Airbnb Income

[CasaBella]

In resort areas most imcome properties are AirBNB or VRBO... how to count this as rental income for single family rent comprable if you only have 3 months of income statement?

 

[CANative]

You have to accept, and get them to accept that the rent survey is not going to be what they are used to seeing. Get them to agree in writing (as part of their order form or engagement letter) that they are going to be okay with this. I've never had one rejected or sent back for comments. I include exibits such as listings of other vacation rentals, rate cards, MLS descriptions, etc.

Part 1:

01/09/2019 - NOTES ON RENTAL SURVEY


The client has been advised that rental occupancy on a full-time, year round basis is very rare in this vacation/recreational development where pricing is well above rental housing in general in Sonoma County. On the other hand, there are numerous properties that are rented out on a transient basis under various rental programs, local and nationally francised. VRBO is becoming quite popular, along with VACASTAY, and a few others. Local RE brokerages have vacation rental departments and there are several dedicated vacation rental businesses, such as The Sea Ranch Escape and others.


Under these circumstances, a typical FNMA-style rent survey cannot be completed with any reliability. That process requires at least 3 full time rental comparables and associated data. The client and I agreed to a modified approach to the appraisal problem and develop an estimated average yearly vacation rent using data from the MLS, vacation rental managers and franchised vacation rental companies in order to develop a credible opinion of yearly vacation income.


The appraisal problems include: Inconsistent occupancy rates which can vary between type of improvements, locations on the east side of Highway 1 (so-called Hillside property), the Meadow areas west of the highway but well east of the shoreline and bluffs, and oceanfront (properties with no other property, including Commons, between the residence and the bluff top or beaches.) Other considerations include convenience of access to The Sea Ranch amenities including the pool area, tennis, equestrian features, hiking or walking trails.


Based on my interviews with local vacation rental managers these locations can be looslely grouped with an estimated or typical occupancy rate. For instance, Hillside locations typically have 15% to 30% occupancy while West Meadow locations have occupancy rates from 30% to 40%. This can vary. Oceanfront or those properties with large improvements which can accommodate larger parties and have excellent coastal views can have occupancy rates from 70% to perhaps 90%. These same characteristics also determine rental rates.


Rental stays are typically in two-day increments with some having a seven-day weekly rate which is discounted slightly. The owner of the subject property states that the subject has a $190 per day (This is confirmed by the subject's listing on VRBO under Property #392751.) For purposes of comparison this would be $380 for two nights. The owner states the average yearly income is about $35,000. This would represent a 50% occupancy rate which is above average for the size of the property, the location and the views. When valuing hospitality property (hotels and motels) I have found a strategy by owners/managers of lowering the nightly rate to increase the occupancy which can increase gross income while partially mitigating some operational costs. Refer to the exhibit page titled "Sea Ranch Escape Rates Oceanside Meadows" for a list of properties and rates. The rental property named "Villa Therese" is located on the subject's street and is listed in the attached 1007 form as Rental Comp 3. At $559 per two-night stay it is well above the rate the subject property is offered at. Note: The VRBO lists the subject living area as being 1,800 square feet and this is not correct based on the measurements I took during the site visit on January 2, 2019.


I have addressed the appraisal problem of developing an opinion of of rental income for the subject property by studying rental rate charts, interviewing property managers, analysis of listings of property in BAREIS MLS and using a location/property type occupancy percentage applied to the listed rate or described specifically in a property's listing in MLS. I have provided three examples which, in my opinion, are the most reasonably similar and allow for a bracket, such as it is. See the 1007 form which follows and refer to the comments on each of the comparable vacation rental properties.

 

[CANative]

Part II:

Rental 1: 344 Pilots Reach - Comments from MLS: A sophisticated Sea Ranch hillside vacation home with a relaxed attitude! This free-flowing contemporary home was designed by Janet MacKinnon AIA and offers beautiful outdoor spaces including 4 decks on two levels, including a private spa. Master bath has a walk in shower & tub. Upper level is open & spacious with library or office attached. Exterior has just been repainted & ready to continue with vacation rentals or be a special second home.


Home has been a popular vacation rental with VACASA, YTD 2018 gross $26,960. 2017 $48,860 with 80% occupancy. Now off rental program. Gross income is described in the listing referred to abvove. Occupancy rate is well above typical for Hillside property (east side of Hwy 1.) Occupancy rate of 80% is very high for a hillside property but not unheard of according to rental agents in The Sea Ranch.



Rental 2: 150 Masthead Reach - The Sea Ranch Escape property management. Abalone Cove / Unit 28 Lot 97 / Two level home / 6-person occupancy, children welcome. Two bedrooms and loft. (King, Queen, 2 single 3 inch floor mats) – 2 baths. Hot tub, dogs only, internet access, forced air heat, wood stove, Satellite with 40” wide flat screen TV with blue ray DVD/CD. Washer-dryer, gas BBQ, deck furniture.


Enter through an enclosed landscaped garden with large hot tub. From the garden enter into the comfortably appointed great room with views across the meadow to the ocean beyond. To the left the large master bedroom/bath suite with its own views to the ocean. To the right the dining area and kitchen, also with views to the ocean. The great room has plenty of comfortable seating in front of the wood stove and television and the dining table will accommodate your entire party. A large outdoor deck with seating and a gas BBQ is accessed through sliding glass doors. The second bedroom is located so as to enjoy views of the enclosed garden. A second bath is located next to the bedroom and a circular staircase leads to a small loft area.

$671 two nights, $1763 seven nights. Estimate 30% occupancy (Oceanside Meadow West with good views.) PGI of $122,458 x 30% occupancy = $37,000 (rounded.)



Rental 3: 39034 Hedgegate Rd - Located on the same street as the subject (third property south) The Sea Ranch Escape property management. Villa Therese / Unit 21 Lot 41 /TOT ID#2186/ 2 level home / 4-person occupancy- adults only. 2 bedrooms plus reading loft – 2 baths (1 king, 1 queen). Hot tub, internet access, forced air heat, wood fireplace, Living room with Satellite and 46” wide flat screen TV, VCR, DVD, Master bedroom with Satellite and 35” wide TV, stereo, CD, washer/dryer, some deck furniture.


Villa Therese features an expansive whitewater south coast view from living room, dining room, kitchen, front deck, loft, and front bedroom. Designed by acclaimed SF architect, Jerry Veverka, it is nestled against a hedgerow and atop a meadow rise in coveted Unit 21--a spectacular upscale meadow home for those who appreciate fine architectural design. It features high ceilings, bamboo hardwood floors, skylights throughout, and a full-featured stereo system piped throughout the house. An enormous expanse of front windows offers an unobstructed view of the entire south coast, including Black Point. The comfortable living room includes a 42" flat screen TV with satellite TV/DVD/VCR, a 400+ collection of movies, and also a wood-burning fireplace for cozy evenings. A dramatic spiral staircase leads up to a semi-private reading/sleeping view loft equipped with a professional piano keyboard. The large, protected front deck, sheltered by the nearby hedgerow, is a perfect spot for taking in the sun, ocean view, and natural setting. The sumptuous master suite includes its own TV with DVD player, plus an Italian-tiled bath with a 72" tub and piped-in stereo. A large and tastefully landscaped backyard adds to your enjoyment, featuring a hot tub with coastal views. Adventuresome guests also discover the ping pong table in the garage facility. Villa Therese is a beautiful, light-filled, comfortable home - an ideal getaway for one or two couples.

Adults only. $559 two nights, $1,503 seven nights. PGI of $102,018 x 30% occupancy = $31,000 (rounded). Property manager disclosed average income of $24,000 which would be about 24% occupancy.


From the 1007 form:

NOTES - Monthly rental forumula: Daily rate (advertised) x 365 x Occupancy rate (see previous page.) Adjustments converted to yearly amounts (Example: Superior view at $50 per day x 365 days x occupancy rate of 30% = $5,500/year) See next page for comments on each comparable rental. I have made no adjustment for two bedroom versus three bedroom as the subject has a loft that is advertised to sleep 1 but could also sleep 2 children or young adults. Comps 1 and 2 have superior coastal views and I estimate the impact on rental rate at $50 per night. No adjustments for garages vs. no garage as they are not typically included in the rental rate and are used for other purposes. Condition of properties and the subject are all essentially similar and suited for vacation rental uses. Rental comp 3 is obviously the most proximite property with very similar views. It appears that it's approximate 25% occupancy is somewhat less than typical and below the range provided during my interviews with property managers.


Reconciliation:

The range of indictions is between $24,000 and $44,000 (rounded) with Comp 2 being the bracket at $31,500 and very similar to what the subject property owner has stated. It is my opinion that the $35,000 yearly income report is reasonable and within the range of indicators.

 

[CasaBella]

WOW thank you CANative! this was extremely helpful!

 

[Tim The Enchanter]

No adjustments for garages vs. no garage as they are not typically included in the rental rate and are used for other purposes.

I can see the stip now.
What other purposes? Any sign of an MJ grow room or meth lab?

 

[George Hatch]

I generally don't get involved with analyzing vacation rentals because the majority of that income is attributable to the business interest and not the real estate itself. There's often no barrier to entry from competition (and local politics change) so what one owner does in 2017 easily can end up being completely different than what another owner can do in 2019. If my comps all have comparable locations then they're usually going to have the same potential for such operations.

Hospitality properties are notorious for financing during a good year and then failing because of a business downturn a couple years later.

The financing that goes with non-residential uses (and a hospitality business is a non-residential use) does not correspond to the financing that goes with SFRs, and neither does the underwriting.

 

[Eli]

I agree with GH, which is rare here lately. He is on point here.

 

[Michigan CG]

Th management aspect of these properties can be very high but understated by the owners. Management has to be market and not the $10 they give their teenager to change the bedding every two days.

 

[George Hatch]

The thing for a lender is that what they get back in the event of a default on one of these is not a going concern. They're not going to get the FF&E, the client list, the marketing website, the vendor relationships - none of it. All they get back is a vacant SFR, just like any other SFR in the neighborhood.

As for the income from an ongoing business, the gross rents are almost meaningless to an underwriter for the purposes of debt service analysis. It's the net income that counts and you can't get to the net income before debt service without analyzing all the expenses, including the reserves for replacements of the FF&E, the ongoing maintenance, all elements of management whether performed by the owner or by an employee or vendor, all utilities.

And then there are the rates of/on return, because after all, if the income is the thing then the appraiser needs to understand how all that works, too.

My point being that the average big box SFR lender is going to be in over their head when it comes to underwriting a mortgage based on hospitality income so they're not even going to know what questions to ask the appraiser or be able to judge what is/isn't a reasonable analysis and conclusion. They're barely capable of understanding an income approach for the average duplex under conventional occupancy terms.

If you were going to do an actual income approach on one of these you would need 2 or 3 years worth of income and expenses in order to see what the long term operating history looks like, both for the income and the expenses. And don't clutch your pearls when the income statement they give you doesn't relate to what they report on their tax returns which will be (or at least, should be) part of the underwriter's loan file. The business appraisers I've known have commented on how often their appraisals come in way lower than the seller or borrower thought they would because the appraiser went with the income/expenses reported for tax purposes instead of that reported in the loan application.

If I was going to perform a rent survey for a vacation rental for an SFR lender I'd analyze for both types of occupancy - the rents the property could generate under conventional year-to-year occupancy would comprise one analysis and the other would consist of the vacation rental business revenues. That way the lender couldn't change the question up on me after the fact.

 

[CANative]

I don't like doing these for all of these reasons. But sometimes I get hounded until I give in and this is the best that I can do to answer their question. And I won't proceed until we understand each other. They know it's transient income, that it is inconsistent, that it might not survive a change in ownership.

I'd analyze for both types of occupancy - the rents the property could generate under conventional year-to-year occupancy would comprise one analysis and the other would consist of the vacation rental business revenues.

That would be lovely but year round occupancy in remote coastal areas or around major lakes, etc. is almost unheard of while vacation rental is becoming more and more common. At least up here.

Using the data for a possible run at an income approach is futile. It doesn't work that way. $30k to $100k to pay the mortgage and leave a few good weekends and Christmas or New Years. These are second (or third) homes.