Luxury Vacation Rentals: Are They Right For You? | Tim Hubbard

Welcome back, ladies and gentlemen, to the Short Term Rental Riches podcast. Another week, another topic. This week we're talking about how risky it could be for you to invest in a pure vacation rental, a pure luxury vacation rental. And I'm talking a large one. So stay tuned. Let's jump right in.

Welcome to Short Term Rental Riches. We'll discuss investing in real estate, but with a specific focus on short term rentals. Quick actionable items to acquire, manage and scale your portfolio. I'm your host, Tim Hubbard. Welcome back, everyone. Hope you're doing well out there in this big, huge, amazing world. We're talking this week specifically about luxury vacation rentals. And now I'm not talking about a luxury studio vacation rental. I'm talking about a large vacation rental that hosts families, maybe multiple families, maybe 10 bedrooms, really expensive ones. And this idea came up. Well, I'm always kind of thinking about this and, and the reality is vacation rentals are what people normally think about when they think about short term rentals. They don't typically, if they're new to the industry, think about urban type properties or short term rentals in cities where people are just living and working, which can be very lucrative, as we've talked about on this channel. But most of the time people are thinking luxury vacation rentals overlooking the ocean, overlooking a cliff view of a river or a canyon or something like that. So my friend calls me the other day and he says, hey, we just finished an amazing vacation. My family and another family.

Rented a luxury vacation rental. It was expensive. It was over a thousand or fifteen hundred dollars a night. And he said, we discovered a property in that market that's off market and it's for sale. We're thinking about buying it now. It's not a cheap, this isn't a cheap entry price. They are partnering. One of the cool things about real estate, we can partner and do bigger deals together. But he said it's $3 million. What do you think I should do? So that's not like a super easy question to answer, right? There's tons of variables and that's what we're going to talk about this week, whether a deal like that or a big vacation rental is super risky for you or not. So the first thing is I want to cover some of the brief prior points we made in a prior episode comparing luxury vacation rentals and short term rentals in an urban area that are less expensive, for example. And so some of those things were it's just kind of harder to get financing for a pure vacation rental, which Means if it's harder to get financing, it's going to be harder to sell that property too if it's in an area where people are typically using financing. So it might be harder for you to purchase a property, might be harder for you to sell the property later on because there'll be less potential buyers in that buyer pool. The other risk to buying a huge vacation rental is what happens if that thing's not rented out. Can you rent it out to a long term tenant on a year lease? Not as likely as you could, maybe a two bedroom in a city, which is kind of what I've been doing. Yes, call me conservative, but hey, it works and I feel comfortable with it. And I'm not opposed to vacation rentals. We're going to get into that here. But you just want to make sure that you evaluate your risk, your individual risk before you purchase one of these luxury vacation rentals. So there's a few points. The other point is what happens if there is a recession in the economy and people aren't spending $1,500 a night on a short term rental and families aren't traveling together. That's one of the first things to go in a recession is unnecessary travel, I guess, you know, so luxury vacations, that kind of gets cut out in recessions. Now if you have a smaller vacation rental that's maybe one bedroom or two bedrooms, it could be really nice and luxurious. Your chances of renting that out long term are going to be much better. Because yes, we do live in a world now where you can pretty much work from anywhere. But the chances of one person or individual, couple, individuals renting a 10 bedroom home, it's just a little less likely. So we've talked about these points in the past. I don't want to dwell on those. I want to talk about your actual risk profile if you're thinking about buying one of these properties. And so the first thing I want to bring up is the break even occupancy. What do I mean by that? How many days out of the year do you need to rent this property to cover all your expenses? So to cover your mortgage, to cover your property taxes, to cover your utilities and your housekeeping costs. Now remember, some of these costs are going to increase the more your property is booked. So there's a few calculations you have to do in there. You can Google break even and come up with that formula, but you want to make sure you're accounting for everything. We do have a great calculator in our STR playbook Which is essentially my playbook for investing in these types of properties on our website@restmethods.com so you can check that out there. But regardless, you need to know what your potential expenses are for this property. Now you can estimate them. The other side of that is you need to know potentially how many days you're going to rent this property out. So we're going to do an episode shortly on a handful of great places to find, forecast your occupancy, but in a nutshell, give you a sneak peek. You can go to airdna. Co. I've talked about that one a lot. You can go to mashvisor, you can go to alltherooms.com and you can simply check the listing sites like Airbnb and VRBO to see how booked their calendar is. So we're gonna dive more into this occupancy and forecasting so we can get more realistic numbers in a future episode. But those are some great starting points. So you need to know your break even occupanc and you need to know how many days you are comfortable with renting that property out. If it only rented for two months, is that going to put you in a really stressful financial position? Is two months the break even point? Is it enough to cover all your expenses on these properties? So part of the exciting piece of these luxury vacation rentals, like my friend mentioned, is, hey, property is $3 million, but look, it can make 300 to $400,000 a year. It can make that much, but what if it doesn't? Right? We always want to be thinking of the backup plans. We don't want to put ourselves in a risky financial position. So we need to know what the break even occupancy is. And you need to be confident that you're going to meet that break even occupancy. The lower the break even occupancy is, the less risk you're kind of gonna have there. If you can rent the property for one month a year and cover all the expenses for a whole year, well then awesome. That's gonna be a lot easier than a property you need to rent for six months. Right? So that's the first thing a little bit on our break even occupancy. The second point I want to bring up is just your net worth and your assets. Is this property you're potentially going to buy, Are you going all in on this thing or is this like 5% of your portfolio? So this very individual basis, right. This is gonna be different for everyone. I would Just recommend if it's a huge percentage of your net worth or you're really going all in, then you want to be extra, super duper careful that you're getting a property that's going to make sense. So that piece is going to be different for everyone. What percentage of that is a percentage of your income you're making right now? And what percentage is this purchase going to be of your net assets? So that is another thing. We want to look at another point. What is your rainy day fund? How much do you have saved up after the purchase to support this property? If it's not rented? That again, that number is going to be different for everyone. So the bigger your rainy day fund, the better. But at a minimum, especially if this is a real seasonal property, which a lot of these big vacation rentals are, I would, I would want to have like six months at least. And a lot of your lenders are probably going to want to see that as well. So backup plans, what backup plans do you have? If this property does not work out, can you sell another one of your properties? If you have another property, can you work more to cover the extra expense? Can you move into. The property is in a place where you would love to live as well. So maybe you're buying it not just as a vacation rental, but it's a potential place to live part of the year. What are your backup plans? If worse comes to worse and this thing's not getting rented and there's a recession and people aren't traveling, we got to think about these things. And the more we think about these things, the more comfortable we're going to be with all of this. Right.

And then the last point I want to bring up is age. Yeah. How old are you? And this is something we really got to consider. I mean, if we're older and especially if this is going to be a big percentage of our net assets, it's a really big purchase for us. Well, then it's going to be a little riskier. Right. When we're older, we have slightly less opportunity to kind of start over. Right. So if we get into a bad deal and it flips upside down and we're tied into it for multiple years, that's going to be a lot more stressful than if we're. If we're quite a bit younger. Right. This is why a lot of mutual funds and stock portfolios and stuff for retirement, they have age groups where they place you in more conservative mutual funds if you're older. So it's another thing you want to think about. And all of these things together is going to create pretty much your risk profile. So if you've got a green light on all these things, then go for it. Awesome. The huge vacation rentals are fun, they are cool, they're exotic and they're just nice, right? So just keep these things in mind though. I think they can be great investments. We just got to make sure we're comfortable with it. So hopefully that helps you analyze a potential deal you might be working on or thinking about a little better. And if you haven't yet, we've got quite a few resources@restmethods.com for free under our Recommended Resources. Check those out. Get our house rules in the show notes, the same ones that I use to help protect your property a little better. Until next time, I hope you have a wonderful week. Cheers. If you're looking for a ton of free resources, well, you can check out the links in the show notes or head to our website restmethods.com where you'll find free guides, house rules, and my ebook on finding the best short term rental properties. Thanks for tuning in.