You are an investor and you are looking for a property management company to manage your vacation rental property. Finding a good local manager is becoming more difficult. Vacation rentals have proliferated to the point very few short-term rentals are profitable. A rental management company makes money when guests pay for a stay. Fewer stays, lower income for the rental manager and of course the owner. Worse yet, foreclosures on short-term rentals are on the rise. This puts the rental property manager in a bind because when guests book in advance and the property is no longer available, it’s difficult to place them. The local rental management companies suffer both a financial and reputation blow.
Internet property managers are starting up it seems every day. A few people, computers in an office space in San Francisco, and there you go, instant short-term rental property management. I have written about this type of management in other articles.
This is now what an investor needs. They need “boots” on the ground, someone who will look after their property with real eyes. Anyone can operate a booking system with a computer. The real work of property management is local. Let’s get to the real point of this article.
Local vacation rental property management
The property management company that I am an investor in is a local company. We manage rentals that are within a short drive of our office and managers’ homes. Why? When something goes wrong, a real live person must be there. It depends upon how much you value your real estate investment. Do you want a long-distance manager or a local manager?
The real problem now is that real local property managers need to make a living. Many of the internet start-ups are expending capital that belongs to someone else. Some of these companies are not profitable and will eventually succumb to the financial pressures of too many vacation rentals and not enough guests.
Local companies are experiencing the same issue, too many properties, each with far fewer guests than just two years ago. The consequence of this changing environment is that all property managers are earning less income. As I mentioned above, what is worse is when their rental properties are sold either from a posted sale or through foreclosure.
Property managers deal with stress
If the property managers do not have a location to move their booked guests, they will suffer the fallout. It’s also the stress to deal with the situation and the disappointed guests.
Worse than the above, is what happens to property owners. Many people bought vacation rental properties after reading social media stories about getting rich quickly. Estimates of rental income are much inflated and those inflated amounts are going around the internet and in social media.
I spoke to a prospective buyer recently who was ready to buy a property that frankly would have probably been a good vacation rental. He told me that he was financing it with 10% down. I told him he would not be profitable since the purchase was intended to be a profit maker for him.
The property for sale made $50,000
My prospective buyer said that he read on the listing that the property had made $50,000 in the past year. I do not doubt that the real estate agent was quoting fact but the data was old and as we were 8 months into the year, he failed to ask for year-to-date numbers which would have shown very low income.
At best that property would have generated about $20,000 in 2023. His fully loaded costs were about $23,000. With a high-interest rate, his equity payments would be nil. Values are slipping so buying it strictly for appreciation is out of the question at least for the short term.
Without a doubt, if he had bought that house, I would be putting it back on the market for him within six months. He would have lost the $20,000 he invested in furnishings, the purchase costs, and the selling costs. If my property management company had taken this property on as a client and guests had booked, they would have to be moved.
Rental owners become stressed
You may think that going through all of this as a buyer is stressful and costly. The guest experience would have been terrible and one more thing that most people are unaware of is the problems caused by property managers. I am not talking about guest reviews or the management fee, I am talking about how the rental owners become stressed and make it difficult for rental companies to conduct business.
Desperation is a terrible thing. When owner statements are reviewed and there is little or zero income shown, the previously good property manager is suddenly not doing their job. Market conditions may have changed or they were already bad when the property was purchased. First-time investors come to us full of excitement about their new property.
This is completely natural. They have heard that investing in real estate is a good way to build wealth and they would be correct in that assumption. Unfortunately, the source of their information is usually not current. And, many are not performing adequate due diligence before signing a contract to buy.
Jumping into a short-term rental property
This phenomenon of jumping into buying a short-term rental property where I work on the Mississippi Gulf Coast is particularly pronounced. Someone living in a 40-year-old house located in Southern California, a Chicago suburb, or elsewhere that is worth nearly one million dollars looks at a $250,000 house here and their eyes widen.
They can’t believe their good fortune in finding this area where you can buy a home within walking distance of the beach for less than $300,000. The next thing they do is call a real estate agent and make an offer. Sometimes the offers are increased if there are more buyers interested.
Quite a few buy without looking at the house and the surroundings. The last thing they seem to do is contact a property management team before they start spending money on furnishings. We often meet people who have purchased the wrong locks, lights, and other items. They may buy a small steel fire pit which will waste away in a short time instead of one made of stone that we recommend. I have noticed that some love the prospect of decorating their vacation house, it’s a project that keeps them busy and it’s fun.
There is too much to know
I wish that I could have learned they were looking for a vacation rental house before they bought it. There is so much to know before you invest the first dollar that only professional property managers with years of experience know. Regardless, our property management company is willing to work with investors to manage their short-term rentals. What has changed is that we no longer work with just anyone.
Our policy has changed to the point where we will not manage property for investors unless they have no mortgage or they can tell us that they are financially secure enough to cover all costs without any income. That means zero rental income.
This is a major change for our business. Working with investors who are constantly stressed about their income and expenses is not fun. These investors constantly request things, try to get involved in pricing, and everything in between in the vain hope that something will improve. They then begin to think that our company is not doing well for them, that they could do better on their own (saving the fee we charge) or another company could do better.
Local vacation rental property managers make real effort
Many local property management companies put a great deal of time and effort into helping investors with their property. This goes well beyond greeting guests, managing the calendar, disbursing finds, cleaning the property, and working with contractors. It means a call at 10:00 PM for new batteries in the remote control. A leaking sink on Sunday going through their list of contractors until they find one who will go out.
Going by properties before a large storm ensures the lawn furniture does not blow away. Making small repairs that they do not charge for. And the hours required to set up the property and meet with owners both in person and via telephone.
Two or three hours waiting for cable
How about the two or three hours of waiting for the cable guy or pest control or maintenance people to get their work done? Much of what a good property manager does is not compensated for in the fees earned from rentals unless the business is booming.
Now when weeks go by without any revenue, property managers are still responsible for the property. Vacation rental management becomes more difficult when the managers have to manage the owners with anxiety.
We have had a couple of clients who were with us for a few months. One property was renting nicely with about a 40% occupancy rate and a 5-star review. The problem is the “what have you done for me lately” concept that appeared when they looked out on the calendar and saw months with little or no activity. Guess what? Correct, they were in debt up to their eyebrows on the property.
We have decided to go in a different direction
Many of the activities mentioned above started to develop. Finally, they called and said, “We have decided to go in a different direction”. During this very short time, we helped with the furnished house, went shopping, assembled furniture, and much more. Our company charges for this service and we decided to delay charging them because they were trying to get started.
When I talked with them about leaving us, I mentioned all of the work that we had done without a charge. I explained that we expected to recover over a long-term relationship. The answer is you should have billed us. Immediately I knew they were so desperate that we would no longer be able to work with them.
I found their property listed and they were the host. That commission was the deal breaker. Unfortunately for them, we had three bookings in the future which we moved to other properties. I recently looked and after several months, they had only one guest for a total of three nights in 90 days. I fully expect the property to be offered for sale soon.
Future clients will be interviewed
It was this situation and a couple of others that sent a message to us that we have to interview future clients. Fortunately, the last several that have come our way are people who fit into our new policy as follows:
- Zero mortgage or
- A mortgage but it and expenses are affordable and/or
- The property is a true vacation home they will use and extra income is just that extra
- They agree to keep the property well-maintained per our request.
- Agree that the calendar, pricing, and other aspects of the property are at the discretion of the property management company
- Get involved in the marketing strategy using their social media to recommend friends to rent their property
The difference between clients who agree to the above and someone who just purchased a vacation rental property with a mortgage and usually without an adequate analysis is night and day. The last thing any professional property manager needs is to take on the stress of an over-extended owner. Believe me, there is sufficient stress in the property management effort on its own. What do you do with a family when the AC goes out? How about the roof leaks?
There is a water line break? We like other full-service property management companies feel the pain of the guests. And you should know nothing stops working during regular business hours. It’s always at night on a weekend.
Vacation rental managers spend time and money
We spend a lot of time making sure that the property’s condition is suitable for our guests. When the hot tub stops working, we need to get it fixed. I hope that you can see the point that I am trying to make which is this: The vacation property management business is changing. Some local vacation rental property managers are not earning enough money to remain in business and it’s worse when they have to expend fuel driving back and forth to a property to manage contractors. In good times things tend to work out well. The industry is no longer in the good times. We may have a long way to go before the situation improves and many short-term rentals are sold as permanent residences.
Other local companies are starting to refer people to us because they can no longer manage a large portfolio of underperforming properties. Even the time to drive by dozens of properties is time-consuming and costly when there are no guests. My company is not in the same position, we have decided to keep the number of properties that we manage to a small number and they are all located in clusters on or near the beach.
By implementing the new policy of interviewing prospective clients and only taking those who pass our six-point test above, we will be able to remain in business and continue to provide great customer service. At some point, those internet companies will also fail because you need income even when you are using investors’ capital.
Internet property managers take anyone
They will start picking up owners that good local vacation property managers do not want. A few months later they will lose them because when the people who jump around find that the “grass is not greener over the hill”, they will give up.
I have written about what property owners can do if they are in a situation where they are not earning enough to cover their operating costs. Sell or rent long term. The market as of this writing was still good for the sale of properties and the long-term rental market rates are still higher than a few years ago.
The problem is that some drag it along without deciding to “see if things get better”. Unfortunately, they probably will not get better any time soon. Selling before foreclosure is always the best thing to do if you are not going to rent your property.
Over saturation of vacation rental properties
This situation with an over saturation of vacation rental properties is a problem throughout the United States. There are simply more vacation rental homes than there are vacationers. The vacation rental property business is changing.
Some communities see the overabundance of short-term rentals that are vacant as a reason why there are not sufficient housing options. Rules are being considered to limit vacation rentals.
Soon, only people with financial resources and the need for a true second home will be the primary market for a rental property management company or real estate agent working with investors.
It’s always a good time to rent homes if you buy right. Your investment property is still a valid way to invest capital and again if you buy right.
I recommend to prospective investors to acquire vacation rental properties when a current owner has offered it for sale fully furnished at a bargain price. Then and only then, run your analysis. The most important thing is the evaluation of prospective guests, days booked, and the price per day. This information is hard to find but there is a free source most people ignore until after they have already made the purchase.
A local vacation property manager knows all. For peace of mind, contact a local short-term rental property manager and get the lay of the land. They in fact may have a client who wants to sell.
Buy a distressed vacation rental property
A great way to help ensure profitability is to buy a property that has been managed by a professional local property manager. The owner can make introductions or better yet, you can find this vacation rental property through a local property manager. If you stay with the local property manager after the purchase, your property retains its history.
Instantly you have 50 stays at your new vacation rental property. This is how you skip to the head of the line. Potential guests want to stay where someone else has stayed. If you buy a property and start from scratch, you will find that it takes a long time to build a good history. As I always say “the more you rent it, the more it will get rented”.
In conclusion, don’t be surprised if a local vacation rental property manager interviews you about your intentions and decides not to accept your property into their program. Not all local vacation property managers have reached the same conclusions that we have so it may be possible to squeeze in as a client before they change their policies. Of course, you can always go with that San Francisco company that drives across the country to change a light bulb at midnight.
Please visit our short-term rentals/vacation website. Read additional articles there. If you are visiting the Mississippi Gulf Coast, check out our properties for short-term rent. The website may have some that are for sale.