A father’s advice to his daughter on her wedding day was that “marriage should be viewed as a marathon, not a sprint. ” The same can be said for many property investments, in that long-term gain should be the priority rather than targeting a quick profit (which in reality, often fails to materialize). Short-term or vacation rental is a good, solid asset class as a property investment, but just how do you start to understand the economics? Being aware of the balance between income and expenses can help you manage and increase the benefits of owning a Charleston vacation rental.
As luck would have it, we operate several legal short-term rental properties both in downtown Charleston and on the barrier islands, mainly Folly Beach SC. Consecutive years of operation provide insight into where income and costs lay, including those large and often unexpected maintenance items that are temptingly ignored.
So let us look at a rental on the barrier islands such as Folly Beach, Isle of Palms, or Dunes West. Income will be seasonal and the 1-week long summer renter looks for shorter trips in the fall and winter. Maintenance can be undertaken in the winter, as high-season bookings begin early in the year and winter bookings are typically up to a year in advance. Here is a typical cash flow pattern based on real examples of a 4-bedroom rental built and equipped to a luxury standard:
You can clearly see the seasonality. In this example, we achieved an average of 70% occupancy, with the late winter months being the hardest to fill (and where most maintenance is scheduled), and with peak months being May through September. If the property is mortgaged, you will need to plan to retain a cash flow during these peak months to cover the mortgage and other costs later in the year when income falls. How do we define income? Anything that brings funds into the asset – rentals, accommodations taxes, cleaning fees, damage insurances and incidentals are all included. In the example, the income was $250,000 per home, averaged across 2 ongoing Folly Beach vacation rentals.
Now expenses may come as a surprise. Operating a vacation rental to a good standard is labor intensive and ever changing. It takes some planning, which is why picking a good management company is paramount to your peace of mind. Expenses can also show a pattern (similar to the pattern of income), such as when Accommodations Tax or City taxes fall due. Most expenses are easy to plan once you know the pattern. For the example, total expenses were 50% of income over the year. In descending, order the expenses to consider are:
- Cleaning fees
- City taxes (& HOA fees?)
- Flood and building insurance
- Lawn maintenance inc. pool
Note also that there will be periodic maintenance, such as new HVAC, every 10 years or so – you do NOT want this breaking mid-summer with a house full of guests.
Once you have the data in hand, an overview of income and expenses emerges, making planning more efficient. Planned maintenance is better than periodic maintenance, and considerably more cost effective. Utilities can be reduced with improved HVAC systems and programmable thermostats or enhanced attic insulation. Income can be improved with variable rental prices that predict demand, vacancy, and competition. All these more subtle adjustments will go towards turning a good investment into a great one.
A few things will, however, remain certain. Income always comes in slower than predicted, costs are always there and cannot be ignored, so don’t think otherwise. Short-term or vacation rental is really a great asset class for the savvy investor. Go into the venture with open eyes and good partners who understand the business and you will do well. And remember, it’s a marathon, not a sprint.
Note: Our Luxury Simplified Retreats team manages an ever-growing portfolio of Charleston luxury vacation rentals both downtown and on Folly Beach. When it comes time to choosing a company to manage your property, they know you’re entrusting them with a significant asset and it’s their job to maintain and secure it while you’re out of town.