Turn vacation home into cash cow

Study finds more owners covering 75% of mortgage through renting

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Sep. 2, 2011

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Study finds more owners covering 75% of mortgage through renting

Steve Bergsman
Inman News™

To me, one of this year's biggest surprises in the hot initial public offerings market was the success of HomeAway Inc., an Austin-based operator of vacation-rental websites.

In June, the company's successful IPO raised $231 million as HomeAway opened trading with a nifty price of $27 a share.

I always considered HomeAway more of a real estate play on vacation-home rentals, but the IPO market, which has been very generous this year to startup technology companies, viewed HomeAway more of a tech play, as it owns more than 30 sites mostly dedicated to the online vacation-rental business.

I guess we were both right.

Still, the IPO caught my attention, and when I began looking at HomeAway's core business I came across a recent study the firm had undertaken on the direction of the vacation-rental market.

The lead information from HomeAway was about the strength of vacation rentals heading into the peak season, but what I found more interesting was the claim that the number of owners who cover the bulk of their mortgage with rental income is increasing.

The lack of syntax obscured important trend-line information: Those investors who have a mortgage on a vacation property have been able to recapture more of that expense through rentals than had been the case in recent years.

To be specific, according to HomeAway, 48 percent of owners who financed their vacation home said they're able to cover more than 75 percent of their mortgage by renting to travelers. That was up from 38 percent a year go.

About 65 percent of owners earn enough to cover at least 50 percent of their mortgage

Of course, this kind of positive news means more people will think about renting their vacation homes, which increases business for companies like HomeAway, so on one hand it might all be a little self-serving. On the other side of the corporate coin, companies have to do this kind of research to figure out which way their business is heading.

I called Alexis de Belloy, HomeAway's senior vice president of North America, to see what's what.

Underlying the change has been better rental programs by individual owners, said de Belloy. "As people get more sophisticated about renting, they are able to generate more income."

There's a learning cycle in the business. At first, buyers of vacation homes settle in and use the property for themselves. After two or three years, they realize they are not quite using the home as much, or even if they are, there are upkeep expenses even when they are not there, so they start to rent. Then, they have to learn how to rent with efficiency and acceptable income.

"You have to find the right places to rent and the right places to advertise," de Belloy said. "You have to learn how to properly set your rates, how to adjust rates for the different seasons, and how to make your property stand out."

Renting a vacation home is a slice of the property business that has come into its own, partly because of the bursting of the real estate bubble. Up until 2006, vacation-home owners didn't really worry about expenses because they figured price appreciation would eventually override ongoing costs. Those days are over.

Indeed, even vacation-home prices suffered serious declines over the past four years. Depending on location, prices have fallen up to 50 percent from the bubble years.

"Generating income to cover the mortgage is important," de Belloy said. "You can't count on appreciation."

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