Should expansion come about through the purchase of an existing Vacation Rental Company or if the Vacation Rental Company chooses to buy “homes” that they rent, this changes the debt dynamic.
Know that, Vacation Rental businesses can often be purchased inexpensively because wary buyers often don’t fully understand what they’re buying nor the overall concept. The value of a Vacation Rental business is derived through their existing “Rental Management Agreements” that usually self-renew every year or two. What Vacation Rental Company purchasers are buying are existing and renewing Rental Management Agreements.
The renewal clause is what often spooks the inexperienced buyer. “How can I be sure homeowners will renew?” For seasoned veterans, however, it is commonly known that if homeowners are kept happy and informed they are unlikely to leave a program.
The result of that discussed above is that you can often buy a prospering Vacation Rental business using a lower than normal “times earnings” factor. In turn, it means that debt service compared to earnings is kept on the low end of the spectrum when adding an existing company to your operation.
Renting what you own or buy often requires sizable debt, yet the return on those careful investments can increase the Vacation Rental Companies bottom line significantly.
The lion’s share of all Vacation Rental cost is dictated by “the Rental Management Agreement” in declaring the distribution percentage that will be paid to homeowners. These agreements dictate what your monthly “mortgage payment” or homeowner distributions will be. It is therefore, critical that before “leaping”, the Vacation Rental operator understand his/her costs and, in turn, the ability to generate a 15% to 20% bottom line profit.
Revenue types, labor practices and operational costs in different regions, of course, differ. So study’s will vary and must focus on local markets and practices.
Because Vacation Rental Company’s require such a nominal capital outlay, they can afford to pay homeowners more than condo-hotels and even traditional realtors. The Vacation Rental norm in the industry is to pay a 65% to 75% distribution on Gross Reservation Revenues.
The norm in the industry for condo-hotels falls within a 42% to 48% distribution range directly on Gross Reservation Revenues. The differential in that range occurs as a result of the diamond rating of properties.
Condo hotel program owners purchase “space” in the condominium. This could include the front desk, back office, executive offices, the housekeeping department, engineering department, closets and so forth. They also must pay monthly commercial Association Fees and Special Assessments. This is why they are unable to match distributions of Vacation Rental Programs.
Additional “revenue types” generate income for Vacation Rental Companies that ARE NOT shared. From housekeeping fees, to resort fees, parking fees, credit card fees, refrigerator stocking fees, transportation fees, concierge fees and the like, Vacation Rental Companies keep 100% of these ancillary revenues.
Add that the homeowner, in most cases, pays their own utilities, Wi-Fi, cable TV, insurance, condo fees, towels, linens, semi-annual deep cleaning fees and replaces furniture, fixtures equipment when needed and you can see why Vacation Rentals are able to afford to pay these higher distributions and still bring respectable profit to their bottom lines.
A Vacation Rental Companies Gross Operating Profit can be as high as 70% compared to average hotel Gross Operating Profits of 32%.
You can also view an example of bottom line profitability in the illustrations provided below at various distribution levels.
Some Vacation Rental companies absorb some of the costs mentioned; but that would not be the norm in the industry. When this occurs, of course, it has a direct impact on Gross Operating Profit and ultimately the bottom line.
The mix of revenues and variable costs described means that before the Vacation Rental Company decides what to declare as their distribution percentage to homeowners, they should do a careful study of all these considerations. Providing homeowners with sizable distributions always makes a strong case to entice homeowners into a Vacation Rental Program, however, like your mortgage, you must be able to sustain that “debt service” in order to succeed. For me, taking on debt in order to sustain cash flow should never be an option; nor need it be.
At times I see clients who take bridge loans during off season, but careful planning and declaring the right distribution percentage avoids this.
Vacation Rentals are very unique; how often are you able to declare what your mortgage cost will be and change it if you need too?! Declaring the right “mortgage” (distribution percentage) means you will insure success, maintain your cash flows and truly enjoy the Vacation Rental experience!
Below, please find an example I provide in my book, “the Definitive Study of Vacation Rentals, of a fictitious 75 “home” vacation rental operation when distributions are (a) 75% and (b) 65%.
You can purchase the book on Amazon at http://amzn.to/2D9IimE
I am grateful to have been invited to speak at the upcoming “VRMA Xtravaganza Conference” on May 23, 2018. My segment will be entitled “Revenue, Metrics, Profit Margins Establishing Vacation Rental Standards”. I’d be delighted, if you’re there, to meet you personally! Hope to see you. – Mail me if you’d like to meet [email protected]
Link to VRMA Xtravaganza: http://bit.ly/2Bh9X3q
Richard B Evans