Vacation rentals are becoming increasingly diverse and urban. But beware of the costs and rising risks of renting out your dream property.
You could call New York City's Melissa Mesku a maestro at vacation-home renting. In September, she and five extended family members leased a spacious Lake Tahoe, Calif., cabin for $168 a night. A month earlier, she'd leased a floating house on Lake Union in Seattle for five days at $150 a night. Earlier this year, while mulling over whether to remain in New York City, she spent four months renting 10 different New York apartments.
"On a night-by-night basis, the rentals were more affordable for me than booking a New York City hotel," says Ms. Mesku, who now sublets a Manhattan apartment.
The Internet is expanding the vacation-rental market, allowing do-it-yourselfers to offer accommodations in scenic getaway locales and, increasingly, in big cities as well. Travelers get an alternative to a hotel room: from a couch to an entire apartment. Homeowners have a new income opportunity. But before jumping into the $23 billion-a-year vacation-rental market, consider the costs and the risks, especially if the property is in a city, where a backlash from neighbors, some hoteliers, and city councils is growing.
The bulk of the vacation-rental business still takes place in traditional getaway spots, entailing facilities from castles to treehouses. For travelers, especially in groups or with families, these home rentals can provide comfortable as well as (depending on the property) affordable options to hotels or resorts. In turn, homeowners can profit.
For Nikki Wills of Gilbert, Ariz., income from leasing the family's three-bedroom, 1,150-square-foot mountain cabin in Pinetop, Ariz., for half of the year covers nearly all that vacation home's expenses. The family lists the property on VRBO.com and FlipKey.com. Without such listing services, "I don't know how renters would find us," she says.
Home renters listing their properties on HomeAway – whose major US property rental listing sites include VRBO.com as well as HomeAway.com and VacationRentals.com – book guests for an average of 18 weeks a year and gross $28,000. Average rental rates for homes listed on HomeAway: $1,778 per week, reports the Austin, Texas-based online marketplace for vacation rentals.
But as listings have spread to city rentals, some observers say they've turned the "vacation rental" market into more of a transient hotel business. Revenue from short-term apartment rentals can be useful: In San Francisco, 56 percent of hosts using the listing service Airbnb – a major provider of short-term urban and vacation rental listings – said they use the income to help pay their mortgage or rent, reports Airbnb. However, in urban areas, renters can run afoul of local taxing laws, as well as housing, zoning, health, and even fire codes.
Increasingly, homeowners aim to turn a profit from rentals. "They are taking a hard-nosed approach to meeting goals, offering competitive [rental] rates and marketing more aggressively," says a 2013 report by PhoCusWright, a global travel market research company in Sherman, Conn. "They are twice as likely as homeowners of five years ago to list their property online and twice as likely to use both self-marketing and VRMC [vacation rental management company] models."
Making money off vacation homes isn't a snap, however. The homes have to be managed, cleaned, and maintained. Basic costs of renting a four-bedroom, two-bathroom house with a swimming pool in popular Orlando, Fla., can run at least $9,000 a year (excluding mortgage payments and marketing and listing costs), says Mark Douglas, chief executive officer of SunKiss Villas, a local property management firm. Listing costs on the HomeAway service range between $349 and $999 a year.
Owners can try to handle all or most of those operations themselves or farm them out to a VRMC. "VRMCs typically take about one-third of rental revenue and often charge additional fees," says the PhoCusWright report.
"The idea of buying a property and renting it for a small portion of the year – hoping to command enough rent to cover a year's worth of costs and still make money – is very difficult," says Greg McBride, a financial analyst at Bankrate.com in North Palm Beach, Fla.
Even reaching break-even depends on property, location, and other factors. To determine how much rent to charge in order to break even, Mr. Douglas suggests dividing expected annual operating costs by the number of weeks you expect to rent your property. Make sure to include expected cleaning fees and taxes.
There are steps that can help boost revenues, rental officials say. Homeowners should maintain a website for the property that can be easily found on the Internet. The site should include ample photos, descriptions, recommendations from past guests, and an up-to-date booking calendar. Home-owners should be able to accept credit cards.
In addition, they should screen prospective renters to avoid potentially costly problems.