Investment Return:

There are two obvious profit centers available to short-term rental vacation homeowners. First, there is money to be made on the actual rental of the property to vacationers. Secondly, there is the eventual realized appreciation profit if the property is sold. Naturally, the return on investment is affected by financial factors such as deposit, interest rate, closing costs, etc. We will discuss those in the finance section.
There is also a third return on investment, which is huge, that I will spotlight at the end of this chapter.

Let's now examine the rental profits. If vacationers pay the same rates to rent your home that they pay for a suite in an upscale hotel (roughly
$90.00 to $250.00 per night, depending upon season), the total would be at least $630.00 per week. Consider that Walt Disney World draws tourists every week, 52 weeks a year. Of these, 25 weeks are particularly active and command the highest rent. That is 25 weeks which could bring in $250 per night. This is a profitable business, right? So, what percentage return on your money invested will you derive from the rental income? OK - stop here and sit down. The answer is "zero"! I am glad you are reading this chapter before you buy a house.

Return on investment is calculated after expenses. It is certainly possible that you could profit from the rental if you plan on doing part, or all, of the rental advertising and booking. However, most vacation homeowners prefer to have a management company take care of that. The management company is going to get a percentage of the rental income for its services. If you can just cover the expenses, mortgage, taxes, and insurance with your portion of the income, that is great. That is real. That should be your goal. Don't worry. You should reap a return to brag about in years to come if you ever sell the property. For now, be content to allow the hard working management company to profit from the rentals. There is security in knowing that if they are profitable, the management company will be around to take good care of the goose laying the golden egg - your vacation home.

If you are not going to profit from the rental of the home, then is there any return on your investment at all? You'd better believe it! My next
statement may sound like a contradiction to the last paragraph, but bear with me. The vacationers who will rent your home will be putting money in your pockets. The better description is that the vacationers will keep you from taking money out of your pockets, but it means the same thing. A penny saved...is not having to pay for the mortgage, the taxes, the insurance, the association dues, the utilities, the housekeeping, the lawn care, and the general maintenance. In fact, that should account for saving millions of pennies per year. This means that you are no longer investing in the property. If it all works out as planned, your only investment will have been your initial deposit and closing costs.

Before we calculate the projected return on investing $75,000 in a vacation home, let us first look at that same amount of money in different investment. Let's say that most individuals would be satisfied with a 10% return on their money. $75,000 producing 10% per annum will earn the investor $7,500.

If that same $75,000 were used to purchase an income producing vacation home, where would the money be used and how much of a return would there be? For this example, let us say the original purchase price of the home is $300,000. I'll keep it simple, primarily because it is. The initial 20% deposit will be $60,000. Closing costs, a one-time expense, usually vary between 0 and 5%, depending on your mortgage and whether you purchase from an individual or a developer (a developer may offer to pay all, or part, of your closing costs). For this example, factor in 5% for closing costs ($15,000). You now have invested a total of $75,000. Say the home appreciates 8% in value over the first year. How do we calculate the return if you were to sell it for that increased price? Would it be $75,000 multiplied by the annual appreciation rate (8%) ? No. To accurately calculate the return, first determine the current market value of the home. Multiply $300,000 times the annual appreciation rate ($300,000 x 8% = $24,000). Add $24,000 to the original $300,000 sales price and you have a new market value of $324,000. Now divide the $24,000 of appreciation by the money invested ($75,000) to get 32% (see fig. 2). So, if you sold the home for $324,000, you would realize a 32% gross profit. Naturally, this example is very simplistic and does not take into consideration several factors that may reduce the sales profit. For this example, we are imagining the unlikely occurrence of a quick resale. Real estate is considered a better long-term investment. When we subtract the additional expenses of having to negotiate a reduced sales price and the costs associated with selling the home (closing costs, real estate commission, and capital gains tax), the return is less, but still attractive over a number of years in comparison to other investments. Think about it. Your vacation home only needs to appreciate 2.5% per annum for you to realize a 10% return on your money invested, provided that your monthly expenses are all covered by the rentals. This is the big advantage of investing in real estate. You invested $75,000, but your appreciation is calculated on $300,000. Now do you understand why investors are satisfied just to break even on the monthly expenses?

Finally, what is this significant, third return on your money invested that I promised to tell you about? It is the memories that you will deposit as you enjoy your vacation home with your friends and family, year after year. It is home away from home. It is that place in Orlando where fun, sun, and relaxation are the daily priorities. It should be the real reason that you buy your vacation home, because it is certainly the most important.