Recently I had someone ask me about renting a home on a nightly rental basis. The next day I had another person ask the same thing. Both people said they make a lot of money but it’s too stressful, they live out of town, but want to stay in the home when they come to visit Salt Lake. So they asked if we manage nightly rentals. Well, the answer is no but we have some great companies we can refer them too. But I challenged them a little bit on why they felt nightly rental is better.
THEIR PROS ON NIGHTLY RENTALS:
- Homeowners have a place to stay when they visit Salt Lake City.
- Homeowners don’t have to move out their personal property.
- Homeowners love the extra money and cashflow. (I’m a sucker for cashflow too.)
I decided to take the challenge and break down the real cost of nightly rentals vs long-term leases using one of these properties as an example.
Disclaimer - Stuff we will leave out:
- Taxes. Airbnb charges taxes. You’ll have rental income taxes. Honestly, I didn’t want to dig that far to see what Airbnb charges.
- Repairs. Regardless of it’s a nightly rental or long-term, you’ll have repairs on the home. I would argue that you’ll have more repairs on a nightly rental because of the turnover. Also, you have to repair or replace all the personal property like tables, chairs, linens, etc. With a long-term rental the house is empty except for the appliances.
- Insurance. You’ll still need renters insurance regardless. I don’t know if insurance companies will cover nightly rentals or if they charge a premium. Talk to a licensed insurance agent for details.
- Professional Photography or Videos.
Here are the specs: 2 Bedroom, 1 Bathroom, Fully Furnished, and No Garage. The average nightly rental is $72/night. 30 days in a month. Assuming there is zero vacancy (doesn’t exist), the gross revenue is $2,160. I can rent that home for $1400/mo on an annual lease. So at a glance that’s no brainer, right?
Well you need to look at the whole picture. So let’s break this down further.
Option 1 - Do It Yourself Nightly Rental Analysis
I did the research on this rental and the home was booked 80% of the time. So your gross rents went from $2160/mo to $1709/mo. The owners managed the home themselves (super stressful because one lived out of state and the other lived 25 minute each way and had visit the home once a week.)
So that $1709 – 3% is now $1658/mo.
That’s still more than what I can rent it for on a long-term basis, right? Wrong.
Let’s keep going. You still have to find:
Cleaners ($50/visit/week for a total of $200/mo,)
Check people in and out. (Average Utahn makes $18/hr X 1 hour drive time each every week is $72/mo)
Update availability and monitor advertisements and answer questions.$40/mo
You might even argue that nightly rental tenants are higher maintenance, harder on homes, and requires more of your time or you’d have additional handyman time. I don’t know how much to allocate to that but I’ll say, if you self-manage you get all the headaches and drama.
So That $1658/mo minus $200/cleaning, minus $72/mo visiting the home, $40/mo managing the sites = is now reduced to $1346/mo. Remember you’re doing all the work.
Guess what you still have to monitor and pay for utilities too! On this unit utilities averaged $175/mo for water, sewer, garbage, gas, and electric. That’s a net of $1,171/mo.
So they heck with that! I’m going to call a vacation rental company.
Option 2 - Nightly Rental Using A Professional Vacation Management Company
Now if you live out of state and need a professional to help you, a professional vacation manager charges 20% to 45% management fees. That 20% of the rents you receive so that’s $1709 x 20% = $342/mo in management fees. But you have to take that off of the $1709 - $342 = $1,367/mo because that is what your net is so far.
Best-case scenario is you won’t have to worry about advertising fees (maybe), or cleaning fees (maybe), or other stuff because the vacation manager will do that for you. Oh, utilities. That is $1367 - $175/mo = $1192/mo net best-case scenario.
- Stuff wears out and breaks faster
- More stressful (if self-managed)
- Less reliable income.
- People have less respect for your home, appliances, the neighbors, etc.
- The turnover of people constantly coming in and out. Personal property being taken by “accident”.
- City Ordinances. Are you in compliance?
- Utilities. You pay for all the utilities. So when it’s 100 degrees outside and tenant cranks the AC to 65 guess who’s paying for that?
So lets look at the other solution. Which is long-term rental.
Option 3 - Long-Term Rental
Rent is $1400/mo. Management fee is 8.9% of rent. $1400/mo - $125/mo = $1,275. We do have a Leasing Fee of 39% of the first month’s rent. Our average lease length is 18/mos because people love us and stay longers. So you’ll see that fee less than once a year. Regardless that is $30/mo for a grand total of $1275 - $30 = $1245/mo Net Income
PROS TO LONG-TERM LEASE
- Tenants may for damage or repairs to home.
- Tenant pays for all the utilities.
- Tenant is responsible for the yard.
- Less turnover and volatility.
- Less stress or headache for you as the homeowners.
- Consistent income. Easier to qualify for another home.
- With the extra money you make from the rental it will pay for you to stay in a nice hotel.
CONS TO LONG-TERM LEASE
- Less flexibility to stay in your home
- Less flexibility to sell the property.
- May have to pay for storage fees. I just say sell it or donate it and pick up the deduction.
If you aren’t completely sold – that’s ok. We are still happy to refer you to vacation rental management companies, put together a rental analysis for your home personally, and discuss the nuances of your situation. Please think of as a resource!