Is it Too Late to Invest in a Vacation Rental?

By William May
Published: 08/10/05 Topics: Comments: 0

Are vacation rentals the espresso stands of the future?

Over thirty years ago a couple of Seattle entrepreneurs started a little shop in Washington State to make and sell the kind of rich and potent coffee - common in Europe - that they couldn't find in their home town. More than a decade later, another young entrepreneur leveraged himself into buying the - by that time - small group of coffee stores thinking he could spread the company into a large and profitable retail chain. The rest is history. Starbucks now has over 6,000 stores worldwide, wholesale packaged goods and other operations including their own music label. (!)

While Starbucks blossomed, thousands of other entrepreneurs leaped into the coffee fray. They saw the success of Starbucks as a quick opportunity to get rich. Said an early participant, "How tough could it be? Get a little stand, buy some beans, figure everything out on my own and rake in the money."

But like most things in life, the reality of owning any business, even a small espresso stand, is not as easy as it appears. Check any business opportunity newspaper classified section today and you'll find a long list of espresso stands for sale. There are exceptions, of course, but most coffee stand operators work long hours for less pay than what they'd make working for a grocery store.

HOW THINGS COMPARE

Vacation rentals have been a viable lodging alternative for a great many decades having their roots in "Holiday Lets" and similar rental arrangements in Europe and elsewhere across the globe. While individually managed homes have always been available in established resort areas, the majority of homes and condos have been handled by management firms.

But in recent years the dream of capital gains and even cash-on-cash profits have become a big attraction for individuals who would like to see owning a vacation home as a true investment. It seems that almost everyone would love to have a vacation home. And what better way to do it than to get guests to pay all the costs. Just throw up a simple website, buy a few ads on those sure-thing listing sites, answer a couple of phone calls and watch the money roll in. If the place doesn't produce a nice, early cash flow then the owner can get all their loses back plus a big profit when they eventually sell the home at a big price, right? Well, not necessarily.

Some owners find that operating a vacation rental is just as much work as owning a coffee stand, but they can lose more money and don't even get free java.

OWNER FEEDBACK

At VROA we hear from vacation rental owners all over the US, Canada and many foreign countries, and increasingly the comments are from newer owners who feel like they've been sold a bill of goods about how easy it is to buy, operate and profit from vacation home ownership. That is unfortunate. We are all for vacation rental ownership as a wonderful way of paying some of the bills. And there is nothing wrong with hoping to pay ALL the bills, but what was a possibility for owners as recently as just a few years ago is becoming increasingly less probable for several reasons.

First, the cost of buying second homes has been escalating faster than that of primary homes, which themselves have been growing at a schooner's clip. In some areas, certain resort homes have risen 200 to 300 percent in price in just three years. Prices that were once a bargain are now so high they saddle buyers with much higher mortgage costs.

Second, while rental rates grow they have been restrained because, as more owners rush their holiday homes into rentals, the inventory of available homes in many areas is growing faster than demand. Saturate the market, watch the prices go down. It's my hope that this trend will reverse as the industry continues to pull guests away from hotels/motels and into our rentals.

Third, owners are also being targeted by governments for increased lodging and property taxes. As the industry becomes more visible, politicians love to reach into landlord pockets by further increasing costs with regulations and licensing.

Last, but not least, other operating costs are also growing and often faster than rentals rates. Supplies, electricity and other utilities will do nothing but go ever upward and, yes, faster than rental rates and income.

THINGS HAVE CHANGED

Throughout history, real estate has pretty much always been a safe long-term investment. It's said that 80% of the wealth in the US was gained through real property. Primary homes have been a good source of security for owners with prices rising steadily, if only moderately for a great many years, with only periodic downturns and corrections. On occasion owners have had to sell personal residences at a loss but, in general, home owners could expect to recover and even profit from their homes if they just wait long enough.

Commercial real estate has been a long-term investment winner but the larger the property, the more expertise the owner or managers needs to exhibit.

Real estate prices have grown rapidly in recent years and will continue to do so, and the most savvy of investors will buy wisely, operate tightly and sell when the time is right. But not everyone can do so. The chance of easy money in vacation rental homes has gone away. Just as the chance of building an espresso stand into a huge corporate automaton are long past.

A SURE THING

Does all of this sound like too much "The sky is falling?" Sadly, no.

There is really only one proven reason (and there has always only been one) for buying a vacation rental: to offset the costs of a property that is truly a second home. This was the goal for vacation home ownership for decades, and is still a worthy one.

If you select a home you love, in an area you want to spend time in for many years, if you invest considerable time, know how to operate a business, can afford to allow time to build up your vacation rental business and have reasonable expectations of offsetting your costs then second home ownership is a wonderful undertaking.

If you think you can beat the system by buying cheap, remodeling smartly, marketing intensely then lucking out - you may, in fact, succeed. But you may also be setting yourself up for failure. The extraordinary gains of the last few years are unlikely to continue.

Please don't fall for those folks who would sell you a seminar, book, website or other services that primarily promotes the simplicity of making money. I appreciate their enthusiasm but only ask that prospective owners take those messages with a grain of salt. I hope the new owners now rushing into the industry will use the kind of caution all those espresso stand buyers now wish they had exercised.

Author: William May – Volunteer, Vacation Rental Association
Blog #: 0065 – 08/10/05