How to Analyze an Investment in a Vacation Rental on St John
With the flurries falling in the States, we have seen a flurry of activity in the Real Estate Market on St. John. Most buyers on the island are shopping for second homes or investment property, and with values through the roof in most places in the States, buyers are seeing the tremendous value in the St. John real estate market. One major point that sets St. John apart is the un-ending demand - at this point nearly year-round - for vacation rentals. The stunning beauty of the island and National Park protections keep visitors flocking here year after year. Almost all buyers want to know about the returns on their investments and try to analyze rental numbers provided. With the sometimes erratic data provided by sellers, we have taken a more practical approach to producing a prospectus-like look at how to analyze a vacation rental investment.
One of the best investments on the market right now is Bordo Mare and Sopra Mare - two separate, two-bedroom masonry homes on 1.4 acres of ocean-front land. Not only are these homes solidly constructed, they are impeccably designed and see occupancy 90% or more of the year.
Here is how we break down the return-on-investment (ROI) on a property like Bordo Mare and Sopra Mare:
For us, there are four main categories, each with subcategories: Initial Costs, Annual Costs, Income, and Operations Costs:
Initial costs would be the cost of the property, down payment, and any closing costs.
Annual costs include mortgage payments (if taking a loan), taxes, and insurance.
Income is the gross rent collected. We calculate this using a conservative estimate of occupancy over different seasons with different rates. Typically, we start estimates at 80% of winter weeks (19 of 24 possible weeks), 2 holiday weeks, and just 40% of summer weeks (10 of 25 weeks). These estimates are quite low compared to the last several years of data in our villas, but again, being conservative is the only prudent investment analysis.
Operation costs include Marketing, Sales, Commissions, Management, Guest Services, Housekeeping, Landscaping, Pool Care, Maintenance, Repairs, Utilities, Supplies and Additional Expenses. For a healthy budget, this runs at about 55% of gross rent collected.
I built a simple spreadsheet to pop out the NET INCOME after all of the above are factored into the calculation. While this number is informative, it’s really not reflective of any ROI in real estate. Like almost any sound investment, we must look further into the future to estimate ROI. We are strong believers in the value of longer-term investing, and while we have all heard some fluffy haired fella at a BBQ talking about a get-rich-quick flip, we prefer to stick to realistic data from market professionals to plan our investments.
To get to that longer look, we take the Net Income number and calculate out the loan balance (if borrowing), invested equity (initial down payment plus any net income or loss) and choose a conservative estimated non-compounding annual appreciation value, and then we can come up with an ROI after a given time period, say 10 or 20 years.
(10 Year Estimated Value – Loan Balance – Invested Equity)/Invested Equity = ROI%
With Bordo Mare and Sopra Mare purchased at asking price of $3.985 Million, and a 30% down payment at current market mortgage rates and a meager annual appreciation of 3%, this property projects an ROI of over $1.7 Million or 147% gain after 10 years, or. In 20 years, this swells to 297% gain or $3.8 Million ROI!
I always go back and play with numbers like interest rate, income, and the appreciation rate to see how the numbers change. For example, the average annual appreciation on St. John over the past 20 years was 6.8%!** While I would still stick to the more conservative 3%, just for fun, If I put 6.8% into the calculation, the gain on this investment is $3.23 Million in 10 years, and $6.8 Million in 20 years!
**average annual appreciation calculated by taking % change in median cost of sold homes on St John year over year and averaging those numbers from 2002-2021
If we look at the bottom of the market, the numbers still come out favorably. Right now, the least expensive home on the market on St. John is $850,000. That home under the same analysis (3% appreciation) still gives you a $202,000 ROI in 10 years!
Another lower end example I have my eye on which is listed for $1.35 Million shows a gain of $460,000 after 10 years, nearly doubling your initial investment.
Ultimately, some homes do better than others, and we have singled out Bordo Mare and Sopra Mare as the best investment on the market right now, but there are many other close contenders.
While we don’t take it into our equation, the picture can get even prettier for the ROI when taking into account tax benefits from the expenses and depreciation of the asset.
Its important to note as well that the US Virgin Islands is 100% eligible for 1031 exchanges both for buyers and sellers of Real Estate in the Virgin Islands
We can’t ignore that there is risk involved in all investing, but when diversifying your portfolio into Real Estate, you’ll always have your stunning villa with a multi-million dollar view of the Caribbean Sea where you can sit on your deck, and strategize your next investment.
Contact us today to talk about your investment goals in the Virgin Islands.