How to Run the Numbers?

[marcus]

Ditto all the above, sorry I was abrupt.

What I meant, although I put it a bit strongly, is that even if you are buying a property solely to rent as a financial investment, there is such a wide range in your future estimates of income that estimations are virtually worthless. And earnings by previous owners form only a slight clue as to the actual earnings you can expect when calculating a p/e type ratio - can the claims of past income be verified; were they returning guests who will stop returning when the owners sell; can you do better?

Will you rent out for 8 weeks ayear or 25? You won't know until you try. And for how much rent? Will you make a capital gain on your property of 0% a year or 15% a year? Either is possible. This is why I think it is a waste of time using ROI type formulae. As said above, these work on a property in a city for example which will be let all year at a reasonably predictable rate, but not really very well with holiday rentals.

A significant part of the price is often paid for your own accommodation so you would also need to value that separately and deduct it from the total, again not easy.

The one time I think I can use 'financial ratios' is with changes to the property. Do I pay 10,000 euros to put heating in the house? Only if I think I can generate at least 1500 euros extra in rent a year. 20,000 for a second pool so the larger house has a private pool instead of shared? If I think the total rent will increase by increase by 2,500 euros a year, perhaps.

Good luck, and sorry for being abusive...
Marcus

[Paul Carmel]

This may or maynot help........but try running your figures through the following.

http://www.vacationrentalsdirectory.net/healthcheck.php

I also apologize if you feel I was being rude.

[mpprh]

Hi

I think Wade should be applauded for asking this question.

I have recently been involved with a failed holiday rental adventure. The owners ran out of cash before the centre was completed. In truth, it failed because they had a coup de coeur and went ahead with no business plan, no idea of local demand, or renovation costs, or ongoing costs, or letting prices, competition, etc. When the bank said no more, it folded. The result for the owner was a catastrophic bankruptcy and loss of the family home.

It is not the first example like this I have worked with, and the cost of getting it wrong is so high that the planning stages are crucial.

Return on investment and cash flow are the crucial factors in business decisions large & small, and too many people fail because they haven't thought the opportunity through properly.

The answer in these cases is, of course, complex.

There are several decisions to be considered :

Property development - Cost + renovation v long term appreciation ;Value of a home ;Rentals business ;Quality of life - the emotional factor ; Cash flow; Financing ; Risk.

Each will have a different result for different people. And risk avoiders will put their money in the savings bank !

Most people have analysed the opportunities in a less formal way, without quantifying gut feelings. And often it works !

I think if people were to respond to Wade with facts about their experience, it would help him enormously.

Peter

[Ju]

Hi Wade

I think you are being very sensible with your question. Whilst I agree in some respects to the fact that it is difficult to put ecconomics into this business, I do think there are some things you can do.

As has been previously said:

The one time I think I can use 'financial ratios' is with changes to the property. Do I pay 10,000 euros to put heating in the house? Only if I think I can generate at least 1500 euros extra in rent a year. 20,000 for a second pool so the larger house has a private pool instead of shared? If I think the total rent will increase by increase by 2,500 euros a year, perhaps.

Marcus

I agree with this, anything above and beyond routine maintenance should be looked at in terms of return on investment. (but don't forget for something like an extra pool the running costs should also be taken into consideration).

You can also apply this sort of rule to the initial choice of property. If for example you are down to a shortlist of 3 properties, you can look at each one in terms of expected income. Would one property generate more income because it has more bedrooms, or less work to do. Is one near a busy road, or closer to a beach. Remember it is not always about being able to charge more, sometimes renting out more weeks is more important, so somewhere within easy reach of an airport for example may be more likely to rent out in the lower seasons.

You don't say where you are thinking of buying, but again you can consider cost benefits. A property in a very touristy spot may be much more expensive, but more likely to let. One in a remote area may be cheap, but does anyone want to go there? There are of course a limit to how many weeks you can let, and the different pricing stucture for the seasons to take into account.


Consider three properties of similar price.

One is near a town, and has a small garden and no pool.

In summer perhaps you could charge $1000 for 8 weeks
The rest of the year you rent out another 14 weeks for $500
A total of $15,000

One is in a popular tourist spot, but not a very big property.

In summer 8 weeks at $2000
but maybe only 4 weeks off season at $750
A total of $19,000

The third is somewhere in between, near enough to each so that there is interest but big enough to put in a pool.

In summer 8 weeks at $2000
but perhaps 10 weeks at $500 off season
A total of $21,000

You can charge more for the touristy spot, but only in summer. The property with the pool demands a premium price in summer, and is more likely to let off season, as the pool is normally usable for a time outside the main season.


Hope this helps

Ju

P.S Don't get me started on running costs and decoration and furnishing costs as I could go on for pages!

[Normandy Cow]

When I talk to friends about our holiday home in Normandy and I mention that this year it was booked for 35 weeks, they presume that I am rolling in it and making a huge profit. Nothing could be further from the truth!!!!

They have no idea of the costs involved, apart from the mortgage - cleaner, keyholder, gardener (including weekly mowing of a 3000m2 garden!), electricity, logs, advertising, etc etc the list is endless.

And when you watch these TV programs such as "A Place in the Sun", they often mention that the property being looked at can be rented for X amount - but that can only be during whatever is the high season for the region.

In my case, yes I can rent it out for £600 per week, but that is only for July/August - the rest of the time the rates plummet to as low as £250pw. To be honest from a financial standpoint it's really not worth letting it out in the winter, but I like the house to be inhabited as much of the time as possible to discourage burglars.

If I really wanted to make a profit, I should have bought a small one-bedroom flat in some small town in Kent for example, refurbished it to the minimum cost using the cheapest flat-pack furniture, and let it out to the local authority for social housing.

[gh]

I think if people were to respond to Wade with facts about their experience, it would help him enormously.

Agree with you Peter,


Mortgage Free Purchase
Bought in 2002 28K 2Beds,lounge,dining,kitchen,bathroom,grenier,wilderness(garden)
Renovation (6Mths) 5xbeds,lounge,dining,kitchen,3xbaths,landscaping,pool
Profit on Property to date 122K
Recoupe initial outlay through rentals 4yrs (5 yr Est in 2002)
Enjoyment and satisfaction-incalculable
Experience in this-none, research and careful planning
Would we do it again?-yes paid for by above
Fugures are bottom line.

Hope this is of interest to you wade, cannot stress the importance of research and planning. Good luck in your quest wish you every success. This forum is informative and friendly.

[vrooje]

Wade,

Welcome to the forum!

Although I knew nothing about P/E ratios (still don't!) and had no experience with vacation rentals before starting this one, I just went by common sense and tried to do my best to come up with numbers.

As soon as we found the property, I went to Google and found several rental listing sites, and pretended to be a vacation-goer. I made a list of available properties in my region (Burgundy) and department (Cote d'Or), including how many people they slept, what they cost, and the quality of accomodation I observed from the pictures. I also made a note of their availability, where it was posted, so that I could get an idea of a reasonable expectation of bookings.

I was looking for an area that wasn't over-stocked with rental properties, but that wasn't completely devoid of them, either. Our property was also in a unique location, and I wanted to make sure that it was really as special as I thought it was.

Then I made pessimistic assumptions about the property we were looking at. What we could charge, how much we'd be able to book, etc., and came up with a possible yearly gross income figure.

Then I asked, "could that pay for our costs?" and the answer was: yes, barely. (For this I had to make a list of expected costs, and then I think I doubled everything but the mortgage to try and account for unexpected costs.)

Then, "Not including property appreciation, would we make a good profit on this house?" Answer: not really.

But we wouldn't lose money, which is all we were looking for. So we bought the place and it has done very well so far!

Would we do it again? In a heartbeat.

But then again, we're not in it for the money!

[wkoteras]

Thank you all. You have really helped me to understand this better.

I have done quite a bit of research on the Galveston, Texas market and my father has owned a beachfront house there for almost 20 years. He has done very well with it. I live in Houston, so checking on the property and using it when unoccupied is easy (it's less than 90 km away). I have also been looking at mountain resort areas in New Mexico, although I just started looking and don't have much of a feel for that market, yet.

I have not been offended, it just seemed like getting an answer was going to be difficult. You all -- and I mean ALL -- have been helpful.

Thanks again for the welcome and for sharing your experiences,
Wade

[enid]

The kind of property makes a difference for the calculations too. We have a house with a grange attenante - that means the house and barn are under the same roof. We have built two gites at the other side of the barn. We are aiming to rent each for 10 weeks high season minimum - actually this would be enough for us as we have no mortgage - so two weeks mid or low season count as 1. 2006 will be our third year and we are making a 10% return on our investment - haven't valued the property for capital return.
So we are happy - this is our home too and we think that we are solucky to be living here that we can't put a price on that. It is hard work but it's fun - like Alan and Joan we're not ready to turn our toes up yet and needed something that would bring in an annual income and be fun too - we think we've found it!

[Badger]

Even if you are buying a property simply as a business venture I think you should still base your choice on whether you would be more than happy to stay there on holiday yourself - if you wouldnt want to (for whatever reason) then dont buy it.
When we bought our place 8 years age we spent 6 weeks looking around (in an area we already knew extremely well) with a set plan in our minds regarding area, type of apartment etc that we thought we wanted. As soon as we viewed the studio that we eventually bought all our previous criteria went right out of the window - we just knew the location and views were right for us and those factors alone over-rode all others.

[Fraise]

Hi Wade.We spent years hunting for our first house but we never intended to rent that out.We spent a relatively short time looking for our house that we rent out as we just fell in love with it as soon as we saw it.We already know the area and it is very popular with holiday makers.We had it restored and furnished to a standard that we would want on holiday.I always tell my friend who looks after it when I am not there that she must make it like a first class hotel (this always amuses her!!)-it's what we ourselves would want.The house more than pays for itself (no mortgage) and has appreciated in value hugely after the restoration( another friend is a French estate agent).We just bought what we loved,in an area we knew was marketable,aimed at the top (ish) end of the market.We would never have bought in an area that was not popular with tourists because although we adore our house it does need to make money and that was always at the back of our minds.Every decision we took was based on " will holiday makers like this?" and "how cost effective is this going to be?" Good luck
www.thepetitmanoir.com

[Alan Knighting]

I think it is fair to say that most people here don't own rental properties purely as an investment vehicle, but because they have an emotional attachment to a particular property or location. So the idea of running numbers is alien to most Lay My Hatters.

To a large extent I agree with you but, unless we are registered charities we are not wanting to rent at a loss so numbers do have a significance, even if we don't want to admit it.

What amazes me is the sort of thing that Peter talks about. How can anyone invest everything they have without doing every tiny bit of research possible? How can they possibly get involved without an in-depth, sensible and viable business plan? How can they get it so wrong that they run out of funds even before the project has been completed, never mind up-and-running? Are people like that completely mad or do they live in cloud-cuckoo land? With Renaults size matters, with business investments money matters.

For the rest of us some rental income helps towards the cost of having a holiday home or helps towards total annual income.

Alan

[Giddy Goat]

Hi Wade! Welcome from me too. The other forum members have said it all, and very eloquently, so there's only one more thing for me to add - in considering your ideal property, the grass has to pass the taste test.

Keep us informed of your progress, and good luck!

[cromercrabholiday]

There's only one more thing for me to add - in considering your ideal property, the grass has to pass the taste test.

I didn't think that your kind were so choosy! Takes me back to a holiday in France with a field of donkeys where we found that they (unlike Tigger) adore thistles. If you picked the most prickly looking piece and held it for them, they would munch it up with enthusiasm.

[Alan Knighting]

John,

Don't hang onto the thistle theme for too long otherwise you might pick up "Prickly" as a nickname. How do you think I got stuck with "Fluffy"? No, that can't be right. Fluffy things aren't sticky, or are they?

Alan