How to calculate return on vacation rental that you live in part-time

[anonmustach3]

I get the basic idea behind the 1% rule and I’ve read quite a bit about real estate investing (although I haven’t jumped in yet). Mostly it seems fairly straightforward to calculate the estimated return on a pure long-term SFH rental/investment property.

However, I’ve recently been trying to convince my parents to not buy a time share in a trendy vacation spot. I think they have the right attitude about time shares, at least, they know they’d lose money, they view it more as a prepaid vacation (they like to vacation in this one spot almost exclusively and have been doing it for years and plan to continue that), and they’d hope to rent our their prime time weeks and only stay in their offseason weeks. I still think it’s a dumb idea.

At first I looked at investment properties to go 50/50 with them but I have a hard time estimating how the return works out to be a good investment. (Vacation rentals seem highly variable as-is, and this is a ski town which seems about as bad as farming or something for guessing how you’ll do any given year - good snow years, maybe ok, bad snow years, terrible.)

My parents are interested in living in the vacation rental for long stretches of time in the offseason when it’d otherwise be vacant (they’d have the freedom to come and go if someone booked it for an extended period in the offseason so we’d hopefully get some of those). They’d also be willing to pay quite heftily for the time they’d stay there in the off season (taking what they currently pay for a 5 star hotel and “paying” rent into our 50/50 property during those times). Even so, I don’t see other renters+their rent paying for much more than the mortgage, and all the fees, utilities, etc. (although it looks like it may be able to cover those items). They likely won't be paying their portion into it for the full 15 or 30 years of the mortgage though, so at some point I'd need to re-evaluate selling or rerunning the numbers with actual rental data.

Once the mortgage is paid off I can see the return generating some cash, but nothing until then. My dad thinks appreciation is a reasonable play although I'm trying to take the view that an investment property shouldn't depend on appreciation to be a good property. I don’t see it being a very good deal but I also want to convince my parents to stay out of time shares, and breaking even on something we own instead of flushing money into a time share also seems like a better idea.

Does anyone have any advice for this and/or estimating the rental numbers more accurately (especially vacancy in a specific vacation town - I can lookup what units sell for/rent for, but I’m not sure how to tell how much of the time they’d be rented)?

[maizefolk]

If your parents are willing to pay the equivalent of 5-star hotel costs towards a cabin/unit you bought, could they just rent such a cabin/unit for the same price? Particularly in the off season and if they want to book a big block of time (saves the property owner a lot of hassle dealing with trying to schedule many short rentals and the unavoidable short vacancies between them).

If so, that would seem to be the superior option to the time share, since there would be no risk of uncontrollably growing maintenance fees/difficulty unloading the timeshare in the future.

[anonmustach3]

If your parents are willing to pay the equivalent of 5-star hotel costs towards a cabin/unit you bought, could they just rent such a cabin/unit for the same price? Particularly in the off season and if they want to book a big block of time (saves the property owner a lot of hassle dealing with trying to schedule many short rentals and the unavoidable short vacancies between them).

If so, that would seem to be the superior option to the time share, since there would be no risk of uncontrollably growing maintenance fees/difficulty unloading the timeshare in the future.

You're absolutely right that renting is the best option. The place they have been staying only allows them to book a couple weeks out, which they hate doing (they're the kind of people that like to plan a year+ in advance and have that control -- so they think they have to "buy" something or at least be able to request their timeshare weeks well ahead of time to get that). Obviously there are places that you can book well in advance, I just have to convince them to find that kind of place and start doing it (so far they're very resistant to it -- they've found a resort they like and want to just keep going there).

So as part of convincing them not to buy the timeshare I'm trying to put together the whole list of options+numbers to present to them: rentals they can book a year in advance, especially for the offseason, as well as buying their own place, and buying a timeshare. Putting together the numbers for renting and the timeshare are pretty straightforward but I'm not as sure about the numbers for buying a place (mainly due to vacancy) so it's a bit of a grey area. Buying their own place or timeshare appeals the most to them, I think, due to feeling like they'll have more control over it (or at least known dates a year in advance). I'm suspecting that the numbers will show that the best option is renting (they just need to do more research to find a place they like that they can book far in advance), then buying their own property, then timeshare.

[Dr Kidstache]

Have they looked at long-term rentals? I mostly live in a ski town & long-term rental rates are much cheaper than short-term rental rates. Might be worth calculating the cost of a long-term rental that they only stay in part of the time as an alternative. That's what I'm doing.

[cchrissyy]

The time share idea is toxic, your workaround is better but adds a lot of complication, work, and risk for you just to solve the problem of them making a huge mistake.

I love Maizeman's workaround - what your parents need is a month-long offseason stay at somebody else's fancy vacation home. No hotel. If they love it they can rebook every year, and if they don't quite love it, they can book another house for another month's stay until they do find "the one".  If you are right that these places are mostly vacant in the shoulder season or off season, then there will be plenty of nice places to choose from, and lower rates, and no ongoing expenses or risks to you and your parents, and it will feel like a big win form the perspective of the owners as well, who will love having guests like your parents keep the place occupied a bit more of the year than it would have been.

Help them browse VRBO.com (Homeaway)  and see what their usual hotel budget will get them at longer-term off-season rates.  If you can walk them through booking one or two, they will hopefully be distracted away from the timeshare idea forever and save you all this hassle. And yes you can definitely book a year in advance or have a recurring arrangement directly with the place you've  stayed before.

[anonmustach3]

Thanks everyone for the feedback. I agree 100% that renting is the best option here. The difficulty is convincing my parents. I'm not sure why they're so opposed to renting long-term, just the mentality that they want to "own" where they are staying -- even if it's not a good investment (they don't really need the money so that's not a huge issue, they can afford most of the options they're considering, even if they don't turn a profit or even lose some). Although I'd still like to help them from making dumb decisions (hence I'd even be willing to go 50/50 on owning a not great rental property if it's enough to keep them from the timeshare, assuming they refuse to keep renting and won't listen to my reasoning and math on why it's the best option).

I'm hoping that laying it all out on paper will give them a concrete idea just how much more a timeshare or purchasing a vacation home would be vs. renting, and that will convince them.

If anyone has specific tools or tips for estimating vacancy in a resort town, I'd love to hear it. If nothing else I suppose we can talk to agents in the town and see if they can give us estimates, although I'm a bit worried most of them will have a tendency to overpromise a level of occupancy that's not realistic and skew the numbers.