Vacation Rental Valuation 101
In our experience, very few vacation rental property owners know how to calculate the true value of their property. Ask a typical Airbnb host how to do a vacation rental valuation, and they’ll probably start talking about what other houses or condos in the neighborhood are selling for, even if those comps aren’t vacation rentals.
The fact that very few real estate agents specialize in marketing and selling short-term rentals further muddies the scene. A lot of real estate agents don’t know how to do a proper Airbnb valuation and even experienced investors disagree on how best to approach the exercise.
In this detailed post, we apply universally accepted principles of appraisal and commercial property valuation to show you the proper way to put a current value on your short-term rental asset. We’ll also help you sort out how to approach selling a short-term rental property when the time is right.
What Would an Appraiser Do?
Appraisers have been grappling with the proper way to value real estate assets for decades. It’s not always obvious because any one real estate asset can be deployed in different ways. A single-family home or condo can serve as a residence, a long-term rental property, a short-term rental property, or even a source of raw materials. Appraisers typically tackle this tension by deploying different methods of calculation to arrive at separate valuations for each use case. They then compare the results and arrive at a single final value based on what they determine to be the highest and best use for the property for a likely next buyer.
Note that it’s the “next buyer” that holds the key here, not your current preference to use the asset as a vacation rental. Just because you’ve decided to pursue short-term rental income, doesn’t mean that’s necessarily the most lucrative use for the property. If your rental is in a rapidly gentrifying area, the next buyer might be willing to pay more for it to move in and live there rather than to acquire an operating business. You’ll want to run the numbers both ways and then compare the results to arrive at an accurate valuation for your property. This vacation rental valuation exercise will also help you figure out the best marketing strategy to deploy when you do decide to sell.
Valuation as Owner-Occupied Residence
This is the easy and obvious way to value a residential property and any decent real estate agent or broker can come up with a number fairly easily. They won’t all agree and of course your particular property might sell for much less, quite a bit more, or not at all. Every property is unique, for better or worse!
The standard home valuation process relies heavily on recent comparable sales of similar properties in your neighborhood. Brokers and agents used to protect this data as a closely-held trade secret, which made doing the calculations on your own nearly impossible. Fortunately for you, the increasing public availability of sales comp data via online platforms like Redfin and Zillow makes this exercise much more accessible to property owners.
Here’s our preferred (rough) approach…
Find as much comparable sales data online as possible. We’re assuming that nearly all publicly available data is still from owner-occupier transactions. This may not always hold true in popular vacation markets, in which case you’ll probably want to consult a local real estate agent for thoughts and advice.
By “comparable,” we mean:
- Exact Same Type: Single-family, condo, townhouse, etc.
- Similar Square Footage: No more than 25% larger or smaller
- Recent: Ignore any sales more than 6 months old
- Local: Same neighborhood, zip code, school district, etc.
Pay attention to the prices paid per square foot, rather than total selling price. Run a quick average of the per square foot comps data and then multiply the result by the square footage of your property. Subtract 5-6% for brokerage commissions and another 1-2% for other selling costs.
Voilà! You now have a rough baseline estimate of likely net proceeds from a sale to someone who will live in the property full-time.
Valuation as an Investment Property
Next, you’ll want to value your short-term rental property as an ongoing operating business. Real estate that generates positive cash flow is generally valued on the basis of a “market” capitalization rate (cap rate). Put simply, this is the annualized rate of return, excluding the impact of debt, that a new investor will require in exchange for owning and operating the property going forward.
It’s important to note here that “going forward” is not the same as “what happened last year.” Short-term rentals are “investment” properties, and investment properties, like all other businesses, are always valued based on projected financial outcomes, not historical results. While your past financial results may heavily impact a new buyer’s expectations of what will occur in the future, it’s ultimately the expectations themselves that carry the day and determine the price someone is willing to pay.
To value your short-term rental as an investment property, you’ll want to start by projecting your financial results for the coming 12 months. Is your daily rate going up or down? Is occupancy increasing or decreasing? Are your property taxes stable? Are there local vacation rental regulations brewing that might limit your (or a new owner’s) ability to operate? Are there new occupancy taxes on the horizon that might reduce your net cash flow?
If everything is fairly stable, you can use the prior 12 months’ results as a starting point. You may also want to bump it up by a 2-3% inflation factor. Just remember that a prospective buyer might have a completely different assessment of what the future has in store. We’ve found that you’ll increase the accuracy of your valuation if you favor realism over wishful thinking.
The key figure you’re going for here is projected net operating income (NOI) for the next 12 months. Here’s how the math might break down for a sample short-term rental property:
| # Days Available | 330 |
| Occupancy | 72% |
| Average Daily Rate | $245 |
| Projected Revenue | $58,212 |
| Operating Expenses | ($14,500) |
| Net Operating Income | $43,712 |
Use our nifty Airbnb income calculator to run the math for your own property!
Note that you don’t include mortgage payments or capital expenses in your NOI calculation. The next buyer will make his or her own assumptions about financing, while any expected capital costs will be subtracted from your valuation at the very end.
So let’s assume $43,712 is a realistic projection of short-term rental NOI for the next 12 months. What’s next? Now we just need to know what the market’s required rate of return is for a stabilized short-term rental investment property. And that’s where things get a bit tricky!
Cap Rate for a Vacation Rental Valuation
Historically, there just hasn’t been much of a “market” for this type of investment property. Most vacation rentals were bought on hopes and dreams, not careful financial analyses. This is starting to change, but the traditional market for long-term rental homes is probably the best proxy for determining the required rate of return for a vacation rental valuation.
As we update this post in January 2020, you can get 1.5% interest on a high-yield savings account without lifting a finger. Proven long-term rental properties, which require some ongoing work and attention but not as much as short-term rentals, currently sell at 5-7% capitalization rates. Common sense would argue that the appropriate rate for vacation rentals is higher, perhaps 8-10%. Not only are vacation rentals not as easily financed, they’re significantly more demanding from a management perspective. They’re also subject to considerable regulatory risk from local governments intent on protecting ideals like “neighborhood character.”
The flip side of course, is that operating your investment as a full-time short-term rental will typically deliver significantly higher NOI than operating as a long-term rental. The question is, does the higher NOI more than compensate for the higher cap rate?
Let’s assume the market cap rate for your short-term rental is 8%. Here’s how to arrive at your valuation:
(NOI of $43,712) divided by (cap rate of 0.08) = $485,689
Subtract $15,000 for that new roof you’ve been putting off doing, and you’re at $470,689. Knock off another 5-6% for commissions plus 1-2% for other closing costs. You’ll end up with final net expected proceeds somewhere around $438,000 (assuming 7% total selling costs).
Which Property Valuation is Higher?
Once you’ve finished both valuation exercises, compare the two outcomes to get a feel for which might net a higher selling price. Keep in mind that pursuing a marketing strategy solely focused on investors interested in short-term rentals definitely carries more risk than a traditionally brokered property sale. That said, if the upside appears to be worthwhile, read on for some tips and advice about your next steps.
How To Sell Vacation Rental Properties
This is today’s million dollar question for short-term rental owners. How do you market your property to other vacation rental operators looking to add to their portfolios? Are there real estate agents that specialize in short-term rental transactions? If so, what are the chances he or she will also know my local market?
“Not likely,” is the answer.
The marketplace for buying and selling short-term rental properties just isn’t very well developed yet. You may be able to find a good local agent with a track record of selling long-term rental properties, but it’s unlikely they’ll know where to find the right buyers or be familiar with the intimate details of short-term rental operations and cash flows.
This is where your own personal knowledge and grasp of investment property valuation will prove essential. If you’re serious about getting top dollar for your short-term rental asset and are convinced this is the highest and best use, then you’ll most likely need to be heavily involved in the sale process. Share your math with your agent, make sure the marketing materials focus on opportunities for the next buyer to increase cash flow, and help your agent figure out how to reach a promising pool of established (or aspiring) short-term rental operators.
Exploring a Strange New World
In deciding to sell a seasoned short-term rental property, you’re boldly going where few property owners have gone before. Expect the adventure to be exciting, confusing, challenging, and (hopefully) well worth the added risk and uncertainty.
If you’re currently marketing or have recently sold a short-term rental to another STR operator, share your story by dropping us a note at:
lordy(at)rentbumper(dot)com
We’ll anonymize the responses and post a follow-up article with more tips and advice soon. One aspect we’re particularly interested in is how you handled the transfer of past guest reviews, online platform listings, and other STR marketing resources to the new buyer. The platforms seem totally uninterested in making this easier for buyers and sellers, and that’s a real shame. We’d like to work with the likes of Airbnb, VRBO, FlipKey, and Bookings.com to give property owners the option of letting their listing and reviews data run with the property instead of the host. This would bring substantially more liquidity to the STR asset market and allow more hosts to build real businesses with lasting entity value.
You Made It!
Thanks for reading this far and we hope you’re now feeling a bit more confident (and realistic) about how to calculate a vacation rental property valuation.
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