How to Estimate Vacation Rental Income

Pricing a vacation rental for income is an art in itself. Find out below how to estimate vacation rental income to know how much you can make.

Table of Contents

Are Vacation Rentals Profitable 100% of the Time?
8 Key Metrics for a Vacation Rental Business
How to Estimate Vacation Rental Income in 2 Steps
Wrapping It Up

Vacation rental properties offer excellent potential for creating income. It is why a lot of real estate investors scurry to look for investment properties. They somehow know how much they can make on a good short-term rental. All they need is to find a house for sale in a good location. But is that all they need to do?

Nope. Not by a longshot. There’s more to starting a vacation rental business than just finding a property in a good location. You must also consider how to set rental rates for your vacation rental. Setting vacation rental rates is both a science and an art, actually. To set the right price, you need to know how to estimate vacation rental income and do some serious studying.

In this article, we hope to help you understand the different aspects involved in coming up with an income estimate for vacation rental properties. We also aim to paint a clearer picture of how to estimate rental income with Mashvisor’s rental income estimating feature.

Related: 5 Tips to Boost Your Airbnb Business Efficiency

Are Vacation Rentals Profitable 100% of the Time?

To the uninitiated, vacation rental properties are simply houses that are available to rent for shorter periods of anywhere between a few days to a few weeks. However, as the pandemic carried on, the duration was somehow extended to up to a few months.

There are several reasons for the extension, but the main driver is how companies embraced work-from-home arrangements. It allowed workers to get work done remotely, so a lot of people took advantage of such an arrangement.

Nowadays, Airbnb’s path of recovery continues as more property owners decide to rent out vacation rental properties. With the easing of travel restrictions, more and more people took to the road and made bookings on Airbnb properties. The trend seemed to peak in spring 2022, but it is expected to continue its upward trajectory throughout the summertime.

Now, Airbnb is at its healthiest ever. The same can be said for most other vacation rental platforms. The question now in real estate investors’ minds is this: Are vacation rentals truly profitable?

Related: Are Airbnb Rentals More Profitable Than Traditional Rentals?

How Profitable Are Vacation Rentals?

Real estate investors are quite aware that vacation rentals offer some sort of decent income. The amount of income and how big it is will depend on several factors. The real estate community continues to debate the profitability of a vacation rental. Some say it’s the worst thing you can do, while others cite their excellent cash flow to back them up in saying it’s the best.

We need to look at the hard numbers to answer such a neverending question. As a real estate website, Mashvisor maintains a massive database of information for vacation rental properties all over the US. It includes monthly Airbnb income, cash on cash return, and cap rate.

To provide you with an estimate of how much income you can make on a vacation rental property, let’s take a look at Mashvisor’s latest data. Here are the median numbers for traditional and Airbnb properties in the US:

Monthly Traditional Income: $1,787
Traditional Cash on Cash Return: 1.93%
Traditional Cap Rate: 1.97%
Monthly Airbnb Rental Income: $3,196
Airbnb Cash on Cash Return: 3.74%
Airbnb Cap Rate: 3.86%

The above numbers are based on the state-level reports. Comparatively, vacation rental properties are the more lucrative investment types based on income, according to Mashvisor. But it doesn’t end there. There are other key metrics to consider when you estimate vacation rental income, which we will discuss later.

But to answer the question of whether vacation rentals are profitable or not, yes, they are; provided you put the right strategy in place.

What Is a Good ROI for Short Term Rental?

When it comes to return on investment, the experts’ opinions vary on what exactly is a good ROI for vacation rental properties. However, all of them agree that an above-10% ROI is already good for a rental property. Others find an acceptable ROI to be between the 5% and 10% range. However, other investors will never consider an income property unless it gets them at least 20% ROI.

So the answer to the question is that it depends. There are, technically, no right or wrong answers here as ROI is subjective to the investor and the amount invested.

To get a good estimate on income for a vacation rental property, you need to know which factors you need to consider. These are some of the main considerations on how to estimate ROI on a vacation rental, according to Forbes:

Property Details: The property’s value, cost of repairs and rehabilitation, property size, property type, and the number of bedrooms and bathrooms, among others.
Mortgage Details: Loan type, terms, amount of down payment, closing costs, and mortgage rates.
Rental Income Details: Monthly rental income, other monthly income, and the anticipated vacancy rate.
Monthly Rental Expenses: Recurring monthly expenses such as mortgage, maintenance, utilities, HOA fees, and property management costs, among other things.
Annual Rental Expenses: Monthly rental expenses multiplied by 12 months, property taxes, and annual insurance.

How Do You Calculate ROI on a Vacation Rental?

Before you can even come up with an income estimate for your vacation rental property, you must first know how to calculate ROI. You will need the following information:

Net Operating Income (NOI). The NOI basically shows you how profitable a vacation rental property is. It is done by taking your gross income and subtracting your operating expenses.
Cash on Cash Return. The cash on cash return metric measures how much income you can make on a rental property by dividing your NOI by how much cash you put into the investment property.
Cap Rate. Similar to cash on cash return, you are dividing your NOI by your total investment on the property, assuming that you paid for it in cash and it is not financed.
Annual Gross Rent Multiplier (GRM). The GRM gives you an idea of the value of the rental investment. You can get the GRM figure by dividing the total sales price by the annual gross rental income.
Annual Cash Flow. You simply subtract debt from the NOI to get the annual cash flow. It can be either positive or negative. A positive cash flow means you’ve made a profit on your investment. A negative cash flow, on the other hand, indicates you are losing money on your investment.

To hammer it home, a good ROI is subject to an investor’s situation. It will depend on the level of risks the investor takes. It is why knowing how to compute ROI and get an estimate on your vacation rental income is important before making the jump. You can do them by performing a more in-depth rental market analysis. We’ll talk about that in a bit.

Related: Single-Family Rental Market Analysis: What You Need to Know in 2022

8 Key Metrics for a Vacation Rental Business

Knowing how to get a better estimate on income for your vacation rental property involves keeping track of certain key performance indicators (KPIs). For a vacation rental business, these are the main KPIs you need to know:

1. Cash on Cash Return

As mentioned in the previous section, cash on cash return is a good way to measure a vacation rental’s profitability. It works similarly to a cap rate, only it takes into account financing options for property acquisition. As a KPI, the cash on cash return is important to any investor because it gives you a good estimate of how much income you can make on your investment dollar for dollar.

Cash on Cash Return Formula:

Cash on Cash Return = Net Operating Income (NOI) / Total Amount of Cash Used to Purchase the Property

2. Cap Rate

The cap rate is one of the most common ways investors estimate their income on vacation rental properties. However, unlike cash on cash return, cap rate is only used if a vacation rental is purchased in an all-cash transaction.

Cap Rate Formula:

Cap Rate = Net Operating Income (NOI) / Property Purchase Price

3. Occupancy Rate

One of the most important KPIs for a vacation rental is the occupancy rate. It measures the percentage that a vacation rental property is booked against the length of time it is listed as available.

Occupancy Rate Formula:

Occupancy Rate = Number of Booked Nights / Number of Available Nights

4. Average Daily Rate

The average daily rate metric shows the average daily price for a vacation rental property. It is used to estimate how much an Airbnb property can earn in a day.

Average Daily Rate Formula:

Average Daily Rate = Total Revenue from Bookings / Total Number of Bookings

 Take note, though, that while it is a good way to estimate vacation rental income, it is not entirely accurate as it does not take into account expenses, such as property taxes.

5. Average Length of Stay (ALOS)

The Average Length of Stay shows the average number of nights a guest books per stay.

ALOS Formula:

ALOS = Total Number of Nights Booked / Total Number of Different Guest Bookings

6. Revenue Per Available Room (RevPAR)

The revenue per available room refers to how much income a single room makes. If you own a vacation rental with several rooms for rent, RevPAR is a good KPI to keep track of. It takes into account the income generated by your units based on the average daily rate and occupancy rate.

RevPAR Formula:

RevPAR = Gross Rental Revenue / Total Number of Available Units for a Certain Period; or

RevPAR = Average Daily Rate x Occupancy Rate

7. Net Operating Income

We already talked about the NOI in the previous section. Net Operating Income is an important metric for vacation rental owners because it gives you an idea of how to improve your income by lowering your expenses. It can be used to assess and adjust your business model accordingly.

NOI Formula:

NOI = Gross Income – Operating Expenses

8. Inquiry-to-Booking Conversion Rate

Getting inquiries from potential guests is always great, but if you fail to convert those inquiries into bookings, they won’t do your business any good. A good way to make such inquiries count is by monitoring your inquiry-to-booking conversion rate. The metric is extremely useful in monitoring how well you are doing with your conversions.

Inquiry-to-Booking Conversion Rate Formula:

Inquiry-to-Booking Conversion Rate = Total Number of Received Inquiries x Total Number of Actual Bookings

If your conversion rate is low, you might want to evaluate your response time to guest inquiries. It may also be related to the quality of your vacation rental as it may not meet your guests’ expectations or needs.

How Do You Calculate Cash Flow on a Rental Property?

As a rental property investor, what you really want to see is your vacation rental generating a positive cash flow year in and year out. As we already mentioned earlier, there are two types of cash flow: positive and negative.

Between the two, your goal is to generate a positive cash flow on your rental income. Knowing how to calculate the cash flow on your vacation rental will give you a better estimate of how much income you can make.

The formula for calculating cash flow isn’t as straightforward as the other KPIs. For this, we will use the 50% Rule. The 50% Rule simply implies that expenses on a rental property make up 50% of its gross income. Let’s use a scenario to give you a better idea of how to go about it.

For instance, you operate a vacation rental that makes an estimated $4,000 on income monthly. The 50% Rule posits that half of it, or $2,000, goes to expenses to keep it running. However, that is just for the recurring monthly expenses. Now, if you’re also paying the mortgage on the property, you will still need to deduct it from the remaining amount.

Let’s say you’re paying $1,200 on your monthly mortgage. You subtract that amount from the remaining $2,000. You will end up with $800 for your monthly cash flow. Now, based on the 50% Rule, you’re in a pretty good position with $800.

To help you get a more accurate cash flow estimate, we recommend using Mashvisor’s investment property cash flow calculator.

How to Estimate Vacation Rental Income in 2 Steps

Now that we’ve discussed the different metrics and KPIs to watch out for, we will now talk about how to estimate vacation rental income.

The best way to do this is to use Mashvisor’s rental income estimating feature. As a real estate investing tool, Mashvisor’s investment property calculator will help property analysis and rental income estimation faster and easier.

Here’s how to do it:

Step 1: Enter the Location on the Property Search Tool

When you log on to Mashvisor, you can enter your property’s location in the Property Search field. It will take you to a map of the neighborhood your property is located. Click on the subject property (represented by one of many pins), and you will get a pop-up window showing all the important details and information about the property.

The pop-up will give you a better understanding of the subject property’s income-generating potential as you scroll through it. It will give you different types of traditional and vacation rental data, allowing you to make a side-by-side comparison of which rental strategy works best.

Step 2: Calculate Your Monthly Revenue

While on the pop-up window, you can calculate your monthly rental revenue based on rental comps and rental strategy.

Rental Comps

As you scroll down through the pop-up, you will see a tab labeled Rental Comps and Insights. The tab will show you comparable properties within the area that will show you how much the typical rates are for vacation rentals near you.

Rental comps come in handy as it allows you to set reasonable rates that are within the acceptable range in your location. It makes your vacation rental property remain competitive in the market it’s in.

Mashvisor’s Rental Comps feature allows investors to see comparable properties in a specific area or neighborhood and their respective occupancy rate, daily rates, and rental incomes.

Rental Strategy

The Rental Strategy tab will allow you to compute your potential income on your vacation rental property. The system is powered by sophisticated AI technology, so you can input whatever number you need to, and the AI will automatically adjust its calculations.

You can play around with the calculator by entering reasonable vacation rental rates and making the necessary adjustments. The system will automatically fill in the different details needed based on the actual real estate market data.

Additionally, you can customize your computation based on your situation and research. It makes your vacation rental income estimate more accurate and realistic.

The expenses used for computations include both startup costs and recurring expenses that can be easily modified. The system will intelligently calculate your revenue based on the numbers you enter.

For this reason, we highly recommend performing your due diligence, so you get the most accurate information and data to use in computing for your revenue.

As a real estate investment platform, Mashvisor can help you obtain the most accurate computations for vacation rental income. If you’re still looking for an investment property to buy, Mashvisor can also help you locate the right property that best fits your investment goals.

To learn more about how Mashvisor can help you find profitable investment properties, schedule a demo today.

Wrapping It Up

To sum it up, knowing how to estimate vacation rental income will help you:

Find the most lucrative investment property if you still don’t have one; or
Set reasonable vacation rental prices that will generate a positive cash flow.

You only need the right information, data, and tools. Fortunately, Mashvisor is a one-stop real estate investing platform helping countless real estate investors make the right decisions. It keeps a massive database covering almost the entire 2022 US housing market and is regularly updated for greater accuracy. Its investment property calculator lets you do the complicated math and find the right property that fits your calculations.

Find out more about Mashvisor’s real estate investment tools. Click here to sign up for a 7-day free trial today, followed by a 15% discount for life.

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