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Estimated reading time: 7 minutes
If you are thinking of selling your vacation rental property read about the factors that will affect how you think about the asking price. As the recent months have shown, the vacation rental market is unique from the rest of the residential housing market. While some of the same important factors hold true, like location, condition of property, there are more things to consider when valuing your vacation rental for sale.
You are not just selling a vacation home, you are selling a business opportunity that has distinct value to certain buyers and investors. Whether your vacation rental property is located in a popular beach resort or ski area, you can evaluate your vacation rental in a number of different ways. Let’s take a look at factors to determine the most appropriate asking price when selling your vacation rental property.
How much is my vacation rental property worth?
When you are considering selling your vacation rental, there are several factors to identify and weigh to determine the most appropriate asking price. Let’s take a look here.
1. Know your local vacation rental regulations
Cities and towns all over the world have instituted regulations and licensing requirements for vacation rentals or STRs. If your vacation rental home falls within any of these licensing requirements, it can affect the value and sale price for buyers. Fewer restrictions and regulations will command a higher price tag.
- Does your HOA have restrictions for short term rentals?
- Are there restrictions on length of stay imposed by the town or city?
- Is a license required to operate as a vacation rental? If yes, is the license “transferable” to a new owner?
Whether you rent out your vacation home full time, part time or once in a while, it is important to understand licensing requirements. Many towns do not allow licenses to be transferred to a new owner. They must re-apply. If you have a license and it will transfer to the new owner that is valuable!
2. Understand your property’s financials
Buyers of a vacation rental property want to understand the potential for revenue when they own the property. Whether you have rented the vacation property out full-time or part-time you should be prepared to show at least 12 months of financials. Savvy buyers will do their own underwriting, but in order to get the best price on your vacation rental home, show off your work.
Financials should include gross revenue, occupancy rate, average nightly rate, and net operating income (NOI). Net operating income is your gross income minus all expenses before taxes and interest payments.
Use HighFlyRE’s listing tool for help understanding what information to include. Don’t worry, you don’t need to list it yet!
Capitalization rate: important to understand when selling your vacation property
Some buyers and investors in vacation rental properties will look for the capitalization rate or, cap rate for short. While it sounds intimidating, it’s quite easy to calculate, and you should be aware of this percentage calculation when determining your asking price. Let’s go through it here:
To get cap rate:
Cap Rate = Net Operating Income (NOI) / Value (asking price or market value)
To calculate your net operating income (NOI), use this formula:
|NOI =||Gross Revenue (total sales) – Operating Expenses (before taxes and interest)|
Let’s take this example:
Your vacation rental makes $50,000 per year in gross rental income or total sales revenue. Your total expenses, before taxes and interest payments, were $20,000. Subtract your expenses from your total rental to get your net operating income (NOI), which is $30,000.
|NOI ($30,000) =||Gross Revenue ($50,000) – Operating Expenses ($20,000)|
Next, take your NOI of $30,000 and divide it by your asking price, say, $350,000 to get the cap rate.
|Capitalization Rate (.085 or 8.5%) =||Net Operating Income ($30,000) / Value ($350,000)|
NOI $30,000 / Asking Price $350,000 = Cap Rate .085 or 8.5%
Typically cap rates will fall between 7-10%. Keep in mind, the lower the cap rate, the less attractive the deal will be to an investor. For more about capitalization rate and how investors use it in real estate read this article on Investopedia.
3. Consider these other factors that will determine sale price for a vacation rental property
What if my vacation rental is only a part-time business?
If your vacation rental has only been active part-time or you have not maximized its potential, providing additional data will help make the case for your asking price.
Using tools like AllTheRooms or AirDNA, gather information from AirBnb or Vrbo about the performance of similar, well-performing properties in your area. Help a buyer understand your property’s potential by sharing other, comparable properties’ gross revenue, average nightly rate and occupancy rate.
You can also use HighFlyRE’s vacation rental property real estate listing tool to showcase the data you find.
Do you intend to sell fully furnished or with other physical or digital assets?
If you wish to include items that are part of the vacation rental business, like furnishing and other physical or digital items, you may want to consider a separate sales agreement. These items might include:
- Home furnishings
- Soft goods (linens, towels, etc)
- Golf carts, bikes, other physical assets
- Digital assets: guidebooks, pricing spreadsheets, etc.
If additional assets are added on top of the market value of the home, you run the risk that the property may not appraise for the asking price. Therefore, having a separate sales agreement outside of the real estate transaction for any vacation rental business assets may facilitate a smoother sale.
4. Learn about your buyer demographic: how might they finance the purchase
Several considerations of buyer financing may impact the sale price. These include, but are not limited to, traditional bank financing, seller-financing, and all-cash purchases.
Traditional financing for the purchase of a vacation rental home
If the buyer is using traditional bank financing to purchase a vacation rental home, the property may not appraise at a higher value than recent comps. Most banks do not count short term rental income as a way to value the property.
Seller-financing for the purchase of a vacation rental property
You may be able to command a higher sale price if you are open to the possibility of seller-financing. For a variety of reasons, some buyers may not have available cash or access to traditional financing. Therefore, buyers may be willing to pay a premium for seller-financing options on a vacation rental property.
The pros of seller-financing are that you determine the terms with the buyer (can be favorable to you). For instance, you can spread out any tax obligations you may have over time. And, you will continue to have monthly income from the property until the financing term ends.
The cons are that you would not receive one large payout, prohibiting you from doing a 1031 exchange or realizing other investment or retirement opportunities. Also, you risk the buyer defaulting. In that case you would have to take back the property and start over again to sell your vacation home.
Cash offers for vacation rental property
If you are in a hot vacation rental market, you may find buyers looking to purchase in cash. This type of buyer may not be concerned with the vacation rental property’s appraised value. Instead, cash buyers may be more focused on the capitalization rate.
5. Be realistic about the value of your property
Listing your vacation rental property for sale at a realistic, achievable price will give it the best chance at a sale. A competitive price point may even give you an advantage and encourage a bidding war. And more interested buyers can lead to a better result than you expected!
6. Consult with a real estate agent to price your vacation rental property
HighFlyRE always recommends consulting with and working with a licensed Realtor in your area. Speak with several Realtors about how they will approach pricing your property. Understand how they will market it before making a decision to list with a particular Realtor.
An ideal scenario is to work with a real estate agent who owns and operates a vacation rental themselves. Or, an agent who has transacted the sale of a vacation rental property to an investor in the past. That knowledge can mean more accurate feedback on positioning your vacation rental property for a successful sale. Connect with agents specializing in vacation rental real estate.
Once you have determined the best strategy and pricing for your vacation rental property, it is time to list and promote! Consider listing it through traditional channels such as MLS, Zillow and Realtor.com and specialty sites, like HighFlyRE, which target buyers and investors looking exclusively for vacation rental properties like yours.
Selling your vacation rental property and determining the asking price are important decisions. HighFlyRE’s vacation rental listing template is a valuable resource that can save you time and give you a leg up when you are ready to sell your vacation rental property.