If you’re considering buying a vacation home or have already bought one, you know this is a big investment. It’s a great decision to make, but there are some things you should know before you take the plunge. Here are 10 things to know before buying and renting a vacation home.
What To Know About Your Vacation Home
As you spend more time in your newly purchased vacation home, you start to get to know the ins and outs of its operation. As you discover new things, whether they’re best practices or exciting upgrades, you want to jot them down on a list. This list will come to fruition when you go to list your vacation home for rent. It puts you one step above your competition when you are able to include the details of your property rather than a blanket listing.
What Are Typical Vacation Rental Management Fees?
Industry standards state that one should be charged approximately 25 to 30% of the total booking cost when renting a home for vacation. However, it may not come as such a surprise to hear that management fees also vary by location and property, with charges ranging from 10% all the way up to 50%! The key here is do your research and make sure you are charging the correct management fees so you can profit however not to overprice and risk losing bookings.
How Many Days Can I Rent Out My Vacation Home?
If you use the home for more than 14 days then it is still considered an investment property, but if it is rented out for less than 10% of the number of days per year that it was rented, then the IRS considers your residence an “active”, versus a “passive”, rental property. Therefore you may be able to write-off expenses against rental income on this property. The key is to get as many days booked as possible so you can profit as much as possible, however don’t forget to leave adequate space between renters so you can ensure quality upkeep.
How Many Bookings Are On Your Calendar?
There are a few vacation rental sites out there that not only make it easy to get the word out about your property while being affordable for individuals and families to rent your properties for their vacations. You can easily advertise efficiently while staying within your budget.
Make sure to space out your bookings enough to ensure a proper clean and always keep in mind your renters may request a late check out or early check in. Time between renters is key to your success in your upkeep and your income.
Can Your Neighbors Affect Your Vacation Rental?
When it comes to renting, some pitfalls may arise with your property’s neighbors. In the case of a “party house” type of issue, it can have a negative effect, but if your property is advertising as being rental friendly and therefore listing things such as a coach house or an in-law unit that has its own entrance then these can possibly have a positive effect on your rental neighbors. Keep in mind, your renters have the option to rate your home too so you don’t want your ratings to go down because your neighbors are impacting your renters vacation.
Is It All About Location?
While you certainly need to consider the tangible financial aspects of a prospective property, you can’t ignore the fact that it must be in a pleasant and accessible location. You do not want your renters to have a difficult time finding your place and start off their vacation frazzled due the difficulty in finding your rental. Make sure your location is accurate on Google, Apple, Yahoo and any other pertinent and/or local maps.
Are The Benefits Worth It?
Vacation rentals can be a great investment opportunity. They can generate a lot of income and property owners sometimes get lucky and find themselves in high demand, only to witness an even greater profit than they would see from other property types like securing tenants for example.
On the other hand, vacation rental homes don’t get the same tax breaks as you might typically expect. Thankfully there are ways around this particular disadvantage such as investing further in your home and even easier by investing in multiple properties.
Note, this vacation rental doesn’t only have to be for renters. Why not get a vacation rental property somewhere where you like to vacation too? No sense in paying for two vacations when you can have your vacation in your home away from home.
Is Financing Your Vacation Rental Property The Best Long-Term Investment?
If you plan on keeping your vacation home up and running long-term then seeking financing now is the best route to go.
There are several options available to you ranging from short-term to long-term. In the case of conforming loans, you can either look at them as a portfolio loan or a multifamily loan option. Other types of loans include the hard money loan and the bridge loan. If you plan on keeping the home after you pass away, financing now can really help your loved ones, if they take it over.
How Do You Value a Vacation Rental Property?
Cap rate. Net operating income (NOI) is the difference between gross rental income and operational expenses (taxes, insurance and upkeep costs, etc.). Most real estate experts suggest that a good cap rate for vacation rental properties should range between 8% and 12%. Also, keep in mind the value you and your family could potentially have for the home you select. You can use this as your annual vacation getaway.
Are Landlords Responsible For Tenant Safety?
Landlords aren’t just responsible for the property, they’re also responsible for ensuring that tenants have the security they deserve. We know that it’s important to be proactive, especially when dealing with your safety. That’s why it’s always best practice to change the lock or the passcode after each tenant vacates and/or prior to your new renters checking in. Plus, having landlords and/or owners insurance is always better to have than not have, because accidents do happen, plus some states even require it!
Are There Drawbacks Of Owning a Vacation Home?
Of course, unfortunately, not everything is peaches and cream. But if you weigh your pros and cons and the cons outweigh the benefits, maybe this vacation home isn’t the best investment, at least not right now.
The good of having an investment property includes the potential of getting stable rental income, but it has many drawbacks like the lack of liquid cash flow, the need for repairs on serious damage (including maintenance issues), or that certain tenants could cause you problems or that your property might drain your savings if you don’t have enough tenants booked to rent to pay your finances including maintenance.
Vacation homes are a great investment, but they’re also a substantial investment. Take the time to do your research, make your pro con list and make sure your long-term decisions are in line. Being a landlord isn’t always easy but when you know the tips and tricks behind having a successful vacation rental home it helps make being a landlord a little bit easier.
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