Clark Twiddy is the President of Twiddy & Company, a hospitality and asset management firm along North Carolina’s Outer Banks.
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Ever wonder how people come up with a price for a vacation rental? Well, the answer is changing rapidly as the industry overall is impacted by a wide range of forces all driven by new levels of visibility, awareness and access.
The soaring popularity of vacation rental homes located in drive-to destinations surpasses most any proxy model in memory. This is in part thanks to the pandemic’s impact on vacation rental homes as a viable investment platform — look no further than Airbnb’s IPO for a verdict on this trend. With these factors at play, the vacation rental home market entered a new phase entirely.
Notable both for annual revenue and also, with increasing demand, a viable pathway to overall asset appreciation, rental homes have taken on a few identifiers. In many communities across America, they have become not only vacation homes but self-contained operating companies that compare in many ways to other equities in their performance, structure and investment intentionality.
By extension, this popularity and subsequent financial attractiveness are related to many other topics. These include affordable housing, workforce development and student head-count trends. In short, it’s a hot topic and at its core is the surprising financial capacity of vacation homes — in the right places.
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As with any investment, every number tells a story. The vacation rental community is only now beginning to see more structured financial interactions between, for example, annual rental revenue to overall home prices. It’s this ratio-driven interaction that in many resort areas is quietly fueling home prices in a way that more conventional supply-and-demand forces can’t fully explain as they do in other more purely residential areas. These structured interactions are attracting professional investment interest at a jaw-dropping rate. As with any financial interest, it comes with expectations for a sustainable return on investment.
Look no further than the exploding technology around home pricing tools in the industry overall for evidence of this interest. Pricing finite time in a given vacation home has become a cutting-edge collision between data science, performance marketing, pricing agility and speed-to-market. This combination is based on the idea that time is worth different amounts to different people at different points in their lives. For example, a regular soccer Friday to one person may actually be an only daughter’s wedding day to another. More broadly, in a world defined in many ways by uncertainty, the gaps between uncertainty in the minds of consumers and our pricing reactions have become key differentiators in terms of speed to close the gap sustainably.
In practice, pricing any given vacation week used to be, only a few years ago, largely a bell curve exercise around the high point of a vacation season. It might be the Fourth of July in coastal areas or the height of the ski season in others. Now, however, with the very idea of seasonality being pushed to new boundaries, complex RUCA pricing equations are emerging. In this scenario, “R” is the risk associated with the pursuit of a given return in the market, and “U” is the uncertainty around predicting the conditions around even a short-term future. “C” is the complexity around specific home variables such as amenities, location and headcount, and “A” is the ambiguity around complex systems interacting. For example, the Outer Banks bridge closure last year essentially brought all business on the island to a standstill.
Pair that expression with a relationship to a potential sales price and now you have not only a dividend concept but an appreciation concept as well. The higher and more consistent the dividend, of course, the more it drives value to investors. There stands the key insight — home pricing in many coastal and resort areas is now being driven in part by rental performance measures. This drive, in some ways, has never been done before.
If you’re thinking about buying a home and renting it, you’re entering a space that is rapidly gaining in complexity and technology — probably not unlike your day job. To help fully understand your potential for annual income and an eventual sales price, it’s worth thinking about what tools can map out the interactions between annual and sales pricing. For example, imagine a 10x ratio of annual revenue to the sales price. A home that rents for $100 a year sells for $1000. Think about how an incremental annual increase drives a much larger sales return via the multiplier. Now you’re thinking like a professional investor.
If you’re wondering about prices, just a few years ago that price was probably calculated on an Excel bell curve and done once a year. Now, the price you’re seeing most likely changes quickly based on a wide range of factors. Chances are it’s less individually driven and more market-driven than ever before.
For potential investors and, even more broadly, stakeholders in the vacation rental ecosystem, a key takeaway of this larger emerging model is that a new form of valuation is emerging beyond the traditional real estate comparisons of location, quality and scarcity. The predictability and scale of annually recurring revenue in the rental market is a critical pricing facet in this new operating class. While related to quality and scarcity, it’s largely a new idea that should inform purchase and sale decisions at an equal, if not greater, level than more traditional barometers of value.
No matter what, many vacation homes today aren’t what they once were. The days of going up to the grandparents’ lake house, for example, has in many ways become a remarkably luxurious lake experience funded by names you read in Forbes. For real estate investors of all experience levels, there’s more room than ever to include rental desirability in eventual sales price. It’s a great new chapter in the history of the great American vacation.
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