Ten years ago I wrote a blog about why I thought vacation rentals were usually a bad idea, mainly because the equivalent “rent” you’re “paying” to use your own place is much higher than if you simply rent your vacation home experiences.
Last year, my partner and I decided to ignore my old advice. We took the plunge and got a condo in the mountains primarily for our own enjoyment, but also to profit through the short-term rental market. But here me out, my reasoning is logical-ish.
How We Got to Yes
The initial thinking was simple – we take a crack at the short-term rental market and see if we can produce a competitive return. As long as we’re using the place mostly in the shoulder seasons, we won’t sabotage the potential rents figure. But with our mortgage rate over 7%, incredibly high HOA costs (because, snow), and the time and energy that’d be required, it didn’t feel worth it.
So I did what any rational person does when they want to buy something that they know they shouldn’t – Contort yourself into a pretzel with all kinds of math gymnastics until you find the result that makes it look like a good idea. I made a spreadsheet that focused on one number. It wasn’t the expected gross rents or appreciation we might experience. It was the equivalent nightly rate for using our own rental place. Confused?
How it works – I baked in every variable I could imagine, such as:
- An expected appreciation rate on the condo
- The return we’d expect to get on the down payment money if it was otherwise put into our nest eggs
- How much we might otherwise spend on trips to Mammoth if we were renting Airbnbs a few times each year
- Annual anticipated rents and expenses (including depreciation)
- How many days we’d likely use the place (without reducing our gross rents)
Back to “the” number – It tells us how much we’re spending each night to use our own Mammoth rental place. For example, if the annual cost to us for having the place is $10,000, even after factoring the appreciation, and we use it 20 days per year, that’s as if we are paying $500/night. If we could easily rent a much nicer condo for that, we’re not getting a great deal, purely from a financial standpoint. In a year with higher than usual rental activity, the nightly cost could be zero. Is this funny math? A little bit, but it’s the math I needed to see to know if this was a questionable decision, or a bad one.
The Good
People talk about the perks of being able to store your own belongings and clothes in your place. I always felt that was an overrated excuse to make a decision like this. But after staying in dozens of Airbnbs, you start to appreciate the convenience of walking into a ready-to-go place. No manuals to read, check-out instructions to follow, concerns about being able to enter, etc. And having all of my gear, doggy toys, whiskeys, and extra clothes in a locked closet is pure joy for me.
The place has appreciated ~ 13% (per Redfin) in just over a year, so that has more than covered any financial shortfalls in the rents department (on paper). Even if that’s an overstatement, we’re still likely ahead of my projection (3% per year).
The Bad
Because we took out a mortgage at 70% of the purchase price, and at a rate higher than 7%, we knew there was a high chance we’d be in a negative-cash flow situation for a while, and we were right by a greater degree than I’d hoped for. We’ve had to make monthly recurring deposits because our rents have been nowhere near the level we need to cover all expenses. That being said, we’re only a year into this, and I’ve been told this is somewhat common in the first two years. I view these deposits similarly to making contributions to an investment account.
We opted to use a lower cost property management company (takes 10%, while a full-service outfit might charge 20% or more). But this means they aren’t acting as the guest contact for whatever issues come up (broken appliances, failed wifi, etc.). The cleaning company, for a small monthly fee, adds that in as part of the service, but the experience has been bad with both of the companies we’ve tried (might be moving on to #3). The first one even stole supplies, always had a voicemail that was too full to receive new messages, and got us a dirty-sheets complaint by an early renter. The new one is only marginally better.
The Surprises
So, what have we learned and feel that other newbies might want to know? First, you need some renters to offer feedback that you simply could not anticipate. Did we know that a light-sensitive person would be upset about a street light outside of the bedroom window? Or what to do if some stranger is parked in our designated spot when our renter shows up? These are the kinds of issues that can make it hard to average a high rating, which I understand to be a critical variable in having a successful long-term investment experience in the short-term rentals market. According to Airdna you can expect an 18% bump in revenues for maintaining at least a 4.9 star rating.
There’s always that odd risk you aren’t thinking about. In our case, the town of Mammoth put a moratorium on short-term rental properties about 2 weeks after we closed on the condo. We got lucky upon discovering that a) they were grandfathering in people who had already submitted for their certificates and b) our place happens to be in the resort zone. But it was a reminder that a city or state government can easily change the rules on a dime, which could have disastrous financial consequences.
The Friends-and-Family Thing
How do you share a place with friends without the act of doing so negating the whole point of the decision? You want to be nice to all the people you care about, and nothing brings me more joy than getting to share something I value so deeply (the Mammoth experience) with friends and family. But, even giving it away just a few times a year during peak periods would make what was already a questionable financial move into a terrible one (it would surely move our nightly rate equivalent figure into a bad zone). So, we compromised and made a document to share with friends and family that lets them rent directly through us, at a discount, but not during the peak season, when our rents can be as much as four times higher than during the shoulder seasons.
Was it a Good or Bad Idea?
It’s too soon to tell, financially speaking, mainly because new rental properties need time to build up a reputation (reviews), which then leads to (hopefully) higher average rents. We’re the new kid on the block, and need time to build up and maintain our star rating. If we view this decision purely as a lifestyle one, similar to paying a premium for any non-essential life experience (a fancy car, flying business class, etc.), I have zero regrets, at least so far. And our financial plans don’t take a big hit if this underperforms as an investment. It’s a risk we can afford to take.
I can’t put my finger on what the small-town mountain life does for me, but I feel like a different person when I’m there – happier, more relaxed, and a stronger connection to the people around me. If we were having to rent a place every time we wanted to go, we wouldn’t get there nearly as often. So if the financial part doesn’t pencil out over the next 5-10 years, I’ll just have to play the happiness card. In the meantime, my fingers are crossed for mortgage rates to drop and nothing but 5-star ratings.
Happy Planning,
Barrett
