The Economics of Villa Rentals
- October 30th, 2013
- in Lifestyle
The Economics of Villa Rentals
For many overseas investors looking to acquire a property in the BVI, the question of how to manage the property once acquired remains critical to the investment decision.
Assuming the property is not going to be used as a year round residence by the new owner, the options are to shut the property up while not occupied, have management staff “live-in”, have a management company look after the property, or rent it on a long or short term basis. While the solutions will vary from investor to investor, the last option does provide some with the ability to cover operating costs when they are not occupying the property.
It is important for investors to understand that in order to rent, not only is consent to rent required as part of the landholding licence approval, but they are also required to obtain a trade licence to rent as well. Assuming this process is adhered to, the owner is then at liberty to lease the property. Again, the decision whether to lease on a long or short term basis is up to the individual.
Long term lease arrangements are typically for twelve months, meaning the owner must be willing to forego staying in their property for the duration of the lease. Short term leases, by their very nature, permit the owner to use the property periodically, but they must plan well ahead and reserve the villa for the time they wish to use it.
Owners must also recognise that peak rental periods, such as Christmas and New Year, when their villas will be in high demand are the same periods when they too may wish to use their villas. This reduces either their ability to rent or their enjoyment of their property, depending on how they wish to utilise their home during these popular holiday occasions.
Long term villa rentals are typically easier to organise and provide certainty of income during the terms of the lease. For an absentee owner, having an on-island villa manager will make the process of leasing and managing the property simpler as well as providing the owner with ‘eyes’ to ensure the villa is maintained.
Long term leases are fairly standard with the landlord normally accountable for general maintenance of the property and the tenant responsible for cleaning the property. Landlords normally find that controlling landscaping, pool cleaning and other essential tasks is a better solution than giving these tasks to the tenant who may, or may not, be sufficiently informed to undertake them.
The long term rental market is very much tied to the local economy. The present availability of villas to rent is a reflection of fewer potential tenants in the market than there were before 2007. As a result, long term rental rates have generally fallen. Where a four bedroom villa with a pool would perhaps have leased for $5 – $6,000 per month, the current rental rates would now more typically be $4 – $5,000 per month.
As the economy starts to improve and the supply of villas decreases, rental rates will again start to increase. In this market, landlords should keep in mind that it is often better to accept a lower rent than suffer an extended rental “void”; twelve months at $4,000 per month is approximately the same as ten months at $5,000 per month.
Annual operating costs vary significantly from property to property depending on age, construction, materials used, extent of landscaping, swimming pool maintenance and any other features dictating the upkeep. However, property owners looking to lease on a long term basis should consider that the rental income generated will normally cover the costs of operating and maintaining the property on an annual basis, with any surplus cash being a useful replacement reserve to keep the property sustained between tenants.
Short term rentals are more complicated, in as much as the rentals are more labour intensive. Although the potential income for a popular, and economically run villa, is better than for an equivalent long term rental, the costs of operation are also higher; short term rentals require more people and organisation to be successful with the villa owner needing a property manager to maintain the property and look after the guests on arrival. In addition, the employment of leasing agents to help sell the villa to the potential renters is another expense.
Depending on the level of services offered, there may also be a requirement for daily maid service, chefs and other help to make the guests’ stay successful. As a rule of thumb, a villa will lease on a weekly basis what it would normally rent for per month on a long term basis.
With short term rentals, the bulk of the income is made during the high season as rental rates normally drop significantly in the low season. There are typically sixteen weeks of high season compared to thirty six weeks of low season, with premium rates for Thanksgiving, Christmas/New Year and Easter (depending when it falls).
While the break-even point (in number of weeks rented) will vary greatly from villa to villa depending on operating costs, it should be recognised that short term rentals not only require more staff, but they also place greater wear and tear on the property, requiring more maintenance annually. In addition to the monthly management fee, villa owners also have to pay commission to leasing agents. Commissions ranging between 10% and 30% of the weekly rental rate, with 20% a typical commission rate.
Whether considering long or short term rentals, villa owners need to understand the likely costs involved in the annual maintenance and operation of their property. In advising potential investors, our mantra is that leasing a property will assist in the maintenance of the building, as shutting a building up in the tropical environment of the BVI is inviting maintenance problems.
Nevertheless, the long term plan should be to cover costs and hopefully enjoy a gain in capital value.