Buying a vacation property and renting it out might seem like an easy way to make some extra money. But is investing in a vacation rental really a good idea? As with most matters, the answer to that question isn’t as cut-and-dried as you might expect. There are a number of things that will factor into whether a vacation home will make good financial sense for you. So, while you may have friends or family members who have enjoyed great returns on their vacation property, this doesn’t guarantee that you’ll have the same success. As investing in a vacation rental is huge undertaking, we’ve put together a list of some of the things you should think about before you take the leap into vacation home ownership.
Location, Location, Location
If you’re considering buying a second home, you probably already have an area in mind. That’s good! It’s best to choose a destination with which you’re already very familiar as well as one that you enjoy visiting, too. Knowing the market is essential to your rental being profitable. It will make it easier for you to choose specifically where you’d like to purchase as you will already know how close it is to area attractions, if there’s cell phone service, what times of the year are busiest, whether WiFi is available, and much more. Small details like these can go a long way in ensuring that your new property is rented as much as possible.
If you know where you’d like to buy, but you haven’t spent much time there, it’s a good idea to make that a top priority. Several visits to your preferred destination will help you get a better idea of the best neighborhoods, what types of seasonal peaks there are, how easy it is to get to, and who visits, among other things. There are plenty of online resources available that can help you figure what drives tourism to the area as well as where visitors prefer to stay. If you’re curious about certain neighborhoods, local realtors are privy to plenty of information that you won’t find online.
Do the Math
Next, it’s time to look at the financial feasibility of purchasing a vacation home in your destination. You’ll obviously need to have enough money for a down payment as well as all the other costs associated with buying a home. If you’re currently struggling with your finances, it’s best to wait until you can comfortably afford a new home. It’s crucial that you buy only what you can afford. If you go into it with expectations that your rental revenue will make up for any overspending, you’re bound to be sorely disappointed.
It can also be more difficult to qualify for a second mortgage than a first mortgage. You may also have challenges getting additional insurance. Your destination may necessitate extra forms of coverage, like flood insurance, that can be especially pricey.
After you’ve figured out how much you can afford to spend and what a likely monthly mortgage payment will be, you’ll need to start calculating all the other costs that can and will come up. Repairs are a large item that many people forget to include in their budget. While typical home maintenance usually costs about 1% of the purchase price every year, you can expect to spend more than that on upkeep for a vacation home. Sadly, not all visitors will treat your property with the respect it deserves. Items will break or go missing. It’s important to stay on top of repairs to ensure that your vacation home or condo continues to get good reviews.
Don’t forget about budgeting for things like utilities, lawn care, and pool maintenance. If you’re considering buying a property in a Homeowners’ Association, check to see what dues they charge. While homes in an HOA may have modest fees, you can expect to pay significantly higher fees for condos. If you’d like to have a property management company take care of your rental, you’ll need to find out what local companies charge so you can account for that as well.
Once you’ve got all those numbers together, ask yourself, “Would I be able to pay all of these bills if I didn’t get any rentals?” If the answer is no, you may want to rethink your options. You should also take a look at what similar properties in the area rent for throughout the year. If this income won’t offset maintenance and other costs, purchasing a vacation rental might not be a good fit. While it’s tempting to skip over all the financial details, these are a huge factor in whether your vacation home or condo will be a good investment.
Think About the Future
It’s not guaranteed that your vacation home will significantly appreciate in value or that you’ll enjoy a lucrative return. But it’s best if you plan on keeping the home for a while. The longer you own a home, the greater your assets will be. If you’ve owned the home for a while, you’ll be better situated to weather unforeseen circumstances like a housing crisis or market crash. You need to be prepared in the event of an economic downturn. The vacation market takes the biggest hit during times like these and you may struggle to find renters.
If you’re considering purchasing a property in a destination that revolves around certain activities or seasons, think about how that might negatively impact your rentals. For example, if you have a property in a ski town, how will you fare if the winter doesn’t bring a lot of snow?
Finally, how much time do you plan on spending in your vacation property? If you’re considering purchasing a property that you can use for your own vacations, take into account the amount of time you’ll actually spend there. Is it easy for you to get there? Do you only want to spend your vacations in this particular property? If you think that you’ll spend a significant amount of time in your property, then it’s probably a good investment. Likewise, if you’re planning on retiring in your property and you’ve had a good amount of time to pay on it, you could be well-suited to be mortgage-free in your retirement years.
Rules, Regulations & Taxes
During all your time researching, don’t forget to look into the local regulations for short-term rentals. In your destination, have there been discussions or are there plans in the works to prohibit or limit these types of rentals? Recently, a number of towns have set forth new laws governing short term rentals. Certain Homeowners’ Associations or condo boards might not even allow these types of rentals. You’ll need to take a careful look at these to determine if it’s worth it to buy a property in that area.
With a second home, you’ll also be responsible for additional taxes. There are a number of tax rules on the books that you should research before you purchase anything. You’ll have to meet specific requirements in order to take advantage of deductions that can help you cover costs and save money.
Management Company or Self-Managed?
Whether you decide to enlist the help of a property management company or you decide to go it alone will depend solely on your preferences. Hiring a property management company can make a lot of the processes much more simple with limited involvement on your part. They can take care of arranging maintenance, house cleaning, and guest communications. While this can be very convenient, a management company will also charge fees or commissions.
If you’ll be self-managing, you’ll need to stay on top of all the tools and technologies out there so you can stay competitive. Online booking platforms are a must anymore and gadgets that use smart technology can be a boon for your property. Depending on how many rentals you get, self-managing can take up a significant amount of your time. If you don’t live near your vacation rental, you’ll need to have a plan in case of emergencies. For example, if you own a beach property, is there someone local who can close your hurricane shutters or perform other precautionary actions for your rental?
Is It Worth It?
While you may be able to make money from your rental, it’s highly unlikely that you’ll get the same type of returns you’d see from investments like stocks or mutual funds. So, if you choose to move forward with purchasing a vacation rental, don’t think of it as purely a monetary investment. It can be much more than that like an investment into quality family time, relaxation, and worthwhile vacations. If all this appeals to you, you have the financial means, and the numbers work out in your favor, then yes, investing in a vacation rental is a good idea.
If you’ve got questions about how Breckenridge Vacation Properties can help you, take a look at our Program Specifics or give us a call at (970) 528-9700.
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