Can you really make a net profit of $80,000 a year on a one time investment of $127,000? Well, add it up yourself. All the facts and figures are outlined below. There are some variables involved. We talk about them as well.
Many people are not familiar with the ins and outs of owning and renting out short term Vacation Rentals. On our website (Fort Lauderdale Beach Property dot com) we feature a special page on Airbnb’s, which addresses the most frequently asked questions involved in the process and offers sample scenarios projecting the estimated financials for a wide range of actual properties taken from the local MLS,
Vacation Rentals have burgeoned into its own Industry, which takes a lot of the worry out of the process. Hiring a management company like iTrip Vacations, they take care of almost everything. They handle the cleaning, checking guests in an out, paying your “hotel” taxes to the proper agencies, etc…
Fort Lauderdale and the surrounding suburban communities of Broward County are one of the most popular locations in the country for vacationing, and therefore one of the hottest markets for Airbnb type rentals. Most investors focus on Single Family Homes and Residential Income properties like Triplexes and Quadplexes. Financial projections for Single Family Houses are solid, and look extremely good for Multi-Family properties.
Few Condominiums in South Florida are available for short term Vacation Rentals. The large majority of condo buildings have a variety of regulations concerning the rental of units. Many do not permit units to be rented for the first year they are owned. Some associations only allow owners to rent units for a minimum of three or four months, and only once per calendar year. Usually, a prospective tenant must apply to the association, pay a screening fee, meet with a building manager and/or board members.
As a result very few condominium buildings in the Fort Lauderdale area allow short term Vacation Rentals. There are some, however, and we keep an eye on these because the estimated financial projections are eye-popping.
Add It Up Yourself
A case in point – we have a condo property featured as
Sample Scenario #5 on our Vacation Rentals page. (Vacation Rentals, Scenario Five)
Based on our estimates a real estate investor can potentially net $85,000 per year on an initial investment of $127,000.
This is based upon a “Cash on Cash” calculation.
Key variables upon which these numbers are generated are Mortgage Rate, Weekly Rental Rate and Occupancy Rate and.
In the current economic environment it is hard to theorize what Mortgage Rate you might qualify for. Our initial numbers were based on a Mortgage Rate of 6%. Most Lenders will usually require at least a 30% Down Payment for an investment property. Obviously a higher rate or down payment will alter these projections.
Still, how much will that affect your bottom line? Instead of $85,000 a year on a $127,000 investment, perhaps it lowers your NOI to $80,000. Hurt me.
As for the Weekly Rental Rate that was generated by our associates at iTrip Vacations, one of the premier Vacation Rental management firms in the U.S. iTrip takes a percentage of your income and handles EVERYTHING, including paying your “Hotel” taxes, outfitting and cleaning the property.
More important is the Occupancy Rate. The Industry Standard for the Vacation Rental Industry is 60%, which equals your Airbnb property is rented 32 weeks of the year. Since the Fort Lauderdale area is such a hot Vacation Rental destination, most of our projections are based upon a higher rate of occupancy.
The subject property here is a 2/2 Condo within walking distance of the beach. It is also surrounded by shops, stores and restaurants. So we projected this property could be rented 40 weeks of the year, and occupancy rate of 75%.
Any intelligent real estate investor might look at these estimates with some skepticism. At some point we must presume you know how to use a calculator. Still for the sake of argument we thought we’d see what might happen if some of these numbers varied.
65% Occupancy
Should the property show a 65% Occupancy Rate (34 Weeks) that lowers projected Revenue to $136,000, the iTrip Management Fee to $34,000, the Effective Gross to $102,000. Subtract estimated Expenses of $18,000 and Debt Service of 6% on a $280,000 Mortgage ($17,000) and that leaves a Projected Annual NOI of $67,000, which equals a 52.7 Cap Rate.
60% Occupancy
An Industry Standard Occupancy Rate of 60% (31 Weeks) lowers projected Revenue to $124,000, the iTrip Management Fee to $31,000, Effective Gross to $93,000. Subtract estimated Expenses of $18,000 and the $17,000 Debt Service of 6% on a $280,000 Mortgage, that leaves a Projected Annual NOI of $58,000, a 45.7 Cap Rate.
50% Occupancy
Let’s take a look at a “Worst Case” Scenario, where the property shows a 50% Occupancy Rate of 26 Weeks, which lowers projected Revenue to $104,000, the iTrip Management Fee to $26,000, Effective Gross to $78,000. Subtracting $18,000 estimated Expenses and Debt Service of 6% on a $280,000 Mortgage ($17,000) leaves a Projected Annual NOI of $43,000, a Cap Rate of 34%.
Mortgage Rate 7%
Difficult to know where Mortgage Rates are going, but if these numbers are altered for a 7% Mortgage on a 70% Loan of $280,000 it increases the annual Debt Service to just under $20,000.
In the 65% Occupancy Rate projections this would lower the estimated returns to a 50.4 Cap Rate of $64,000 per year.
In the 60% Occupancy Rate estimated returns would project $55,000 per year, a Cap Rate of 43.3
With our “Worst Case” Scenario of a 50% Occupancy Rate (26 Weeks) projected returns would decrease to a 34 Cap Rate of $40,000.
Keep Your Eye On The Ball
This is about profit. This is about Return on Investment.
Don’t know about you, however, a “Worst Case” Scenario of $40,000 a year in projected returns and a Cap Rate of 34 seems pretty good to me, especially when you consider potential appreciation in the property price and mortgage amortization. Fort Lauderdale and South Florida is a highly desirable, highly shopped real estate market, and as you make mortgage payments you will be paying down your balance, reducing your Debt Service and creating equity.
As always we wish to stress these are projections based upon our best guess estimates. There are a number of resources you may utilize to come up with your own estimates, which we will be more than happy to provide, and we suggest you do so before purchasing any property. Specifically you can check the potential weekly rentals of comparable properties on Airbnb and Vrbo, and you should contact iTrip Vacations, verify their projections and estimates. The Broward County Property Appraiser website (www.bcpa.net) features a Property Tax Estimator, along with tools which will show you prices of recent sales in the neighborhood.
