One of the most important things to know when thinking about purchasing, selling, or managing a vacation rental property is its value.
The value of a vacation rental property is an estimate of what a willing buyer, who is cognizant of the current state of the real estate market, would pay a willing seller in an arm’s length transaction—where neither party is coerced into making a purchase or selling.
Major determinants of vacation rental property value include:
- Location: Properties with remarkable views, including those of mountains or the coastline, and those close to well-known attractions typically fetch higher prices.
Also important is proximity to amenities like restaurants, retail establishments, and public transportation.
- Property condition: Well-maintained vacation rental properties equipped with modern appliances bring in more guests and command higher rental prices, making them worth more than those that require upgrades and repairs.
- Size and features: Higher values are often associated with larger residences that have multiple bedrooms and bathrooms. Extra features such as outside patios, game rooms, hot tubs, or private pools also raise the value of a house considerably.
- Booking history: A proven track record of high occupancy and favorable reviews can boost vacation rental homes’ worth.
A property valuation may be required for several reasons by an owner, seller, buyer, financier, etc., of a vacation rental home.
It, for example, guarantees that buyers aren’t overpaying and allows them to determine if their real estate investment has profit potential.
Before granting a mortgage, when the buyer is using financing to purchase the vacation rental, a lender will need an accurate valuation to make sure the property is worth the amount they’re lending.
If you’re a vacation rental property seller, knowing the value of your property will help you set a reasonable asking price that attracts buyers while maximizing your earnings.
As an owner, the assessed value is frequently the basis for the property taxes you pay to the local government. A property valuation can also assist in establishing a just distribution of your assets in circumstances of divorce, inheritance, or legal disputes.
Furthermore, a valuation may help to determine what amount of insurance coverage is suitable for your holiday rental property.
So, how do you value a vacation rental home?
3 Ways to Value a Vacation Rental Property
These are a few of the most popular methods used for establishing a holiday rental property’s worth.
Sales Comparison Approach
Widely utilized by real estate agents, a sales comparison or comparative market analysis values a vacation rental property based on the selling price of recently sold homes that have similar square footage, amenities, location (zip code, neighborhood, school district, etc.), and number of bathrooms and bedrooms. The sale date of the real estate used in this approach shouldn’t be more than six months.
To perform a sales comparison, first, find 3 to 5 vacation rental properties that are as similar as possible to the home being valued.
To locate such holiday properties, utilize internet home value tools like Redfin’s Estimate and Zillow’s Zestimate.
Once you locate these properties, look at their selling prices to get an idea of the average price range.
Looking at the sales price of comparable homes is insufficient to provide you with a reliable valuation because no two-holiday rentals are exactly the same.
To obtain a fair market-based value, you must account for any differences in condition between your property and the comparables. For example, you should deduct from the sale price the cost of a new roof that your vacation rental requires.
Income Capitalization Approach
This approach uses the capitalization rate and net operating income (NOI) of a vacation rental property to value it.
- Formula:
NOI = Annual Rental Income-Annual Expenses
Assume that a holiday rental property generates $50,000 in rental income annually and incurs $15,000 in total operating costs, which include property taxes, insurance, marketing expenses, maintenance, utilities, and management fees. As a result, the property would have a $35,000 NOI.
An investment property’s expected rate of return is known as the capitalization rate or cap rate. Though it varies depending on location and market conditions, most seasoned real estate investors agree that a cap rate of 5% to 8% is ideal.
Let’s suppose for our calculations that the cap rate on vacation rental homes in Big Bear is 8%.
- Formula:
Property Value=NOI/Cap Rate
Finally, using our example figures, the estimated value of the holiday rental property would be $437,500.
- $35,000 / 0.08 = $437,500
Professional Appraisal Approach
While do-it-yourself valuation methods are helpful, consider engaging a professional appraiser.
An appraiser is qualified and licensed to perform in-depth assessments of vacation rental homes, considering features like location, facilities, condition, repairs done, and more, to provide you with an accurate and impartial market value.
Due to the high standards of appraisers’ work, lenders usually employ one to assess a property’s worth before approving a mortgage.
As a vacation rental property owner, one of the main benefits of hiring an appraiser is that their valuation report can help you identify any possible areas for improvement that could raise the value of your property, increasing its appeal to potential renters or buyers.
Unlock the Full Potential of Your Big Bear Vacation Rental Property With Sky High Cabins
Do you own a charming mountain cabin or a gorgeous lakefront retreat, or are you thinking of buying one? Your Big Bear vacation rental can provide a more steady income if you work with Sky High Cabins, the industry leader in Big Bear cabin rentals and management.
With years of experience, we specialize in offering Big Bear, California, vacation homeowners with full property management services. This means you never have to handle guest relations or property management yourself—we handle everything from professional online listings on well-known vacation sites like Airbnb to offering memorable stays that entice guests to return!
For a free consultation to discover how Sky High Cabins can manage your vacation rental property for optimal profitability and release you from the burden of day-to-day operations, enabling you to enjoy a lucrative, passive income, call us today at 909-366-0706 or fill out our online contact form.
