A vacation rental property can be a great investment if you do your research and understand the process. The success of your vacation rental depends on a variety of factors, including the type of property, geographic location, and market conditions. While some factors may not be clear-cut, understanding the range of costs and profits is necessary before getting started. You may wonder, what is a good ROI for a vacation rental? Below you will find helpful information to guide you through the process to determine if you are making a good investment.

What Is a Good ROI for a Vacation Rental?

There are two important ways to calculate your return on investment (“ROI”). ROI measures the overall return on your investment for the entire property. However, cash-on-cash (“CoC”) return is commonly used as a measure of ROI for real estate investments that are specifically vacation rentals. CoC measures the cash income generated by the property as a percentage of the amount of cash invested into the property.

ROI: 

A good ROI for a vacation rental is roughly 10%. This is calculated by dividing the annual net income by the total cost of the property. Your annual net income involves subtracting your expenses from your revenue. The total cost of the property includes the purchase prices, closing costs, and any renovations you made to the property. The calculation will result in a percentage that represents your return on investment. If it’s anything less than 8%, you may want to reconsider the rental property. It’s also important to note that your ROI for a vacation rental can fluctuate based on a number of circumstances, including seasonal demand, market conditions, weather, location, and even how you manage the property. 

CoC: 

CoC is a slightly different calculation and is commonly used for real estate investments that involve vacation rentals. A good CoC for a vacation rental is around 12%. CoC is calculated by dividing the annual pre-tax cash flow by the total cash investment (and then multiplying the result by 100). The pre-tax cash flow includes your income minus expenses. The total cash investment in the property includes the down payment, closing costs, and renovation expenses. While both calculations look similar, CoC is notably different. ROI measures the overall return on investment for the entire property, while the CoC measures the cash income generated by the property as a percentage of the overall amount of cash invested in the property.

Managing Your Investment Property

In order to maximize the profits in your rental property, it’s important to effectively manage your investment. Consider the following tips that have been proven to help vacation real estate investors.

• Maintaining Records: Keep accurate records of all rental income and expenses. This includes things like rental fees, cleaning fees, maintenance costs, property taxes, and insurance. Accurate and timely bookkeeping for vacation rentals can make a huge difference when it comes to your bottom line.
• Occupancy and Rental Rates: Monitor your rental occupancy rates to ensure that your property is consistently booked at the highest possible rates. In addition to tracking your occupancy rates, regularly evaluate and adjust your rental rates to ensure that you are charging the optimal price for your property. Consider factors like market demand, seasonality, and local events. Effectively tracking both of these can ensure maximum ROI.
• Track And Control Costs: Find effective ways to reduce your rental expenses. This should be done without sacrificing quality so focus on factors that won’t impact the renter’s experience. Tracking your costs through affordable online accounting can help you determine where you can save. This may change throughout the year as vacation rentals are often seasonal, but pay close attention to where you can save and at what points throughout the year.