2.4 Ways to Run a Vacation Rental

Getting into a short-term rental is a business, not just a second home purchase.

Your understanding of the vacation rental business model will help you teach your clients all about it as well and help them to appreciate their responsibilities as VR business owners.

You will find clients wanting to buy vacation rental because they think it’s going to be a cash cow (and many of them are at certain price points).   They may draw back, however, when they find out about the possible time commitments; the additional expenses – insurances, taxes, etc, and decide this is not for them.  In these situations, you may want to help them buy a property that is more suitable for residential long-term rental instead,

However, if they do want to continue and get into this great business you’ll need to show them there are different ways of doing it that range from completely hands-off to fully independent methods.

In this lesson we look at the multiple ways there are to manage a rental so you can share the options with your investors.

Hands-off – Full-service PM

This is by far the most popular as it frees the owner from any operational responsibility for the property.  The property management company does the marketing, takes the bookings, collects and distributes payments, deals with problems that may arise, and manages the cleaning and maintenance of the property.  In some areas, large PM companies will arrange for furnishing and décor of a newly purchased property.

Managing bookings – PM for maintenance/changeovers

Many owners who have the time to do so, will undertake the booking management and marketing leaving just the on-site activities to a property manager.  Typically, these owners enjoy contact with guests; create good relationships with them, and act as ‘host’ in every way but face-to-face. 

Rental Management only – manage own changeovers

Another group of owners prefers a rental company to do the marketing and administration but handles their own on-site activities.  This may be with a third-party company –they hire in a local cleaning time and an independent maintenance company – or they do it themselves if local. Generally, they do this because the time portion of this business is in dealing with emails and calls, taking bookings, and managing inquiries.

Fully independent

Lastly, there are those owners who do it all themselves, completely independent of a third party company, save maybe a cleaner.  The huge benefit of this is there are no commission or management fees to pay out.

Some owners start out with this method and quickly appreciate there is more to the business than they expected.

What does the time commitment look like if your client wants to do it themselves? These are just some of the activities involved:

  • Managing website, listings, and social media marketing
  • Answering emails and telephone calls promptly
  • Dealing with multiple enquires
  • Screening guests
  • Creating rental agreements
  • Collecting damage deposits
  • Handling payments with credit cards
  • Paying appropriate taxes
  • Creating guest manuals
  • Handling emergency issues
  • Cleaning
  • Laundering bedlinens and towels
  • Responding to maintenance calls

The time investment could run to 20 to 30 hours per week.

Most people that have the financial means to buy vacation rental are doing it for a lifestyle choice; they’re not doing it because they want to work more. You need to assure your clients that they’re buying a quality-of-life not a job and

It’s important that they work smarter not harder if they want to enjoy the full benefits of their vacation rental. Why do I say all this? Because if they buy and don’t handle it correctly, even if it’s not your fault, you will always be the one they blame when things don’t work out the way they wanted them to. Make sure you show them tough love and encourage the path of least resistance for them and yourself. 

Master Leasing and Rental Arbitrage

Some investors will come to you asking about master leasing and rental arbitrage – both common in Airbnb circles.  

The rental arbitrage model is when the investor approaches an owner and offers to sign a long-term rental lease with them.

  • The investor gets permission to use the rental as an Airbnb rental.
  • The investor will typically offer the owner some type of incentive such as a percentage of the rental income on top of the rent.
  • The investor pockets the net income after the expenses and rent are paid out.

The form of subletting can pose big risks to the guests booking these properties.

If the owner decides not to renew the lease, the investor must either cancel all the future bookings or scramble to find another property to rent them… if they are willing to rent it.

Situations such as these can destroy someone’s vacation plans and give the host a horrible rating on Airbnb

The investor is also putting time and money into an asset that is not appreciating for them and only offers cash flow as a means of income. No real estate or business equity.

Typically people wanting to “test out” Airbnb or those who are not yet financially able to buy, get involved in this type of model.

Guaranteed Income Plans

Companies such as Rented can offer guaranteed income for investors.

“With the Rented Capital program, agents can give new homeowners and investors the option of receiving fixed rent for their property and greater insight into the return on their investment.”