This morning I got a call from an Orlando vacation rental owner (Kissimmee to be exact) who lives overseas, he didn’t purchase his property with me but he owns a nice 2/2 townhouse in one of the more popular Kissimmee resort communities, not far from the attractions. He was really concerned about his property because it’s not generating the type of income he originally thought it would and his management company is taking over 75% of his income for expenses. He was on the fence of whether he should:
1. Sell right now
2. Continue trying to rent it out as a vacation rental
3. Convert it to a long term rental.
After we spoke in detail, I decided to write some possible solutions to the issues he said he was having, hopefully it will help those of you struggling with the idea of whether you should sell or take a different approach as well.
Main Issue: The management company is taking too high of a cut and charging way too many expenses and you’re not seeing a big enough return at the end of the year.
I’m sure you’ve been there, you get your monthly statement from your management company, you see all the expenses that were taken out, the obscene charges for things like changing a light bulb and you just freak out. Maybe you’ve even second guessed yourself and your investment, maybe you blame the agent that sold it to you or maybe you just don’t really care why and you want to fix it. In any event, here are some solutions you can try before throwing in the towel and selling your property.
Solution 1: Switch Teams
You could switch management companies. There are people out there legitimately getting ripped off and there are also people out there who really just don’t understand the cost of doing business so they just think they’re getting ripped off. The root cause of the issue above is that you didn’t ask the right questions when you interviewed the management company to begin with, and it’s no fault of yours because unless you’ve actually worked in this industry or owned a vacation rental before, you wouldn’t know what to ask. Fortunately, I created a list of the questions you should be asking when interviewing a short term rental property manager in Orlando (though you could use these questions anywhere).
Solution 2: Claim The Easy Money
There are at least 8 weeks every year that ANYBODY can book their vacation rental out by just putting an ad online, on one of the major vacation rental sites. Those weeks are Christmas, New Years, Easter, Spring Break (counts for two), 4th of July, Halloween and Thanksgiving. You will also be getting peak rates for these weeks. If you’ve been relying on your management company to book these weeks out for you than you are leaving a huge chunk of cash on the table. They will easily book these weeks and take their cut from it. If you booked these 8 weeks yourself, you could see an increase of at least 30-40% in your annual revenue.
Solution 3: Consider interior updates.
Sometimes your interior just needs to be updated because it’s just flat out ugly and unappealing (tough love here). If you’re not getting guest feedback on your rental from your property manager you should start asking them for feedback from every guest that stays there. If you find people aren’t rebooking, you may want to ask yourself why? Are your carpets dirty? Why do you even have carpets (except in the bedrooms), is the furniture worn etc. A vacation rental requires updating every 5-6 years. You should have been advised to be putting money away to cover these type of updates (refurbishment reserves) so that when it comes time, the money is there to do it. When I calculate the estimated cash flow on a vacation rental for a client, I always factor the reserves in as part of the annual expenses. This money should be placed aside just like any other expense.
Solution 4: Bad Photos
This is such an easy fix and happens ALL THE TIME. People are too cheap to pay for good photography. This never fails to blow my mind. People will spend $300,000 on a gorgeous vacation rental, furnish it to the high heavens and then go super cheap on the photography. Some people even use their iPhone (NOT KIDDING). I won’t even use the term “can’t afford” because anyone buying a vacation rental can afford to spend $800-$1500 on high resolution professional images of their investment for their marketing. It’s a matter of people choosing not to. Lets put it this way, you can’t afford NOT to. Again, tough love but it has to be said.
Solution 5: Convert To Long Term
If you’ve tried both of the solutions mentioned above and you’re still not seeing a positive cash flow, something is terribly wrong on a deeper level. There could be a myriad of reasons why you aren’t turning a profit but the most common reasons are: you purchased in the wrong location, you purchased a floorpan that just isn’t in demand (usually anything under 4 bedrooms), or the market has tanked and nobody is traveling. We all know that tourism is at an all time high in Florida so tourism isn’t the issue. It’s most likely one or both of the first two. This is a tough one to fix. At this point most people convert to a long term rental and just take a loss. They are usually happy to get their carrying costs covered each year and then end up selling it. I hate to see this happen to people, that’s why it’s SO important that you do your research correctly from the beginning. You really need an educated agent who knows this market to help guide you in the right direction from day one.
Solution 6: Time To Sell
At this point, if you’re selling because you’re taking a massive loss and your home isn’t renting (after trying everything possible) the bad news is that it’s also going to be hard to sell it. The reason being is that anyone buying a vacation rental wants a profitable home with a lot of income potential. If yours isn’t profitable than we can’t even use that bit in our marketing, so it will require even more creative marketing to try and find the right buyer for the home, perhaps someone who just wants a second home and doesn’t need to rent it out. The only issue that could come up when selling it is that it may sit on the market longer than one that is in high demand. The longer it sits on the market, the more price drops are required in order to keep in fresh and not become a rotting piece of fruit in the MLS tree. So if you’re at this point and you HAVE to sell for this particular reason you’ll need:
A good strategy
A powerhouse agent who pulls out all the stops (I happen to know one)
A pricing strategy
In closing, this can ALL be avoided for those of you not in this situation yet. The easiest way to avoid this is to understand the way this market works and don’t buy 100% based on emotions. If you can afford to purchase a home that doesn’t need to be rented than great, none of this applies to you, but if you’re part of the other majority of people who need some type of income to cover the expenses, you have to go at this from both an emotional AND financial standpoint.