Profitability of vacation rentals vs. profitability of regular rentals

Profitability of vacation rentals vs. profitability of regular rentals

If you own a property in Fuerteventura and you would like to make it profitable by renting it, it is very likely that you are asking yourself this question: What is more profitable, the tourist rental or the regular rental? In our article we will explain the main differences between each of these two modalities.

Regular rental

The regular rental consists of renting a dwelling for a long period of time. In it, the property is transferred to the tenants and they take it as their own for the duration of the contract. The tenants are, in this case, inhabitants of the rented dwelling.

Characteristics of the usual rent

The habitual rental is regulated by the
Urban Leasing Law
(LAU) and has the following differentiating characteristics compared to tourist rentals:

  • Duration: a regular or long term rental will have a minimum duration of five years if rented to an individual and seven years in the case of a company or firm.
  • Use of the dwelling: the owner of the property may only use the dwelling at the end of the lease. If before this period you wish to enter the property, you will have to do so with prior authorization and notice to the tenant.
  • Income: Rent is usually collected on a monthly basis at the end of each month. In addition, this is usually the same for all months of the year.

Rentability of the usual rent

In order to calculate the profitability of the usual rental of a property, we will have to apply the following formula:

PROFITABILITY OF RENTAL RENT = (INCOME – EXPENSES) / (TOTAL CAPITAL INVESTED) x 100

Example of profitability for regular rentals in Fuerteventura:

Imagine that you are going to rent a property in Fuerteventura as your main residence for 900 euros per month. (10,800 euros per year). In addition, you have to face a series of monthly expenses related to the maintenance of the property (property tax, community fees, insurance, taxes…) of 150 euros per month (1,800 euros per year). Bearing in mind that we bought the property for 140,000 euros, the calculation to estimate its profitability is as follows:

Return on normal rent: (10,800 – 1,800)/140,00 x 100 = 6.42%.

If we rent our property in Fuerteventura as our main residence we will be able to acquire a yield of 6.42%.

Tourist rental

Tourist rental is a lease produced for a short period of time. In this case, guests make occasional use of the dwelling and are considered visitors.

Characteristics of tourist rentals

Tourist rentals or vacation rentals are regulated by each autonomous community. In the specific case of the Canary Islands, the regulations governing this type of rental are contained in Decree 113/2015, of May 22. These are the main differences that we would find in tourist rentals versus regular rentals:

  • Duration: they do not have a maximum or minimum established duration. The duration will be agreed upon by both parties and may be for a few days, a year, or even several years, if there is a justified temporary cause.
  • Use of the dwelling: the owner may use the dwelling during periods when it is not rented.
  • Income: the price is usually stipulated per night and may vary depending on the season, the area of the accommodation or the services offered therein. In addition, it is customary for payment to be made in advance.

Profitability of tourist rentals

The formula for calculating the profitability of tourist rentals changes with respect to the formula for regular rentals, since the calculation must be made by days of occupancy, since the stays are shorter.

PROFITABILITY OF TOURIST RENTAL = [(DAILY RENTAL PRICE x AVERAGE ANNUAL OCCUPANCY) – EXPENSES / ( TOTAL CAPITAL INVESTMENT) x 100

Example of profitability for tourist rentals in Fuerteventura:

Continuing with the previous example, to calculate the profitability that we can achieve by opting for tourist rental instead of traditional rental, let’s imagine that we are going to rent our home for 55 euros per night and we foresee that our occupancy level will be about 5 months per year (150 days). Bearing in mind that our monthly expenses will continue to be 150 euros per month (1,800 euros per year) and at the time we acquired the property for 140,000 euros, the calculation to estimate the profitability of the holiday home would be as follows:

Return per tourist rental: (55 x 150) – 1,800 / 140,000 x 100 = 5.89%.

If we rent our property in Fuerteventura as a holiday home we can acquire a rental yield of 6.42%.

Which option is more profitable?

So, which is more profitable? Tourist rental or traditional rental? In reality, this is a very complex question that requires analysis of multiple factors that go beyond the scope of this article.

On the one hand, the profitability that you can opt for through traditional renting is greatly influenced by the deductions that you can opt for as an owner, deductions that vary according to your profile as an owner. On the other hand, the profitability to which you can opt through the tourist rental, will be greatly influenced by the level of occupancy and seasonality of the region. There are homes that cost more at one time of year than another.

For this reason, it is essential to have the advice of a real estate expert in the area in order to choose the most profitable way and get the most out of our investment.

Do you own a property in Fuerteventura and would like to know exactly how much profitability you are eligible for? Would you like to receive a profitability study before putting your home on the market? At Destiny Home you can find the advice you are looking for.

I want to make my real estate investment profitable

Questions and Answers on rental profitability

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