb is excellent at promoting guest and host mutual feedback. VRBO is starting to pick up on the success of Airbnb’s system, but it’s still fairly basic. For instance, I can only give star ratings on a few categories to VRBO guests – but no commentary.
Now that we’ve achieved Super Host designation on Airbnb, we’ve seen a surge in views of our listing by 20%. This should encourage more bookings.
It’s a significant achievement and one you should strive for. If you’ve put the hard work and effort into this investment, Super Host designation is a meaningful reward that will boost your return even more.
More on Pricing
BeyondPricing automates future date pricing for multiple platforms, BUT, you’re still on the hook to set the base price and minimum price for your average single night of stay. That’s quite a lever to have control over.
Starting out, I kept the base price lower than I’d have preferred, at $69. It wasn’t until I started obtaining more bookings and 5 star reviews that I was in a place to raise prices. The Airbnb is now at a base price of $119. VRBO at $129.
This is supply and demand stuff. The supply of Super Host properties is limited, and the demand for vetted properties with multiple reviews is always high.
Over time, there will inevitably be a shortage of available vacation rentals as units get booked. That’s the supply constraint.
What Beyond Pricing factors into the pricing equation:
As you can see, I have upped my base price from $69 at the outset of the listing, to $119 today. Seasonality is actually a negative factor, because summertime is lights-out amazing. But then, voila! There’s a few local events happening the weekend depicted above, that bring people up north in droves. Boom. +$108.
Finally, because it’s a Saturday, a healthy +$38 “day of week” bonus is added. This is how valuable Beyond Pricing is. I wouldn’t have dared to more than double that Saturday rate. Leave it to the pricing algorithms to crack this nut. The 1%-of-revenue fee I pay Beyond Pricing is well worth the investment.
Keep an eye on the “Airbnb Experiment: Year 1” on the Right Nav-bar of this blog, to see exactly how much of a profitable vacation rental we have. By the end of summer 2018 we’ll know whether or not we’ve hit some pretty lofty goals.
Interested in starting your own profitable vacation rental? Click Here
A Few Things You Should Know Before Jumping In
Guests, by and large, are pretty damn decent people. Regardless of that, the folks who live at the condo units full-time simply don’t like the steady stream of new people coming and going. What’s a vacation rental host to do?
TIP: One regret I have is that I didn’t make more of an effort to reach out to ALL of my neighbors before I started up bookings earlier this year. I would strongly suggest you get to know as many of your neighbors as possible and float your intent. Better to know in advance what the perceptions will be, and simply making yourself known builds some trust.
Earlier this spring one of our neighbors complained about noise from slamming cupboard doors. This neighbor is really good chap. He offered to install slow-closing hinges on the cupboards and drawers. I paid for the hardware, he put ’em in.
Problem solved. This was a neighbor I had met before firing up the rental, and I’m glad I did.
When you think about it, having guests coming and going is sort of unsettling for neighbors. Even in an apartment or condominium setting, one typically prefers the stability of knowing who’s sleeping next door.
I imagine here, in my neighborhood, what it would be like if my next door neighbor all the sudden turned his house into an Airbnb. I would not like it.
So I get it. The only saving grace is that these condos are, by and large, summer havens for snowbirds. There are already a few other units that are rented via VRBO each summer, and require a minimum 1 week stay.
The thing is, when you’re getting established, you can’t right off the bat dictate week-long minimum stays and hope to make a return on your investment. Year one is crucial to break-even on your invested cash.
Our story isn’t unique. This “not in my backyard!” phenomenon is gripping much of well-traveled Europe these past few years. Europeans want to make money just like everyone else, and Airbnb has proven to be a boon for them.
The trouble is, their neighbors are like, “What the hell, Gunther?!? Another bus load of American tourists?”
What’s a Host to do?
For now, we’ll continue to be as good of hosts as possible, and remind guests of following the house rules as closely as possible. There’s really not much else you can do.
Sometimes it seems you could have Mother Teresa as a guest and the neighbors would probably still find a reason to complain. Next season, we plan to try minimum week-long stays over the summer months. But the fall, winter, and spring demand some flexibility, and we really have no choice but to allow two-night minimum stays during those seasons.
Sometimes you’ll get reviews that don’t make a ton of sense. Be prepared for these, and do not react in kind.
Here’s a 4-star review I got recently. Remember to be humble!
Crazy that first point. I can’t help that the bike route goes through downtown, and the drive to the trail-head outside of downtown probably took them all of five minutes.
As for running out of toilet paper? When you’re staying for only four nights and four rolls aren’t enough, you have to wonder.
TIP: This is a reminder to communicate early and often. Nothing ensures a great review more than meeting guest expectations, then exceeding them with showing you care. Make sure they know they can contact you for ANYTHING.
The location comment was helpful. But guests know when they book our place that it is not on the waterfront. If you want that, you roll the dice, get lucky, and pay $300 to $500 per night for that luxury.
Otherwise, you enjoy being within a couple blocks of the lake, feel good about the money you saved. We used to have a title that indicated “close to the beach”, but because that’s a really subjective description, we removed it.
Reality Check: Some Guests Will Drive You Batty
We’ve had tough stains on sheets and towels.
We’ve had dirty dishes piled in the sink and the dishwasher not run.
We’ve had a number of late check-outs that forced our cleaning lady to have to make return trips.
We’ve had guests break our coffee table twice, likely because a kid decided to sit on it to watch TV.
We’ve had guests book under false pretenses. One guest put up her three adult kids at our pad, while she and her hubby rented a different Airbnb down the road. We were expecting only mom and dad.
You’ll get your share of guests who just aren’t considerate. Or, they simply aren’t as concerned about banging suitcases into freshly painted walls. Grin and bear it. When you start seeing returns of 10% and higher, you know you’ve made a good decision.
We have little to complain about, and nothing remotely approaching a “nightmare.” But if you choose to try a vacation rental side gig, be prepared to take the bad with the good.
TIP: Be vigilant with your house rules and update them to prevent repeat issues. Post them on your listing online, and post them in two places within your unit.
Maybe now you’re interested in starting your own profitable vacation rental? Click Here. I will be forever grateful!