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Understanding Valuations for Vacation Rental Properties

Written by Bermudiana Beach Resort

15 | 02 | 22

Advice  |  
5 minute read

Estimating the value of a rental property is a crucial aspect of making a smart investment decision. However, it requires a different approach to valuing a traditional home and there’s a range of factors to consider.

This blog outlines what you should consider when it comes to valuations for vacation rental properties so you can be rest assured you’re making the right decision before you invest your hard-earned money. These include:

  1. Occupancy Rate
  2. Rental Income
  3. Cash Flow
  4. Capitalization Rate

1. Occupancy Rate

For real estate investors, the potential occupancy rate of a property is critical. The occupancy rate of a rental property is the number of days the property will be occupied in a year.

Although it’s challenging to work out an exact number, you should always undertake extensive market research to understand the occupancy rate for other rental properties in the area where you’re looking to purchase a second home.

When it comes to vacation rentals, it’s more than likely that the occupancy will be of a short-term nature e.g. a week or two weeks. By definition, you’re most likely going to attract tenants in the form of tourists, travelers, visitors and vacationers.

This means your occupancy rate is likely to fluctuate due to seasonal demand. Short-term rentals in coastal areas, for example, will generally have a high demand during the summer season in most cases. In ski areas, you can expect higher demand during the winter season.

There are locations worldwide that are less affected by the weather and still see good demand for rental properties year round. Take Bermuda, for example. The temperature seldom dips below 65 degrees during the cooler months and guarantees a pleasant getaway. Therefore, it’s common for rental properties on the island to experience higher occupancy rates throughout the year than more seasonal locations.

Prestigious rental services can help you maximise occupancy throughout the year when you are not occupying your vacation home yourself.

2. Rental Income

Once you have worked out your occupancy rate you need to work out your rental rates. These are likely to vary seasonally throughout the year. To set your rates see what comparable properties are charging. Once you have worked out your rates you can calculate rental income by multiplying occupancy by rental rate.

Rental income is a vital factor to consider when valuing a vacation property. Depending on how much time you plan to spend there yourself, you’ll need to ensure you’re receiving as much rental income as possible throughout the year. This is why it’s crucial to have a good idea of occupancy and rental rates and choose a property in a location that has high levels of demand throughout the year.

One of the key benefits of a condo hotel is that you can convert it to a hotel room or suite when you aren’t there. In most condo hotels, a rental service is provided by the hotel management team.

The management team will handle all your rentals for you and offer the support needed to achieve optimum rental income from your investment. For complete peace of mind, it's best to work with a reputable management company that will take care of everything for you.

3. Cash Flow

In real estate, cash flow is the difference between a property's income and expenses on a day by day, month by month basis. It’s essential to have a clear understanding of how much revenue you expect the property to generate compared to the cost of keeping it running each month if you are to remain cash flow positive.

Doing your research is vital at this point. Reach out to experts in the area to determine how much it costs to run other comparable properties. They should also give you a clear indication of the running costs you are likely to have so you can start to make some estimations.

There will be additional fees you’ll need to factor in on top of running costs. For example, when buying a condo or an individual property within a residential community, you may have to join and contribute to the HomeOwners’ Association (HOA).

Before committing, you should research their community association and determine precisely how much you’ll need to pay and what the fees will cover.

This is why condo hotels are always worth considering. That’s because many are associated with or serviced by prestigious hospitality companies, such as Hilton. They offer rental programs to support you in your efforts to boost occupancy and ensure your investment is lucrative.

It also means you don’t need to spend your own time marketing,  cleaning and maintaining your property, as the hospitality or management company will take care of this for you.

4. Capitalization Rate

The property’s capitalization rate indicates the expected return rate that’s generated on a real estate investment. This is the ratio of net operating income compared to the asset’s value.

Net operating income is the total revenue generated from the property once all outgoing costs have been factored in. Although you won’t be able to work this out precisely before investing in a rental, you should be able to get a clear picture by looking at similar properties close by.

While the asset’s value will fluctuate depending on the market’s climate, you should get a good flavour of current property prices by contacting agents and doing research online. 

A condo might be a better avenue for investors seeking higher capitalization rates as these rates get smaller as properties get bigger. This is mainly caused by occupancy in smaller vacation property such as condos being higher than in larger vacation property such as single homes.

Considering Purchasing a Vacation Rental Property in Bermuda?

Owning a vacation home in Bermuda has many benefits, whether you intend to use it, rent it to others or do both. We understand that it’s a big decision. You want to find something exactly right for you and is also worth the investment.

By downloading our guide, you’ll better understand the potential opportunities of purchasing a rental property in Bermuda and why it’s such a popular place for many people to set up their second home.

Get access to your copy today by clicking below.

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