Is There Really a Formula that allows a Person to Enter the Vacation Rental Market and Guarantee Risk-Free Success?
Everyone who knows what the rental business is all about has heard of the lucrative business that is being made by adding the term "Vacation".
And even more so when used with another term that blows our minds... "Caribbean".
Vacation rentals in the Mexican Caribbean are on everyone's lips, and you may hear stories of different kinds.
From those who took the risk a few years ago and today have managed to acquire properties and are enjoying the returns.
Even those who seem to be navigating a sea of difficulties and are stuck with a property that they just want to get rid of.
What is undeniable is that it is tempting and a very attractive idea.
To be able to own a property that you can visit during your holidays or at times of the year when the season makes you retire to a more favorable climate.
And whenever you get to it, it's in perfect condition.
In addition, you do not pay to maintain it, or to take care of it, it is paying "alone" and on top of that it reports profits to you.
" BEWARE" of this. You don't get anywhere... You get to Paradise.
With this in mind, the residential development market in the Mexican Caribbean is in full expansion.
But what are Vacation Rentals? Is it really clear to you what are their particularities?
First of all, it is important to understand that vacation rentals have been around for a long time here in Mexico, particularly in the coastal areas.
Every year during the vacations, families who could not afford to invest in travel and hotel accommodations used to travel to the nearest coastal towns.
They rented a house for the entire vacation period and enjoyed the ease of being in a place with a kitchen to prepare food and not spend money on restaurants.
Once the vacations were over, many of these towns remained in a state of lethargy until the new holiday period allowed people to return.
Particularly in the Caribbean, this was not the norm, especially because there were no towns, Cancun was a city created from nothing, and its creation was linked to hotels and resorts.
For most people wishing to travel to the Caribbean, there were only two options.
Or invest in a hotel accommodation, or crush in the cousin's house who had come to the adventure of living in the Caribbean and spend a very crowded but joyful vacation.
And then Hosting Platforms Appeared
Technology and the emergence of platforms radically changed the concept of lodging, allowing people to take full advantage of the property conditions they had.
This phenomenon changed the entire dynamics of tourism worldwide.
Now you could access an infinite number of potential customers and also an infinite number of location and price choices.
We all know that already, but this dynamic continues to evolve and transform what we now define as a search engine for lodging and therefore vacation rentals.
The second important factor is the well-known Covid-19.
Although it is still too early to be able to see clearly what the future holds, the fact is that today the world is experiencing a rapid recovery, and everything points to future sustained growth.
Now, for the scope of this article, I would like to highlight some characteristics, which are not necessarily mutually exclusive, on the contrary, they have gray areas or very thin lines.
Vacation Rentals Features
One is that it is not strictly a Hotel, it can be from a room inside a house inhabited by the owners and from there it goes through any form; from houses, apartments, cabins, villas, condominium buildings, etc.
And also the composition of being able to have from one to multiple owners, who may or may not know each other.
The other is its temporality, and here again the line can be very questionable, but let's say that unlike a long-term lease whose usual minimum period is 12 months. This can be from one day to lets say 6 months.
Finally, another characteristic is its configuration, i.e., a vacation rental cannot be "unfurnished and unequipped" for obvious reasons.
How the Participants that Generate this Industry Interact.
An important generator of this industry were all those tourists who almost ritually returned every year to the Caribbean for long seasonal periods.
Being able to acquire a property that would allow them to free themselves from Hotels, created a demand for properties for a foreign public, who also wanted to continue to have certain comforts and amenities.
With a visionary profile and investment notions, they quickly took advantage of the technologies and were able to obtain a financial benefit when they were not occupying their properties.
In response to this demand, came the so-called developers, or those companies that have combined investment, design, development and construction of real estate properties in response to this growing demand.
Sometimes, hand in hand with these developers are the "Property Managers".
A rather specialized turn of enterprise that was born along with technological innovations and quickly appeared beyond the simple co-host or property caretaker.
And that seems to close the triangle of Owner - Developer - Administrator.
But in the middle of all of them there is another ingredient called Real Estate Agency, which is in charge of marketing and bringing together all the participants.
And this is where the nitty-gritty of the matter begins.
Because, although the Real Estate Agent is typically the first contact in order to acquire a vacation rental property, he/she is not the one who will make the negotiation or agreement for the management of the property.
And this has generated a multiplicity of opinions, disappointments and, above all, miscommunication.
It is very likely that even if you have a first contact with a property manager, you will also hear peculiarities and discrepancies between them. Who should you trust?
We reach the part where we could say by means of a recipe what is needed to navigate in such a panorama, but undoubtedly, it conjugates nuances where intuition and vision play a crucial role.
To avoid unnecessary pitfalls, let's focus on the beginning.
What do you want to get out of investing in a vacation rental property?
Clarifying this question may give you a starting point. Are you part of that group of seasonal Caribbean lovers who wish to have their own space to suit their taste and then be able to make an economic profit?
Or you may not even like sand and just want to diversify your portfolio and performance is king in the equation.
Between both positions there is a range of possibilities that makes all the difference and being able to understand what you want is what will bring you closer to the optimal result.
In order to continue with this analysis, let us leave aside for a moment the intermediate zone, and let us go to the extreme of wanting to maximize the economic benefit.
If so, then we have the possibility of being able to do a reverse analysis, i.e., we do not focus on the product and/or service, but on the customer.
It is the typical recipe mentioned by great entrepreneurs and successful businessmen and here will be no exception.
Have a vacation rental customer-oriented mindset.
And that is paramount in the Travel Industry business. Your guest's satisfaction is EVERYTHING, and you won't achieve it if you are not able to understand it, see it and decide with a focused approach.
AIrBnB generated in its own right a whole new style of traveler who is looking for unique experiences that reinforce their individuality against mass tourism at the Resorts. Or they just have a different goal in how to spend their time during their stay.
Also appeared the so-called "Flex" or those who have the flexibility to work remotely, strongly driven by Covid, today is beginning to be a market to consider.
A Different Expectation
So we have the expectation of obtaining a different service. That allows to live a stay motivated by a particular desire (Whether for rest, entertainment, recovery, adventure, or work, etc.).
This also takes into account all the particularities of cultural, social, age and consumer preferences and tastes, as well as purchasing power.
I'm sure in many ways this will possibly be the easy part because you can probably also be an example of the ideal customer.
Then comes everything that marketing has already hammered into us enough. How do you segment your market? Of all the possibilities, who is the one you want to target?
On this basis, we return to the Owner - Developer - Operator triangle with Real Estate Agent in the middle. But the reality is that both the Developer and Real Estate have a clear but mainly temporary purpose.
In most cases we will not stay to be part of the Guest or Customer Experience.
Therefore, what deserves all the focus is first of all the OWNERSHIP (the product) and secondly the MANAGER (the service).
And since there is no Operation without Property, then let's move on to it.
The Vacation rental property
I have mentioned it before in another article, and the reality is that today in the Caribbean you can kick a stone, and underneath it will appear a development, so how do you start and navigate in this vast sea of choices?
Maintaining the line of maximizing the vacation rental property performance. Let's say that we would have to start by distinguishing two major classifications.
Developments with free administration and Developments with previously selected Administration
Developments oriented to Vacation Rentals with Free Administration
As they clearly state, it means that you acquire the property, and you are free to choose who will take care of the vacation rental management afterwards, or you can even manage it yourself.
Sometimes they may or may not recommend a vacation rental property management company, and sometimes they will or will not mention a certain stipulated yield.
In developments with free management you will surely have amenities and may or may not have facilities that ease its operation based on rentals, i.e., they may have facilities such as a reception, concierge area, room service, etc.
Each owner will have a particular goal in their property, some may use it for long term rentals, others will live there for seasonal periods and probably offer it themselves on AirBnB. And also, it is possible that someone may decide to live there for personal use.
While most may choose to focus on vacation rentals, it is also possible that everyone may decide to hire a different property manager, with different capabilities, qualities, standards and results.
With such a variety of goals, it is a fact that much of the potential of development as a whole will be diluted.
In these cases, in order to gain strength as a group, the best scenario that could happen is that all the owners could reach agreements and set common objectives. It sounds far away, not impossible, but rather complicated.
Developments oriented to vacation rentals with previously selected management (*Condo Hotel).
Generally a Condo Hotel is a development, in which there is a previously selected Management, The Developer and the Operator have come together, quite possibly from the conception of the project and the business itself, and have worked together to offer a more specialized product.
In the best scenario, the operating company has provided its experience in operational issues, including trends in occupancy, preferences in the market segment they wish to focus on, and the developer has generated a design that manages to integrate all this under a product that maximizes space, materials and operation performance.
In these cases, apart from the amenities, there are the minimum areas necessary to operate under a hotel service scheme. It is the closest thing that exists to a hotel, with the variant of having a diversity of owners and not just one.
Clearly, you won't have to invest energy in searching for and selecting a company or property manager. Nor will you have to worry about agreeing with the rest of the owners as to their goals; most of them will be focused on maximizing financial profit.
Another possibility that you may encounter is that Condo Hotels are managed as a pool, meaning that regardless of the performance of your property, the profits obtained from all of them are distributed among the owners on a percentage basis.
Does this mean that the Condo Hotel will necessarily be superior to the first one in financial results? Let's say the odds increase, but this is only part of the equation.
The above has been addressed in general terms of how a development has been conceived, but let's not forget that there are not only developments, there are also independent properties that do not have a condominium regime.
So whether it is a condominium or not, the general characteristics that will have an impact are as follows:
Vacation Rental Properties Features to Consider
Location:
This is the main and most important feature to take into account.
Is it close to points of interest? Is it easily accessible?
Does the area in which it is located have urban equipment, streams, breaks, public areas of donation, visual arrangement?
Is it a well-designed area in urban terms, with a purpose and order or is it simply in an endless grid?
Today there is a critical phenomenon in the Caribbean, where developments along with market momentum are moving at such an accelerated pace that they completely exceed any foresight.
It is difficult to glimpse the future of many developments because the city is still being generated and today they may look surrounded by nature, but in 10 years or less that will be gone.
Today it does not matter much that the streets are not paved, now only 100 vehicles transit a day, in a few years it could be 10,000. These small provisions will allow the value of the property to be maintained.
In some cities it is much clearer to get a glimpse of the development trend and evaluate it objectively.
Design:
Here comes the subtle part, since in many cases the actual result to a pre-sales presentation may have quite significant differences.
But here what must be understood is that the visual and spatial experience of the place must be pleasant. Again, originality and good taste come into play.
Macramés and chukum finishing have already reached a point of saturation that the opportunity for differentiation has been lost.
Does the design really reflect a place you situate in the Mexican Caribbean, or can it be in any boulevard of a city with no personality?
Does the place look like a prison cells corridor or does it have an alternation between open spaces, walkways, green areas, etc.?
The design in sum is the permanent impression that your Guest will perceive. And of course, if you have determined the profile of the guest, then you will be able to tell if what you need to place is something modern, rustic, jungle, or simply clean and minimalist.
Amenities:
Amenities are indispensable, in terms of quality, diversity and quantity, as well as originality.
Tomorrow, arriving at a condominium with a pool will not give you a competitive advantage, but possibly a natural pool or a cenote of your own will.
Everything is a matter of balance, the greater the number of amenities, the higher the cost of operation and maintenance. So it is not about accumulating "Amenities" but those that contribute to the same flow of experience that your guest profile is wishing to have.
Alliances:
Does the development or property have alliances with other services? Will your guest be able to avail of facilities for any Beach Club, Spa, Yoga School, Restaurants?
This is an excellent alternative in the area of amenities, since regardless of what your property may offer, you are managing to diversify and expand your entertainment and activities offer.
Price:
The Cost of the Property in itself is not a parameter, but a Relationship with the rest of the property features. The higher the Price x square feet, the longer the period to be able to cover the return on investment.
Substantial investments for a property will require an ultra-specialized service in order to be priced accordingly.
On the other hand, the most affordable properties, which are studios, also make up the bulk of the offer and you will have a lot of competition.
Consistency:
It seems incredible, but it is real, if your development says it seeks to reconnect with nature, but has occupied absolutely all the possible surface and only left a tree on the facade, then it is on the wrong track.
If the place is promoted as a relaxation opportunity, but offers nothing related to it other than a pool, and also has commercial venues with bars, then we are back to the same empty speech.
Renewable energy technologies
Likewise, energy saving technologies or renewable energies will make a difference in operating cost performance. Solar panels, LED lighting, use of natural ventilation, etc.
Some developments have even achieved certifications for this purpose.
And it is not only a fashionable or trendy issue, it is an Imperative Need, especially in those areas where the infrastructure service is poor and will continue to be poor and troublesome for many years to come.
Equipment and Furniture in Vacation Rentals
In the case of free management developments, some have the characteristic of not being turnkey concepts. That is, you will have to take care of acquiring the furniture, equipment and decoration.
In the case of Condo Hotels, it is no longer optional whether they are turnkey concepts.
Surely we could go on mentioning more features, but in my opinion these are the ones that stand out and that you can easily identify and evaluate.
Moving on to the Operation, we will also see an endless number of variants, from Your property's neighbor who offers to co-host and manage your apartment on AirBnB because he has spare time, to large international corporations with complex structures and specialized services.
And in order to take advantage of the article, I will focus on making a list of the characteristics that you can find in the companies and services that we can take as formal. With this, you will be able to evaluate what is close to what you want to achieve.
Vacation Rental Property Managers Features to Consider
Profile of properties handled
This is where the Property Type-Location-Price equation comes in, which makes up the bulk of what the company manages today. If you have a luxury beachfront villa and the manager has only studios in large developments, would you consider it a good option?
Or the other way around. You may have a couple of studios in a city development and the manager is defined as specializing in high-end rentals, or simply by location, many are quite focused on one region or area.
I'm not saying that an administrator who handles luxury rentals is incapable of handling small studies, I'm just saying that matching the property profile with what the Administrator handles is a starting point.
Web page
In the 2022, there are many operators who work without having a website. And for those that do, there are also differences.
In my opinion those that have the greatest advantage are those that are multilingual in the first instance, have a properly developed Brand, the site gives you a "Pleasant User Experience" and there is also an clear SEO management.
AirBnB
There are now several other options, but for obvious reasons we will talk about the most important one, AirBnB. This platform is currently the most popular and effective, providing a fantastic experience and ease of use for both the host and the guest. Their policies are clear and accessible to understand.
Covid generated several adjustments to them, but we can say, in general, that it will continue to be the platform with the largest share of the hosting market.
With all its advantages, it is practically the entry platform for every operator,
OTA's
Online Travel Agency. They are all those platforms (Vrbo, Booking Expedia, etc)
While AirBnB clearly has the lion's share of the market today and continues to recover rapidly after Covid, there are property managers who will seek to offer your properties on an additional number of platforms with the primary goal of increasing your property's exposure.
The game is called what you don't show, you don't sell. There are some differences to consider on the subject of commissions, though.
What is important here is that those who decide to expand the offer through OTA's (Beyond AirBnB) increase the complexity of their operation, forcing them to have specialized software that allows them to coordinate reservations and occupancy.
A significant advantage is the information that can be obtained through them, and with this, there is a wide margin for optimization, and those who really know how to do the job can achieve better yields.
Proprietary Vacation Rentals booking platform
One thing is to have a website as operator, and another is that also has its own booking and occupancy system within its website.
An additional benefit is that booking fees that come through their own platforms generally have a lower cost.
Although they do not have the same exposure that can be obtained with others, it is definitely the starting point for other possibilities such as Customer Loyalty, Growth as a Brand, Improvement of customer profiles. Etc.
Social media
Following the range of options, it is strictly not a booking platform, but the most important thing is that it becomes a platform for exposure, both product, brand and especially to expose the experiences that your guests have.
Is it necessary to have all platforms to get results?
It seems to me that the answer is difficult to answer, after having talked to different administrators, each one expressed different appreciations for the above-mentioned and some even assure that having dispensed with some of them allowed them to be able to do a better job.
In general, those who handle all of the above will talk to you about marketing skills, and that is what you want the company that is dedicated to offer your property to have.
What we have mentioned above is a matter of Bidding, Exposure and Customer Acquisition, but it is only the beginning. The complement that jointly will make the Operator a success is the service it provides.
Service
Once your Operator has managed to get a person to book your property, the rest is a journey called "Experience" and this is what will really create a Loyalty Client, and above all a Client that will advertise you for free, since he will recommend you to all those people he can and has the chance.
You would think that the property itself would provide that experience, but in reality the most important factor, and I want to repeat this because I am a fan of that style of thinking, the most important thing is the human factor.
That is to say, those people who have contact with your guests will provide all that factor that can turn the experience of your property into "THE EXPERIENCE" and it starts with the driver that takes them from the airport to the property (Can your operator provide that service?) and goes through the person at the Reception (If the condominium of your property has one) to the cleaning staff (Again, if your operator can provide a daily or customized cleaning).
If your guest wants you to recommend activities, tours or restaurants, there should be someone who can permanently provide assistance.
A wide range of possibilities
And it is also good to remember that depending on the client profile you wish to target, there are a whole range of additional services from chauffeured vehicles, personal chef, personal photographer, etc. That speak of the level of expertise that the operators have.
You may be thinking that you don't want to complicate your life and prefer someone who just leaves the key under the mat for when your guest arrives and he just opens the door and that's it.
But in the range of options, you are placing yourself at a Serious Disadvantage, and what is a fact is that you would be moving down the ladder of your potential.
This is where the aforementioned property features come full circle to make your property a success as a lodging.
And you must consider that the property by itself is not taken care of, its maintenance and good safeguard and protection is also part of the work that you must be able to foresee.
And here I want to emphasize what I just mentioned.
Care and Conservation of the Vacation Rentals property
Property care is probably the most important job your property manager should perform. Whether this is a performance-based business, or you simply want someone to take care of your property when you are not occupying it and generate some extra income for you in the meantime.
It doesn't matter what your position is.
If the property is not properly maintained it will lose value, for you, for potential guests, for those you plan to inherit, so I can assure you that among all the characteristics that will separate good managers from mediocre ones is the care and condition of the properties they run.
Financial management
Another of the fundamental topics is, as its name says, "Administration", they must cover everything necessary to manage finances, payments, transfers, reimbursements, bank accounts, tax payments, personnel payments, services, contracts etc They should leave it covered and you don't have to deal with it.
Companies that have a legal and financial backing will be able to act responsibly in the event of any incidents that may arise during an operation.
Now, this is just the prelude to get to the final point (or almost) that is
Commission and Return on Investment
Operators work under a commission scheme on sales (Occupancy). Easy and simple (Well, relatively speaking).
Commissions vary according to each Operator, but in general no one will charge less than 25%.
And you have to take into account that their commission does not include the booking platform commissions.
To this you will add the commissions of AirBnB, Vrbo, Booking, Expedia or all those that have been part of the bookings on which the commission is applied. Which, depending on the case, can considerably increase the percentage to be subtracted from the money collected. This percentage may vary according to the particular performance of the property.
So from all the money earned you will be subtracting an average of 40% as a cost. And to this you must also add tax payments, property maintenance costs (if a light bulb blows out, the water heater breaks, cleaning of the A/C compressors, etc.).
If you have done your homework well, selected a good property, a good operator and they don't close the world for a new virus, then you should make a profit of more than 50% of all proceeds.
And this is where the numbers make sense.
This is the number that applied to your initial investment will be able to tell you what your true return on investment is.
At this point I can only share with you that once again there were different opinions on the matter with the individuals interviewed, and I want to be cautious, since I do not represent any of them.
But what I can share is that the more conservative ones were under 6% and the more optimistic ones mentioned 11% as a particularly good performance.
To the surprise of many, there are many operators advertising with magic numbers of 20% ROI and such. It is always worth asking the pertinent questions if those numbers are before or after taxes, before or after platform commissions and so on.
Checking When Selecting a Vacation Rental Manager
The typical expectation is that all operators tell you how great they are at providing excellent service, and if you are someone who is committed to meeting your financial or personal goals, I always think the best form of verification is social and personal.
You can check the properties reviews they manage, and even better, you can book and stay in one of the properties they run and live "The Experience" they say they can offer.
There you will encounter the reality without jargon.
Yield projections
What is a fact, is that a real estate agent is hardly the right person to answer you what is the return on investment that one property or another may have, especially talking about free management developments. Especially if he/she is not directly linked to a Vacation Rental Operator or Manager.
Although many of them have studies that offer ROI's, it is important to ask who did the study, in what year, and under what conditions. Only those Operators with multiple platforms and centralized management have the ability to visualize large-scale information on market behavior and estimate future behavior.
It can be quite opposite for someone who operates 4 properties through AirBnB to someone who operates properties internationally.
Take into account that in cases of free management properties, the most committed operators will first get to know the property, its conditions, check the decoration, the furniture, the equipment and on that basis they will estimate a result.
Few operators will give you an upfront estimate based on a developer's pre-sales presentation alone. Without first interviewing you and getting to know your objectives. They will want to know what dates and periods you will have available with the property, if you plan to occupy it during your vacation or high season. All of this adds to what may already vary.
And here again I reiterate that all of this happens under the lens where we have made the assumption that you are an owner committed to obtaining an optimal result, and will not occupy the property on a seasonal basis, sharing it with your family and friends.
Best of all, regardless of whether you have an ROI of 6% or 9%. If your property has been carefully selected, you will have a capital gain in your favor.
And there is no doubt about it, the Caribbean has an excellent generalized surplus value in the market.
Therefore, it is of vital importance that your property is kept in excellent condition. If to this you add having taken advantage of the conditions of a Pre-Sale, you keep adding the benefits.
Vacation Rental Yields available to anyone
We have talked about the fact that Technology today shapes practically everything and today we can rely on the Benefit of obtaining Real Information, Perfectly Registered and Statistically Accurate. And in the specific case of Visualizing Yields that can have a certain Property in a Specific Location, there is a Platform that can provide you with such information.
AirDNA | Short Term Rental Analytics | Vrbo & Airbnb Data
It has a free version with limited tools and features. And if you like statistics and are willing to dive into the subject, I am sure it will be of great benefit. You will be able to visualize the behavior of Vacation Rentals with different indicators or KPIs.
You will be able to make an analysis of the percentage of occupancy, by season throughout the year, price behavior, etc. and in some way contrast it with the yields offered by the companies or managers.
Of course, the possibility of matching or even surpassing the indicators will depend entirely on the infrastructure of the administrator, and all the aspects mentioned above.
But best of all, there you will be able to see firsthand the indicators that demonstrate the spectacular recovery of the industry in the Caribbean.
Conclusion
Well, I hope I have given you as comprehensive a picture as possible about everything related to vacation rentals in the Caribbean.
Today the Mexican Caribbean tourism market is promising.
This does not free it from a multiplicity of strong challenges that it has to face, both on the global and local scene. Every year will see an increasingly accelerated evolution.
Every year cities are reconfigured with exponential growth, platforms and technology continue to transform and every year more and more offerings are added.
Similarly, the period of renovation of the strict hotel offer is also accelerating, hotels have gone through a critical stage that continues to eliminate the mediocre ones. Those that remain have been strengthened and are aiming for expansion and to take their service to excellence. Although technically the profile of a hotel guest is different from that of a vacation rental guest, there are no rules about when such a person transitions.
I am, of course, convinced that many, many investors will achieve their goals.
All in all, of course, I am convinced that many investors will achieve their goals. If, and only if, they do not get carried away by the "magic numbers" and improvisation or those who are on the spur of the moment.
Success in the short and medium term belongs to those who are preparing themselves better, diversifying their tools and doing the job of super-specializing in providing the best possible experience regardless of the guest profile.
And in achieving this objective the game is called "Anticipation", to be able to stay ahead of the competition, to be able to anticipate trends, to be able to offer segmented products, all this requires vision.
For many, the thought of having to give up 40% of the profit for the occupation achieved is reason enough to go with those who promise returns of what I call "Magic Numbers."
And in this short-sighted vision, they begin to lose the advantage of being able to acquire not an employee, but an ally to navigate the vacation rental market with all the advantages it offers.
After all, the question we started with is still the most important one to answer.
What do you want to get out of investing in a vacation rental property?
This article would not have been possible to write without the valuable help of:
Vincent Schwerdtfeger https://vacationintulum.com/
Diego Garcia https://moskito.mx/
Yvonne https://santadolores.com
Lucia Moreno https://concierge4u.mx/
Hector Mondragon https://www.vacasa.com/
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