How to calculate the profitability of a Vacation Home

A frequent doubt of those who want to invest in a Vacation Homeis how much this investment can bring you over the years.

In this publication we will teach you in a clear way how to do this calculation, based on our experiences with the building administration of our customers.

We set up a Vacation Home profitability calculator that you can make simulations and get an idea of how much profit.

But first we want to explain in detail what makes up this calculator.

KNOWLEDGE FOR THOSE WHO HAVE ALREADY INVESTED AND FOR THOSE WHO WILL INVEST

There are two situations that this publication will be extremely useful as a source of knowledge for decision making:

The first is if you already own a Vacation Home property and want to understand (based on real numbers), whether you are on the right track by looking at your property's profitability history. For you we also suggest reading our post X Ways to increase the occupancy rate of your property.

The second is if you are still deciding for Vacation Home investment and in search of more information in order to make the most assertive decision, we also suggest reading our post How to Buy a Home in Florida.

We set up a Vacation Home profitability calculator that you can make simulations and get an idea of how much profit.

But first we want to explain in detail what makes up this calculator.

Starting point, occupancy rate of the property

1Some very important factors about your Vacation Homewill serve as a parameter and coefficient to calculate the profitability that your property can bring you.

A property occupancy rateis of utmost importance, and one of the main factors that make up profitability of your investmentBut it is not the only one, after all there is no point in having the property always rented, but badly managed, generating unnecessary expenses, and thus reducing your profit margin.

So, the first very relevant information we share with you, is that average annual occupancy rate of a Vacation Home property is 67% to 80%according to the properties that we manage for our clients.

So save these numbers we will use them later.

The definition of daily price of the property, is another very important factor to be taken into consideration, especially if you are still in the process of deciding which investment you want to make.

Since the daily price of the property may vary depending on the region, condition of the property, decoration, photos, area convenience items, proximity to major attractions, etc...

Another important point is that the daily rate varies according to the period of the year (vacation season, summer, winter, etc...). For the calculations that we will demonstrate below we are using the average based on 12 months.

Thus, we already have the second indicator that will compose our profitability study.It will be the price per day, and will depend on the type of property being rented.

Being very simplistic and using only the information provided so far, we can already make a small calculation, considering a full year:

Gross Revenue = (Occupancy rate * 365) * Daily rate.

Assuming that our Annual occupancy rate is 80%, then this means that the property would be occupied during 292 days of the year and 73 days would be completely empty.

If the Average Annual Daily Rate is USD 250.00, then we have:

GROSS REVENUE at 292 days x USD 250.00 = USD 73,000.00.

These coefficients are our starting point, but calmly, other coefficients should compose our profitability grid.

What costs make up our Profitability Grid?

2 After understanding the first step of our profitability calculation (Occupancy rate and daily rate), the next step is to learn about the costs involved in renting and managing a property.

The first investment involved is the commissioning of the property management company that will take care of your property, keep it running smoothly, and give all the necessary assistance to you and your guests.

A commissioning fee of the administrator, is 20% on the gross revenue value of the property.

Thus, following the GROSS ANNUAL REVENUE that we found above (USD 73,000.00), 20% of this revenue will be for administrator payments, i.e. USD 14,600.00 annually in commissioning.

At this point two very common questions arise: What is the role of the administrator? And why should I pay commission?

Therefore, we list below some of the responsibilities of the Property Manager:

• Have the knowledge, tools and resources to make available / offer as much as possible the rental of the property in the main search portals, such as Booking.com, Decolar.com, CVC, Viajar.net, etc...

• Manage the receivables gateways (PayPal, Visa, MasterCard, etc...) and proceed with onlending and payments to the owner.

• Be the point of contact for your guests.

• Maintain the cleanliness of the property during and after your guests' stay.

• Follow up and signal possible preventive and/or periodic maintenance of the property.

There are many other functions performed by Property administratorbut which are outside the context of this post.

But for you to stay on top of everything, we have listed in the post X Ways to increase the occupancy rate of your property, exactly how it works.

Fees and Maintenance

3 Some other fees and maintenance also make up our profitability.

They are:

• HOA à (Homeowners' Association Fee) Costs on average USD 350.00 / month.
• Property Management Fee USD 150.00 / month.
• Pool Maintenance (if any) USD 100.00 / month.
• Light / Water / Gas USD 280.00 / month.
• TV / Internet / Phone USD 74.00 / month.
• General maintenance to USD 125.00 / month.

Total -> USD 1,079.00 / month or USD 12,948.00 per year.

Resuming our initial calculations, we had:

GROSS REVENUE = USD 73,000.00

COMMISSION ADMINISTRATION 20% OF GROSS REVENUE = USD 14,600.00 / YEAR.

ESTIMATED EXPENSES = 12,948.00 + 14,600.00 = USD 27,548.00

ESTIMATE OF ANNUAL NET PROFIT -> -> ANNUAL NET PROFIT ESTIMATE 73,000.00 - 27,548.00 = USD 45,452.00.

Remembering that your net income is dollarized.

Now convert this same profit to Reais and see the additional income your investment is providing you.

But it doesn't stop there... You can finance the propertyand have the possibility to pay the installment with the own rental profithave a property to spend the vacations with your family without accommodation expenses, and still have money left over. As we detail below.

Possibility to pay the financing of your Vacation Home with the rental income

4 As mentioned before, you may have the possibility to pay the financing of the property with the own rental income it generatesYou can make a profit, and still have a house to spend the vacations with your family, without accommodation costs.

As we explained in the post How to Buy a Home in Florida, it is possible to finance a property in the United States, even if you are a foreigner, which in fact were responsible for 22% of all purchases in the United States, with revenues of 153 Billion Dollars in more than 284,000 houses.

The interest rate is low, compared to Brazil, averaging 5.5% per year.

Today, in 2018, for finance a property of approximately $500,000 for example, only 30% down payment is required, and the financing can be done in up to 30 years, which would give an average installment of USD 2,600.00 already including all fees.

If we monthlyize the estimated net revenue we get in the previous year (USD 45,452.00), the estimated net monthly value is USD 3,787.00.

In this way, your own rental income can pay the mortgage instalment, leaving the balance of USD 1,187.00 per month or USD 14,244.00 per year free in your pocket.

Remembering the main point, you will have equity in dollars.

In summary, knowing how to obtain the best profitability from the rental property is the best way to make a safe investment and especially dollarize your patrimony.

The scenario above, was calculated with the occupancy rate of the property at 80%, which is an optimistic scenario.

Doing the same simulation with the worst case scenario of occupancy rate 67%, i.e. your house staying vacant 120 days or 4 months (which is unusual), the result we got was:

GROSS REVENUE at 244 rented days x 250.00 daily rate = USD 61,000.00

COMMISSION ADMINISTRATION -> 20% OF GROSS REVENUE = USD 12,200.00 / YEAR.

OTHER EXPENSES = USD 12,948.00 / YEAR.

ESTIMATED EXPENSES = USD 25,148.000 / YEAR

ESTIMATED NET PROFIT -> USD 61,000.00 - 25,148.00 = USD 35,852.00 / YEAR OR 2,987.00 / MONTH.

In other words, you still have the possibility of paying for the financing and can keep the balance of the property, and you can go out with your family without accommodation costs.

Did you like the article? Keep an eye on our blog! Wanting to invest in Florida real estate? See the list of houses for sale in florida that we have selected for you!