Vacation Rental Dream… or Nightmare?

How we bought our vacation home and short term rental property

“What better way to combine our love for escaping the brutal Minnesota winters while having a profitable side hustle,” we thought! We bought our short vacation rental investment property in January 2020. The verdict is still out on whether it is a dream scenario or a nightmare; if owning an amazing Airbnb property is something you have ever considered, hopefully our story can help!

We fell in love with the Coachella Valley/Palm Springs area of California. We were first intrigued by this area when we spent a week in San Diego in February 2017. We loved the vibe and scenery of Southern California, but realized the temperature was much warmer as you went inland toward the desert. When we booked our next vacation for fall 2018, we decided to fly into Los Angeles for a few days at the beach and then stay a week in the Palm Springs area to see what this part of California was all about. We were so impressed with everything it had to offer and fell in love with desert life.

We rented an amazing home with a pool that was right next to the beautiful Santa Rosa mountains in La Quinta, CA (about 20 minutes from Palm Springs). The area had amazing hiking trails, cool restaurants, breweries, beautiful scenery and perfect weather; also only about 2 hours from the beach areas of San Diego and LA. The area was modern, clean and well planned. During our first stay we found ourselves looking at homes on Zillow and pleasantly surprised by how affordable this paradise was!

After we left, we couldn’t wait to get back. We planned our next trip for just 6 months later in 2019. We picked up right where we had left off with our love for the area. We started researching vacation rentals and it seemed like a no brainer at first glance. Prices were comparable to Minnesota, but in paradise!

After several months of research, considering what we would like in a vacation home and viewing for sale properties online, we got in contact with a Realtor. We explained what we were looking for and scheduled a trip to look at properties. We didn’t have a budget set in stone, but were targeting something in the $325,000 to $400,000 range with 3 bedrooms and 2 bathrooms and 1,500-2,000 square feet. We figured that we could get the property up and running for about $75,000 to $100,000 after down payment, closing costs and furnishings.

We met with the Realtor and over the course of one day he graciously showed us about a dozen properties (which is hard to comprehend having so many options considering what the real estate market is currently like). We had a couple of decent options that we thought might work, but he came through with one additional off-market property at the end of the day. He said the owners, a retired couple from Canada who he helped find and purchase the property about 5 years prior, were considering selling their home.

We looked at the property and had a good feeling from the second we pulled up. It had great curb appeal and had obviously been very well cared for. We went through the house and were very impressed by the floor plan, the extra 4th bedroom that we thought would come in handy, how updated the home was and the amazing private backyard with a pool. The home was also in walking distance to the grounds that the Coachella and Stagecoach music festivals are held.

Some basic research showed that properties rented for $1,000 to $1,500 per night during these festivals!

The real game-changer was that the owners were willing to include all furnishings in the sale. The realtor explained that he would adjust his commission slightly and they would be willing to sell the home and all furnishings for $400,000 (ha, of course conveniently at the top of the budget we had given). The next day we decided to go for it! Conveniently, we were surprised just a few days after making this major life decision that we were also expecting our third child (did I mention that we were surprised by this news?).

In hindsight, purchasing an unfurnished home would have been a disaster for us. With two full time jobs and two young children (and a baby on the way), we would have been in deep trouble if we had to deal with shopping for and assembling an entire house’s worth of furnishings. It was plenty of work just handling all of the little details to get things running (permitting, linens, organizing, maintenance, doing an inventory on everything, etc…).

Now that we have had the home for two years, we have learned A LOT! Almost nothing went as planned, but we’re still all in to make the best of it. Our dream to have our own vacation property to enjoy with our children and to create an amazing, well thought-out place where families can spend quality time together and have a memorable vacation, is still alive!

We’ll be sharing our journey, tips and numbers for those that are interested in pursuing a similar investment opportunity!

Vacation rental dream or nightmare?

We have owned our short term vacation rental property for 2 years now. Let me take you back to 2020. Some of you might remember this magical time. Wearing masks, quarantining, toilet paper shortages, lockdowns and thousands of canceled flights per day were not parts of our everyday life.

We spent a couple weeks of January 2020 at the home after closing on the property. We enjoyed time with our children and some amazing weather while we transformed the property into a vacation rental property perfect for families. We decided to work with a national short term vacation rental property that had a local office in the Palm Springs area. They were a full service management company meaning they agreed to handle all marketing of the property, manage listings on multiple vacation rental websites (Airbnb, VRBO, etc…) and have local staff check on the property regularly and coordinate all cleaning and maintenance. We would pay them 18% of rental revenues year 1 and 22% year 2 and beyond. We obviously didn’t want to give up such a significant percentage of our revenue to manage the property, but from their sales persons smooth pitch it seemed like a no brainer to not have to let the professionals handle it and not have to worry about anything. They also had an arrangement where owners could find their own bookings through their network and having a Facebook page where the fee they charged was only 10%. Realistically, with the constant come and go of short term rental guests, I think having someone local on call is a requirement. You need someone there in case the guest gets locked out of the house, there is a big unexpected party or someone needs help with something that can’t be handled over the phone or text. Unfortunately, the execution of this management company fell short. The staff were not accountable or qualified and were completely overwhelmed. The booking revenue fell short of what was promised and the reviews from guests were positive about the property, but overall negative on the service offered through the property management. Eventually, we decided to cancel our partnership with them, but we gave it a fair try to make it work.

Vacation Rental Dream or Nightmare? Be Ready to Pivot.

2020

One day in March, after the pandemic began, we received an email that the state of CA had passed a ban on all lodging including hotels and short term vacation rentals. The email notified us that we had $20,000 of canceled bookings! NO ONE could rent our vacation home except front line workers (not on vacation). The shortest rentals that were allowed were monthly rentals and our management company did nothing to help us find revenue to make up the cancellations. I was determined to not get stuck paying out of pocket for an investment property that we couldn’t even visit and enjoy ourselves. Our dream vacation rental, sitting empty, what a waste! We quickly pivoted and put up an ad on Zillow. We advertised the home for monthly rental, the perfect place for families to come do home schooling or people to work remotely in paradise to get through the Covid surge (little did we know it would still be going on almost 2 years later). We had the nicest couple from LA inquire right away and after some negotiating, got them to commit to spending a month at the home. When they were gone, we had another couple come stay another month. I was jealous that they were waiting out the pandemic in my paradise, but I was happy to be covering my carrying costs while things blew over. Once summer came along, we were able to get back to short term rentals again. For those who haven’t been in the summer, Palm Springs is HOT. It hits 110 to 120 regularly. We had people coming out and having a great time using the pool, grilling and living their best life. It was great. We did have one issue with a group exceeding the limit of 8 people by 10. My notifications on my phone from my Ring Doorbell was going off like crazy. I wouldn’t normally pay much attention to those notifications since guests are often coming and going, but when I saw I had like 20 notifications in 10 minutes, I realized there had to be a lot more people at the home than 8 people.

We made it through 2020 keeping the home occupied with rentals almost the entire year with the monthly rentals we obtained through our Zillow listing and short term rentals via our management company and Airbnb once the state’s ban on short term rentals subsided in the summer. We earned about $35,000 in rental income, but still had a painful net loss of about $20,000 (not taking depreciation into consideration). This number was inflated due to about $10,000 of startup costs including closing costs, furnishings. Definitely not what we had dreamed of when we made the leap to purchase a vacation rental investment property, but there was no way we could have foreseen a global pandemic 3 months into our journey. Considering we had seen what had to have been a worst case scenario, we were still optimistic.

2021

Still in the midst of the worst of the pandemic as we entered 2021, we decided to continue with our strategy of pivoting to longer term stays. Travel was still an unknown with covid case counts at high levels and the Coachella and Stage Coach music festivals that we had initially relied on for income to earn peak rates in April were already canceled. We were struggling with the management company and were losing money with them in control, so we ended our partnership with them. Rather than renting out the home at a discounted price to simply try and cover our carrying costs like we had initially done with the longer term stays, we did some market research and determined that a furnished home with a pool could likely rent for about $4,400/month + utilities. Considering our carrying costs were around $2,500/month for mortgage, taxes, insurance, gardener and pool service; we figured this would leave us with some nice cash flow and cushion for unexpected costs to come up (which they of course did). We also decided to try managing the property remotely ourselves since there wouldn’t be the constant commotion and logistics to manage new short term rental guests coming and going. We updated our listing on Zillow and immediately had several inquiries. We booked a 3 month stay for someone that was looking to work remotely in our paradise. Part way through the lease, we then had someone respond to the listing who was looking for a 12 month furnished rental. We were hesitant at first since we wouldn’t be able to use the property ourselves and had not purchased it to be a long term rental, but decided to give it a try. There was still uncertainty with short term rentals and the ongoing pandemic. I had also recently accepted a new position at work that made it difficult to get away and work remotely; plus the low maintenance and good rent price with guaranteed cash flow made it hard to turn down. And, it would give us an excuse to visit some other places!

Overall, our decision paid off. The tenants were great. We were able to successfully manage the property ourselves remotely without having to pay a management company. For the first time we were cash flow positive which was a relief. We had some significant repairs including replacement of some pool equipment, AC repair and retro payment of taxes due to an assessment that ate away at our profits, but not taking into consideration depreciation, netted just under $8,000. While the pandemic certainly presented many unexpected challenges, a tight housing market increased the value of the property by about $150,000 over 2 years of ownership which is a big win (but I try not to get too excited about appreciation of real estate since those gains are unrealized until you actually sell the property).