Vacation Rental Income for North Lake Tahoe – Estimates
Vacation Rental Income for North Lake Tahoe – Estimates: What potential home/condo buyers and investors should know when it comes to generating short-term vacation rental (less than 30 day stay) income in our resort area.
I am often asked by North Lake Tahoe and Truckee home/condo buyers and investors what they can expect to generate in short-term vacation income on their North Lake Tahoe, or Truckee property as part of the Tahoe home buying process.
While I am not a vacation rental agent and I do not run a vacation rental company, in general, this is what a potential home/condo buyer, or real estate investor should expect when it comes to generating short-term vacation rental income in the North Lake Tahoe – Truckee area.
There will always be exceptions to this analysis and over-view, but historically this will most likely be the situation when it comes to generating vacation rental income for the North Lake Tahoe – estimates for our area.
As a buyer looking for rental income, always investigate the information provided and talk to a vacation rental manager on what you could expect on the specific vacation/second home you are considering buying.
What is the Bottom Line? For those that want the quick answer, here you go!
- Most properties will not cash flow positive in the North Lake Tahoe – Truckee area.
- Best case for a rental property is a break-even situation. Most properties will come up short on rental income paying for expenses (see list below of potential expenses to be covered), but some may pay for operating expenses/taxes and generating some positive income.
What is meant by break even?
- Pay annual property taxes. Learn more about property taxes in our area here | Mellos-Roos Taxes
- Normal operating expenses (utilities, insurance, snow removal, and Home Owner Association (HOA) fees if applicable).
- Assume property is a cash sale and there is no type of mortgage payment.
- Assume renters pays the Transit Occupancy Tax (TOT) and any other special occupancy tax.
- Assume renter pays the cleaning fee.
- Assume property owner is paying a professional rental company management fee of 25%-50% of gross rental revenue generated on the property.
- No capital improvements, or major repairs are needed
Why won’t your North Lake Tahoe – Truckee property cover expenses and cash flow positive?
Occupancy Rate – Seasonality: Unlike other resort destinations that have a steady year-around demand (limited off-season), the North Lake Tahoe – Truckee area is a tourist destination that has short, high-seasons (Premium Rate Seasons).
- Summer: 45-60 days (Father’s Day in June – Labor Day – September)
- Winter: 45-60 days (a couple of days before Christmas through the end of February)
While the demand for vacation rentals will happen before and after these high season periods, the demand for vacation rentals tends to be limited to the weekends (one-two night stays). The pre/post high season demand continues to declines as we move closer to the next high-season start date.
Occupancy Rate: 90- 120 days (annual use), which is 25% – 33% on an annual rate. While a higher occupancy rate may be possible, remember booking rates will drop in non-prime season rate.
As a general rule of thumb, for planning and budgeting purposes only, using 100 rental days, which historically has been a good planning number to use for estimating annual occupancy rates in the area.
Why the lower Occupancy Rates? Unlike other resort destination areas (even within the Lake Tahoe area), the North Lake Tahoe – Truckee area is not a convention destination area for large groups.
It’s part of the charm that the North Tahoe area offers – restricted development, but it also means we don’t have large meeting facilities that can accommodate thousands of event goers in this part of the Lake Tahoe area (South Lake Tahoe and Incline areas are not considered part of the North Lake Tahoe – Truckee area), which means the off-season demand, that could be off-set with larger group/industry events is not an option for our home owners.
If we have a poor snow year, you’ll see a drop in demand for winter vacation rentals.
If we don’t have good summer weather conditions, you will see a drop in demand for late summer vacation rentals.
Room Rate Pricing: Peak seasonal pricing is reflected in the accommodation rates, but those rates are limited depending on your location, condition of your property (luxury, high-end features and competitive with newer construction) and time of year.
- Ski-in/Ski-out will command top dollar pricing and demand at a ski resort during the winter season, but will have little appeal in the summer months, and will most likely rent at a significant discount.
- Lakefront will command top dollar pricing and demand during the summer months, but will have less appeal during the winter months depending on how close they are to local ski resorts.
- A cabin, mountain home, or condo on the Lake Tahoe area will typically generate income in both high seasons, but the farther away from the ski resorts the less appeal those properties may have for the winter renter.
Buyer Tip: Know when rental revenue is generated for the property you are considering.
If it is possible, potential buyers should review past rental histories and see when most of the rental income is generated.
Is it year around, with most in the prime high-seasons? Does one season bring in more than the others? Is one season dominated? Is the property just rented out only during the holidays? Is the current owner doing “ski leases” to round out income?
What is a “ski lease”? A ski lease is a 2-6 month rental that takes place beginning as early as November and as late as January (right after Christmas/New Year Holidays). The renter pays a monthly rate that is at a slight premium to what a long-term renter would pay, but is less expensive than renting out on a nightly basis.
The ski lease renter often pays utilities and snow removal; however, depending on the rental amount those items may be included in the lease.
A ski lease is appropriate for an owner that is not going to want any personal use time in the winter.
So let’s do an example so you can see how the numbers “pencil” out.
Vacation Rental Income/Cost Example:
Assumptions: Purchase price $500,000 for a 3 bedroom, 2 bathroom, 1,500 square foot cabin (no garage) in Carnelian Bay that sleeps 8 people (2 per bedroom, and 2 on the pull-out sofa sleeper).
The property condition: An open great room floor plan with vaulted ceilings and is upgraded with hardwood floors in the living room area, newer carpet in the bedrooms/hall, a newer kitchen with solid granite counter tops, stainless appliances, updated bathrooms, flat screen TV’s and furnishing that are mountain style, tasteful and less than 10 years old, and in good “like-new” condition.
Annual Short Term Vacation Revenue Estimate Before Taxes and Expenses:
|$8,750||25 Holiday Rate days at $350/night||Christmas & New Year’s – 12 days, Martin Luther King -3 days, Presidents Week-7 days, 4th of July – 4 days|
|$3,000||10 Average Holiday Rate days at $300/night||Memorial Day-3 days, Labor Day-3 days, Thanksgiving-4 days|
|$5,775||21 days at High Season Summer nights $275/night||21 summer rental days (3 weeks not including holidays)|
|$5,775||21 days at High Season Winter nights $275/night||21 winter rental days (3 weeks not including holidays)|
|$3,500||20 Off-Season $175/nights||20 off-season days (10 weeks of 2 night rentals)|
|$26,800 gross rental||97 Total Days (target 100 days of rental use)|
|-$7,504 Rental Fee||Less Management fee of 28%|
|$19,296||Gross Income to Owner before any expenses|
|$19,240||Annual Expenses||See Expense Breakdown Below|
Here is an estimate on potential costs. Costs will vary depending on the actual PUD, energy condition of the property, and actual use, but are good working averages for initial budgeting purposes as of 09/15/2016.
|$6,250.00/year||Annual property tax*: $500,000 at 1.25%*|
|$2,400/year||Property Insurance includes landlord coverage|
|$310/year||TTSA Sanitation $155/6 months|
|$1,800/year||Trash $75/month – 1 can|
|$2,600/year||Gas $100/month for 5 months and $300/month for 7 months|
|$950/year||Electric $50/month for 5 months and $100/month for 7 months|
|$1,200/year||Misc. Small Repairs/Replacement $100/month|
|NA||If your property belongs to a home owner association (HOA) for recreational, or master planned community add that cost here.|
|$0||Cash Sale – No Mortgage|
|$19,240||Total Annual Operating Expenses|
* Approximate percentage, good for planning purposes and your first year of property taxes.
You can see why a break-even is a reasonable assumption when it comes to vacation rental revenue estimates and planning for cash-flow.
From a budget/planning standpoint, based upon what properties in our area have typically generated on an annual basis, this is a reasonable approach.
Costs will vary with use, and property managers. This is an illustration on why vacation rental properties are potentially break-even with no mortgage.
One item that will be a variable for property owners will be the management fee. Owners that choose to do their own property management, or go with a vacation rental model that passes part of the property management fee back to the renter (service fee) will improve their rate of return.
However, owners will find that lining up the professional cleaning will be their biggest hurdle (limited work force) and is the hardest part of the management process for owners that do not live in the area. What happens when your cleaner doesn’t show up, or takes the holiday off?
Tips for New Tahoe Owners:
- If the property you are buying is already on a rental program, stay with that property management company for at least the first year you own the property. It is your best opportunity to learn the ropes, and keep income coming in.
- Meet with the rental management company at your new property and get their suggestions on ways to improve the property, rental appeal and income.
- As a reminder, Tahoe Buyers should always conduct their own investigations and analysis on any property they are considered buying and satisfy themselves on the information they have gathered, or have been provided by third parties as real estate agents do not verify any third party information.
If your goal is to cash flow positive a property here in the North Lake Tahoe – Truckee area, this is mostly likely not the best place to buy, but each potential home/condo buyer needs to make their own determination based upon the most recent available information on the specific property they are considering.
If your goal is to buy a property here in the North Lake Tahoe – Truckee area and cover some expenses because you are looking to make a life-style investment here in the area, you’ll have a good idea on how our vacation rental numbers are working, and what to expect in the buying process!
Vacation Rental Income for North Lake Tahoe – Estimates, what every potential buyer should know before they buy – the pros and cons!
If you have questions, or want more information on buying here in the North Lake Tahoe and Truckee area, call me, I can help you too!
One last disclosure – I am not an accountant, CPA, Vacation Rental Manager, and I do not run, or operate a vacation rental company in the area. The information provided is for general information purposes only, and is subject to change, and/or correction without notice. Buyers should always do their own investigations as each property is unique and may present a different opportunity..
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All information is deemed reliable, but is subject to change, and/or correction without notice.
Vacation Rental Income for North Lake Tahoe – Estimates