The factors and importance of occupancy and returns
Occupancy and returns on vacation rentals in the Orlando area vary based on many factors. Choosing the right location to invest in a vacation rental property is critical to the success of the purchase and return.
In the past, most buyers bought a vacation rental on the understanding that the income from rentals would pay towards the operating costs. As the market has expanded, many purchasers now see an Orlando vacation rental as an investment which should provide a return. While the overall investment cycle in a vacation rental in Orlando will typically return a positive investment, the operating cash-flow may be negative during months where occupancy is lower.
It’s important that you (the owner) recognizes that mortgage interest costs should not be included in your calculation of return on investment. If you bought shares on the stock market and took out a loan to pay for them, then the loan and its interest wouldn’t be a part of your return calculation! Instead, the mortgage and interests is usually included in the overall investment return after you sell the property. At that point, the equity growth can also be used to calculate the final return on investment.
Here’s the “dirty little secret” that realtors and builders don’t want to tell you…Vacation rentals in Orlando are not a cash-flow positive investment for many (cascading) reasons.
- The first and most obvious is that supply is outstripping demand. There are in excess of 425,000 rooms in central Florida (hotels and vacation homes), each sleeping 2 guests. With just over 30 million guests, there are too many rooms for the number of guests arriving.
- The over-supply is depressing nightly rates. In order to get bookings, prices are either stagnant or falling. Our own rental rates have fallen over 25% in the last 20 years as the supply has increased. Less nightly rental revenue makes it harder to generate enough revenue to cover your costs.
- The increased number of homes means more competition, depressing rates further. As more owners come into the market, desperate to generate bookings, they drop the prices further as they have (generally) no other alternative to be competitive.
- On-line Travel Agent (OTA) and Portal sites push rates even lower. Airbnb and Homeaway/VRBO are 2 of the biggest players, followed by Expedia and TripAdvisor. All of them have a vested interest in dropping prices further to increase rentals and their commissions – just like they did to the hotel industry. The hotel industry “learned its lesson” and started to market directly to guests (just like VillaDirect already does) to counteract the loss from these OTA websites. If your management company relies heavily on OTA portals – run away from them!
- For Orlando vacation rentals to be a great investment, the market would have to be constant. But it’s not! There are peaks and troughs to each season, with certain months being very quiet. It’s virtually impossible to recover income during a lower seasonal period. That makes it extremely difficult to maintain a positive cash-flow during those months, as your expenses remain quite high with HOA fees, mortgage, interest, insurance, taxers – and lastly – management fees.
After you’ve chosen an optimal location and furnished your property for success, you’ll need to list it with a company that can provide the best property care and industry leading marketing!
VillaDirect has the answer to the occupancy/revenue dilemmas listed above. Call or visit us today! We look forward to showing you how our management programs will smooth out the “humps” in revenue and give you a better return on your investment.