Should You Invest in a Luxury Vacation Rental?
Are Luxury Rentals Worth It?
The vacation rental industry is gigantic, encompassing everything from the barest-bones budget rooms to sprawling mansions with endless amenities and perks. Most short-term rentals fall somewhere in between economy and luxury, but if you’re hoping to upscale your brand and your business with a new rental investment, now might be the time to think about investing in a luxury vacation rental property.
Today, we’ll dive into the world of luxury vacation rentals, starting with a breakdown of what makes a rental fall into the “luxury” category. Then we’ll move onto a benefit analysis (aided by AirDNA’s helpful statistics) of owning a luxury rental to see if this could be the right move for your short-term rental business.
Breaking Down Luxury in Vacation Rentals
Most of the time, vacation rentals are classified by price tier, and rentals that fall into the most expensive category (typically around the top-priced 10-20% rentals in a market) are considered to be “luxury”.
However, average nightly price is not the only factor that determines whether or not a rental should be put into the luxury category. Typically, those who are seeking luxury vacation rentals will also be looking for additional bonuses like:
Unique and unforgettable home features, such as a one of a kind view or a custom home construction
High-end furnishings, decor, and amenities, such as resort-style pools and saunas
A fantastic location that’s close to nearby attractions, such as a ski-in/ski-out property or one bordering a national park
Top-of-the-line guest services and experiences
Rather than just paying for any passable high-end vacation rental, these upscale travelers want the whole package. It’s not enough to just provide a large, stately home for guests–luxury-seeking travelers are discerning, and the more features that your rental offers, the more likely it is to be booked up by these upscale guests.
The Benefits of Owning a Luxury Vacation Rental
Luxury Rentals Command Higher ADRs
One of the biggest benefits of investing in a luxury vacation rental is that these properties can typically command much higher average daily rates (ADRs) than their budget and economy counterparts, allowing you to earn more revenue on each booking.
According to AirDNA, the average daily rate for a luxury vacation rental is more than three times higher than that of an economy rental. Larger homes get an even bigger share of the profits, with luxury properties of five or more bedrooms commanding up to four times the ADR of economy rentals of the same size. ADR growth has also been strong in luxury properties, jumping up 35.8% over the last four years, while economy and midscale properties have only seen ADR growth of around 22-28% over the same period of time.
Growing Occupancy Rates for Luxury Rentals
Although luxury vacation rentals historically have lower occupancy rates than their economy and midscale counterparts, that landscape has begun to shift over the last few years. In 2019, for instance, AirDNA reported that the occupancy rate for luxury properties was 49.1%, but by last year, the occupancy rate had risen all the way up to 55.1%.
Luxury vacation rental occupancy rates also seem less likely to be affected by supply and demand changes, which can help you to weather out any negative headwinds in the short-term rental industry. For instance, an overabundance of supply on the market last year led to declines in occupancy rates throughout all tiers of vacation rentals, but luxury rentals saw a smaller occupancy dip (4.3% decrease) than budget (6.9% decrease) and economy rentals (6.3% decrease).
Luxury Properties Command a Higher Rate of Investment Return
One financial axiom holds true when it comes to luxury vacation rentals: the more you are willing to invest, the higher your rate of return could be. According to AirDNA, the average rate of investment return for a luxury vacation rental is 14.5%, which is substantial when you compare that budget rentals only command a 6% average rate of return and even upscale rentals only reach 10.5%.
However, there is a bit of risk associated with running a luxury vacation rental. You will certainly pay a premium for a luxury home, especially in a highly-desirable area, and running a luxury rental is more expensive than owning a budget property. Despite these risks, owners stand to make a lot more revenue in the end with a luxury rental, even when you factor in all of the extra costs.
Explore More Luxury Vacation Rental Tips
Purchasing a luxury property could be a game changer for your short-term rental business, but it can be difficult to make such a decision lightly. If you can find a property that fits all of the right criteria, however, there’s tons of potential revenue to be made, and the market is looking strong when it comes to luxury rentals, especially with growing occupancy rates and ADRs over the last few years.
For those who are searching for more ways to upscale their vacation rental experience, check out our blog on some of the most unique amenities for short-term rentals or our guide to turning your rental in a luxury accommodation.