Identifying a Vacation Rental That Can Outperform the Market

With the growth of Airbnb and Vrbo/Homeaway, vacation rentals are present in everyone’s mind, and to many, they could be a path to retirement or at least a high yielding side-hustle.

Obtaining and operating a successful vacation rental is certainly feasible, but it requires much more than simply buying or leasing a property and listing it on Airbnb.

This post will share some tips and tricks on how to identify a good prospect that can outperform the market. These are the same tricks we used to identify the location for one of our properties which consistently performs at the top 10% of the market.

Understanding the Market

One of the most commonly asked questions from vacation rental newbies is relate to pricing and fees. Pricing is a very important topic and is something that needs to be considered early on, not after your listing is almost ready to go.

Each market is different. Some are cyclical with short periods of very high occupancy and longer periods of medium-low occupancy, while others have steady demand year round. No markets are necessarily better than others, but each one has 3 key statistics that are important to understand:

  1. Average Occupancy Rate
  2. Average Daily Rate (ADR)
  3. Seasonality

Whether you already have a property or are looking to acquire a new one, you must first understand these characteristics. These statistics are the ones that will help you determine potential profitability and will ultimately help you identify whether or not the property will be profitable as a short term rental.

We recommend that when analyzing a property, you consider at least 3 scenarios: low occupancy, medium occupancy, and high occupancy along with a variety of daily rates.

While you certainly want to aim to become one of your market’s top performing properties, it is smart to ensure that you can reach profitability even if it underperformed.

The snapshot below shows what these statistics look like for the hypothetical property of Hostville within the prospect analysis dashboard. The market this property belongs to has 131 2 bedroom properties (making up 21% of the market), an average daily rate of $158/night, and an average annual occupancy of 40%. Using this data along with the average daily rate for the bottom, average, and top 25% of the properties, you can calculate the low, medium, and high revenue potential estimate for this property.

Hostology Prospective Property Analysis Dashboard
Hostology Prospective Property Analysis Dashboard

If you’re wondering how to find this data, there are tools like AirDNA, which provides data based on Airbnb and Vrbo listings or the Hostology dashboards which also enhance those statistics with tools that help you estimate revenue potential as shown above.

Understanding your Expenses

Just like market statistics, expenses associated to each market can be different. For example, in some markets it may be very easy to find good cleaning crews while in others it may feel like mission impossible. Some areas may require snow removal in the winter, while others have nice and warm weather year round. Make a list of every single item you need to cover and get quotes (as needed) for those services.

Some expenses will be fixed (internet, cable, garbage collection, mortage/rent), while others will be directly impacted by reservations (property management, cleaning, guest goodies, electricity, etc.). Make sure you understand what they look like, and remember, it’s always best to err on the side of caution; the last thing you want to happen is to underestimate your costs and acquire a vacation rental that is not sustainable…

Calculating Net Income and Return on Investment (ROI)

Once you have all your expenses identified, use the revenue estimates from before to confirm if the property can yield a positive return and determine if it meets your required thresholds.

The calculator below shows a simple table that uses low, medium, and high occupancy scenarios along with rent/mortgage and expense estimates to determine potential net profit and potential return on investment estimates.

Hostology – Quick ROI Calculator

Note that, if you own the property and have a mortgage on it, your equity will be increasing over time. This may or may not be something you want to account for as part of the return on your investment.

Understanding the Market Part 2

Identifying whether a property can be a good fit (financially) for a vacation rental can be a lot of work but it’s only the beginning. Now it’s time to make sure that your property has what it takes to outperform its market and stand out from the crowd.

Again, you will want to make sure that you understand the market, its audience, and what drives the top performing properties to the top.

There are many ways to do this. A simple way (yet time consuming) is to dive into Airbnb and Vrbo and find the properties with the most reviews. Take a look at their listings, amenities, cleaning fees, minimum stay requirements, etc., so you can see how the most successful properties are set up.

Alternatively, you can look at a curated list of top performing properties for your market segment and drill into each listing as needed to obtain more details. This will save you significant browsing time and will give you a clear comparative summary so you can make the most out of your time.

Make note of all key amenities and objectively assess whether your property has those. In some markets a pool with a view is a must, in others being walking distance to key points of interest may be important; no matter what it is, make sure you understand what guests are looking for.

Putting it all together

By this point, you are an expert in your market, you understand your competition, and you know which amenities are important for guests. If your property passed the ROI check and has similar or better amenities that the competition, it’s time to start working on your strategy.

How does your property stack up against the competition, does it have equivalent amenities, is the property in much better condition, better location or with unique and desired features? Be honest about your assessment and use this to set your pricing. The higher you rank, the higher your pricing can be.

Plan your strategy for minimum stays, nightly rates, cleaning fees, and extra person fees based on what you’ve learned about your market. Keep in mind that as a guest, there’s nothing more frustrating that clicking on a property only to find out that your rate has doubled due to “fees”.

Also remember that instant gratification is important and setting your listing for Instant Booking will not only boost your ranking but will most likely increase the number of bookings you receive.

When browsing through Airbnb and Vrbo, guests only spend a few seconds glancing through a long list of properties. Your title and image are the only two things that will be shown to prospective guests until they click on your property for more details. Make the most out of both. Don’t be afraid to use the intel you gathered by researching your top competitors to draft a compelling listing title and pick a picture that will both capture guests and will showcase some of the properties best features.

Keeping up the work

The initial property setup is important, but it is not the end.

In order to operate a top performing property you must monitor its performance and adjust rates and minimum stay restrictions periodically.

While monitoring your property periodically can be a bit tedious at first, it gets easier once you figure out your own process. And, the rewards of keeping an up to date listing with optimized rates and restrictions will almost certainly pay off.

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