Owning A Vacation Rental Home
As I mentioned yesterday we purchased our rental home near the height of the housing market. We secured a 30 year fixed rate mortgage at 6% through a credit union that required 20% down. These days I highly doubt you could attain a mortgage on a second home without putting down at least 20%. The down payment came from a bunch of stocks and mutual funds that my husband and I had been holding onto for years. A large chunk came from company stock that would now be worthless.
Is Buying A Vacation Rental Property A Good Investment
Home » Learning » Is Buying a Vacation Rental Property a Good Investment?
Kate Christensen
Summary: In this article, we will answer the question: is buying a vacation rental property a good investment? Topics also include, things to consider before buying a vacation home, and the pros and cons of owning a vacation rental property.
What Is Airbnb And How Does Airbnb Property Rental Work
Airbnb is a vacation rental platform where users can list their home or spare room as a place for guests to stay while traveling. It was founded in 2008 and has since grown to be one of the top vacation rental listing websites. Airbnb essentially acts as an intermediary between property owners looking to rent their spaces and travelers looking for a place to stay. Today, Airbnb has over six million listings located all over the world. If youre looking for other ways to market your new vacation rental, please be sure to list your property on our online travel agency, RentalTrader.com. It is fee to list and our fees are lower than most of the other competitors in the marketplace.
The Airbnb website is made up of many different listings. Clicking on a listing will show you photos of the property, along with a detailed description of what guests can expect if they stay there. Potential guests who are interested in staying at that particular vacation rental can request to book a stay there . Airbnb will then prompt them for more information and payment. Once the host approves the guest, the stay is booked, and the dates are blocked off on the hosts calendar. While most Airbnb hosts are property owners, those wondering how to rent Airbnb without owning property should know it is not necessary to be a property owner to become a host.
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Investing In Vacation Rental Property
With platforms like Airbnb and Homeaway being used by more and more people each day, investing in vacation rental property has become a goal for many, whether they plan to eventually use it themselves, or simply want to diversify their real estate investment portfolio.
The first step in buying a vacation rental property is to pick the right place. Andrew McConnell writes about vacation rentals and the sharing economy, and is the Co-Founder and CEO of Rented.com, the world’s largest marketplace for vacant rental weeks. He advises that vacation home buyers be honest about their goals and use those goals to guide their choices.
The first thing to ask when buying a vacation property is: Is this an investment or a vacation home? If you are really intending it to be a vacation home, many of your design decisions will be based on your own personal tastes, which may not align with what will actually maximize rental income, i.e. guests don’t always have the same tastes as you.If you want to be as good of an investment as possible, your own desires for the home are secondary to those of the guest. There are tradeoffs with each. In one you get the vacation home of your dreams. In the other, you get outsized returns. It is often difficult to get both.
â Andrew McConnell
When shopping for a vacation home with a focus on renting it, Margot Schmorak, co-founder and CEO of Hostfully, advises buyers to do plenty of research.
View The Home As A Form Of Recreation Not An Investment
Investment experts will be the first people to tell you that you’ll never make the money on a vacation house that you could make on other investments. So if you buy one, make sure, above all, that this is a house and an area you enjoy. It will be worth the cost if you spend as much time there as possible, put your heart and soul into caring for it or plan to keep the home in the family for future generations. You can’t put a price on that.
For more information on buying a home, check out the links below.
Originally Published: Mar 29, 2011
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Tips For The Second Homeowner
If you own a second home for the purpose of renting it, and you have an AGI under $150,000, then get in there and start actively managing it. This means that you won’t be able to use an agent to find tenants. You will be arranging repairs personally, but it will give you passive losses to write off.
If active management doesn’t appeal to you or your AGI is too high, spend more time at the cabin and turn it into a mixed-use property rather than an investment property. This means that the taxes change with the change of designationmainly that you can’t use passive losses. But you will be able to claim a percentage of the mortgage interest and property taxes as deductions against your income tax.
The Perks Of Owning A Vacation Rental
First up: The good stuff. There are obviously many advantages to owning a vacation rental, or millions of people wouldnt do it. Its why platforms like Airbnb and VRBO have grown exponentially over the last decade. Its probably why youre reading this article in the first place.
Lets look at a few of those perks now:
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Develop A Process To Screen Guests And Protect Your Investment
Mackenzie Kearnan is the marketing manager at Autohost, a guest-screening system for short-term and vacation rentals. The intelligent software runs Airbnb background checks and flags risks to reduce parties, property damage and fraudulent activity. Mackenzie is a vacation rental host herself and knows a thing or two about screening potential guests. Heres her advice on owning a vacation rental home:
The vacation rental industry faces a considerable amount of risk from guests damaging properties. To protect our earnings, investments, and the trust our communities place in vacation rental owners and operators, we have to safeguard our properties from unruly guests. Its incredibly important to screen guests. If youre just starting, develop a process for it. Ask questions, verify IDs, and collect security deposits. That way, guest screening will be embedded in your operations. One bad guest has the potential to destroy your reputation and cost you thousands of dollars in property damage. By screening guests in a legal and non-discriminatory way, you can avoid the risk altogether.
The Pros And Cons Of Investing In Vacation Rental Properties
Vacation rental properties can make for great investments, but theyre not without their drawbacks.
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If youre interested in real estate investing, a vacation rental can be a great place to start. Not only can it help you get a feel for finding, prepping, and financing an investment property, but it can also give you a nice place for a little R& R yourself. And what busy investor doesnt want that?
Still, owning a vacation property isnt all sunshine and rainbows — at least not 24/7. If youre thinking of buying a vacation home to rent out for extra cash, consider the full range of pros and cons before diving in.
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Home Repairs And Upkeep Even When Youre Not There
A vacation home needs upkeep just like any property, from lawn care, furnace tune-ups and a fresh coat of paint to gutter cleanings or caulk replacement. The labor and materials required to maintain your residence can add up quickly. Generally, experts recommend setting aside 1 percent of the total purchase price of the property for home maintenance each year. On a $300,000 vacation home, that would equate to $3,000 every year.
Your second home will eventually require repairs and replacement of key items like appliances, lighting and plumbing fixtures or the HVAC system. Because the things that require repair often break down unexpectedly, you may not have the time or bandwidth to shop around for the best price on a service provider or contractor. In other words, repairs can sometimes be more painful in the pocketbook than you anticipate.
Many experts suggest also budgeting 1 percent of your homes total purchase price for repairs. To be extra safe, its wise to salt away up to 3 percent for a combined maintenance and repair fund.
Is Property In The Outer Banks A Good Investment
Lastly, if the money you get from renting your home does not cover the cost of renting it, you may be able to post a taxable loss on Schedule E. The tax laws for rental properties are extremely complex and since Im not an accountant Id highly suggest you speak with a CPA. There are also lots of good articles on the Internet that can explain the differences between passive and active income and between rental properties and personal residences. In each of these situations different tax laws will apply.
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Decide How You Will Finance The Investment
With your business plan and goals mapped out, you now need to decide how you will secure financing to purchase your investment property. There are a variety of options available in the US, such as these:
- Cash-out refinance
If you have built up significant equity in your primary residence, you can use a cash-out refinance to invest in a vacation rental property. By refinancing a larger mortgage, you can take out the difference in cash and use it as a down payment on your rental property. To be able to do this, you will need to have a good credit score on your side.
- Reverse mortgage
If you are aged 62 years or older, a reverse mortgage might be the best option for your vacation rental investment plan. A regular mortgage requires you to pay back the loan in monthly installments. A reverse mortgage gives you access to the full amount and doesnt need you to pay it back until you sell the property or move out.
However, keep in mind that the entire loan balance will be due once you make this decision. The mortgage interest owed will also continue to increase the longer the loan goes unpaid.
- Home equity lines of credit
If you have adequate equity in your current property, you can choose to take a home equity line of credit to buy a vacation rental property. This option allows you to leave your current mortgage rate as is while taking on a separate mortgage with different terms and conditions.
- Traditional vacation rental financing
Everything You Need To Know About Owning A Vacation Rental Business
Written by Inna Shevchenko, Chief Marketing Officer at iGMS
Being a vacation rental owner has become a sought-after profession. The demand is continuously increasing, while the supply is lacking, especially in popular places. This is precisely why you should consider investing in a short-term rental property. However, just like with any other business, there are certain pros and cons. Moreover, this type of business isnt suitable for everyone, which is why you should consider all the factors before making a decision.
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Keep An Eye On Your Competitors
You should also be keeping a constant eye on what your competitors are up to. Try to monitor their pricing strategy, cleaning fees, special deals and packages they offer, and marketing strategies they use. Thus, you will be able to ensure that what you offer is in line with your surrounding competition. If you dont, they may end up receiving reservations that could have been yours.
Do Everything You Can To Get Reviews
Guy Novik is the Managing Director of Orlando Villa Holidays, a vacation rental company that specializes in high-quality luxury villas in the Orlando area. Guys company currently operates 250 villas. Heres one of his tips for owning a vacation rental:
Reviews are amongst the leading factors which holidaymakers consider before booking a holiday rental. Because of the high price of what theyre renting, potential guests wont trust somewhere, which has a low review count or several unfavorable one. On the other hand, highly positive reviews make your listing appear more reliable. Reviews help sway a potential guests decision in your favor. So, find a way to quickly gather feedback and generate reviews for your vacation rental when you first start renting it. And dont worry about a negative review once in a while. A vacation rental that only has 5-star reviews can look suspicious.
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Reasons Why You Should Not Buy A Vacation Property
Updated: by Financial Samurai
Are you thinking of buying a vacation property to live a better life? Ive owned a vacation property since 2007 and let me say I should have just rented instead. This post will discuss all the reasons why you should not buy a vacation property.
I understand why people want to own a vacation property. The secret to never feeling homesick while on vacation is to simply buy a property in each of your favorite vacation destinations. So clever right?
Well, that was what I thought until I blew my finances up buying a Lake Tahoe condo a couple years before the financial meltdown in 2008 2010. At one point, the property was down about 50%. Until this day, the vacation propertys value has not fully recovered.
Ever since I was a kid, Ive been a dreamer. Most dreams never came true, but it didnt stop me from fantasizing what could be. After I discovered San Francisco in 1995 when I went with a childhood friend to visit UC Berkeley, I knew I had to go West at some point. Life felt so much better than in Virginia.
Soon after relocating from New York to San Francisco in 2001, I discovered Lake Tahoe and told myself, if I could spend six months in San Francisco, two months back home in Honolulu, two months in Lake Tahoe, and two months traveling internationally, how sweet that would be!
Furnish And Decorate The Space
Once a host has rented a property, its time to furnish and decorate the space to function as a vacation rental. In many cases, landlords dont allow their renters to paint the walls or to use nails to hang things up, so its always best to have open communication about the types of decorating they consider acceptable. Command hooks are a perfect way to hang up decor without leaving permanent damage on walls, and some landlords may be okay with new neutral paint colors, but this can vary on a case-by-case basis.
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The Mortgage With A Chance Of Increased Interest
Your biggest expense is likely to be your monthly mortgage payment, not including homeowners insurance and property taxes.
Usually, a second home mortgage will run about 0.5 percent to 0.75 percent above the interest rate youd qualify for on a primary residence, says Polina Ryshakov, a real estate economist and director of valuation at Sundae, a San Francisco-headquartered residential real estate marketplace that helps sellers of distressed properties.
So, lets say you do your homework, scout around and pick what looks like a nice vacation property in sunny Tallahassee, Florida. The home price is $300,000. Your lender requires you to put down 25 percent , or $75,000, on a 30-year fixed-rate loan, and your interest rate is 3.75 percent about 50 basis points higher than what youd likely pay for a primary residence. In this scenario, your monthly principal and interest payment would be $1,042.
Work With An Agent Who Knows The Area
You drive to a little country town, and sure, it looks great. It’s picturesque. The boats bob gently on the lake. The little corner grocery carries artwork by local craftsmen. But I bet you didn’t know that the road that leads off to the most exclusive neighborhood is closed for five months out of the year.
A real estate agent would know that.
Resort communities are charming, but they can carry problems that are hard to live with. In the mountains, you’ve got tough driving conditions. At the beach, you’ve got parking problems. A real estate agent will help you envision that winding road to the cabin when it’s covered with ice.
The agent can also be a great resource for little-known information on hidden bonds, community events and that group that likes to run naked through town every year on the solstice.
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You Can Use The Property Yourself
Its dangerous to mix business and pleasure. People tend to make emotional decisions and then twist together some dodgy logic to justify them. This beach house in Naples? Dont be silly, Im not buying it for me. Its an investment property!
With that caveat in mind, you can occasionally use your short-term rental properties for yourself. Who wouldnt love to own a vacation property?
Just make sure you buy based on cash flow first and foremost. If the property happens to be in a location youd enjoy using yourself, well, that can be fun too.