by Lynn Rizzi:
If you are buying an investment property to rent, you may be trying to determine whether your net income will be higher if you rent the property unfurnished to a long-term tenant, or furnished as a ‘vacation rental’ to multiple short-term tenants. While the daily or monthly rent for a furnished property is higher than an unfurnished property, you will still need to consider some other various factors to make that determination. Location, for instance, is always a factor in evaluating the rental income of an investment property, but it is a major factor in evaluating rental income for a vacation rental. You must be realistic and ask yourself if your home or condo is in an area where people want to vacation. And if not, how likely will it be to rent, and to stay rented, enough days out of the year to pay your mortgage, insurance, homeowner association fees, management fees, and the additional expenses you can expect to incur with furnishings. And if you have plans to use the property for your own periodic ‘get-aways’, Ryan Danz, founder of “Air Concierge”, a leasing and management company for vacation rentals, says “furnishing it as a vacation rental is your only option! But if you are planning your personal ‘get-aways’ during the popular summer season, you should expect less income”. Ryan further advises that even in warm sunny climates like San Diego, vacation rentals are seasonal, with more consistent occupancy in summer months, and anywhere from 7 to 21 nights of occupancy in each of the remaining months. Johana Williams, a Property Manager at Utopia Management since 2004, states the average time to find a tenant for a properly-priced unfurnished long-term rental, any time of year, is about 4 weeks. Expenses for both types of rentals should include mortgage, property insurance, advertising costs to market the property for rent, cleaning and painting to first make the property ready to rent. Landscaping, pool services and Home Owner Association fees may also need to be considered for some properties. And of course, there will be property management fees if you use a professional Property Management company to show the property, screen tenants, draft and enforce leases, collect rents, pay bills, take maintenance calls, schedule maintenance, and provide monthly financial statements to owners. While both types of rentals include basic appliances and the possibility of maintenance repairs during occupancy as well as repairs for ‘normal wear and tear’ between tenants, the additional expenses for a vacation rental will likely include linens, silverware, decorative wall items, cleaning and laundry services, utility bills and trash services. And if you want to keep your clientele returning to your vacation rental, the furniture should be comfortable, attractive, and even upscale. There is also a reasonable probability of additional repairs due to multiple tenant ‘turnovers’ and replacement of furnishings between these short-term tenant stays. So while vacation rentals command higher rents, they usually have higher operating expenses. In fact, Professor Leonard Baron, MBA, in his online writings suggests that operating expenses related to vacation rentals are similar to those of a hotel, where 60% to 75% of revenue goes toward operating expenses versus 35% to 45% of revenue for expenses on an unfurnished, moderately priced, single rental unit leased long-term. Once you’ve determined the rental value of your property and the expected number of days occupied/rented for each type of rental, you can pencil out expected expenses for each rental scenario to determine the best choice for you.