Whether it’s a bungalow by the beach or a cabin in the woods, owning a vacation home is a dream for many. After all, you’d always have a place to stay in a favorite travel destination, and could rent out the place when you’re not using it. What’s not to love?
Yet all too often, people venture into a vacation home purchase with “rose-colored glasses on,” says Denise Supplee, real estate investment educator and co-founder of property management software SparkRental.
Vacation homes can be a worthy investment, but owners don’t always fully realize the time and financial commitment involved.
As Supplee describes it, “Here is a typical scenario: New to property investing. Looks at the romanticism of a home by the ocean or one tucked away in the mountains. Assumes they’ll make a fortune.”
In reality, “there is substantial risk,” she says. “That’s especially true when a vacation home is used as a short-term rental, which can bring extra costs.”
Dealing with vacancies and attracting bookings can be time-consuming, too.
All of this begs the question: Are you truly ready to buy a vacation home?
For answers, look no further than our Guide to Buying a Vacation Home. For this installment, we pinpointed the key questions you should ask yourself to gauge just how prepared you are to take the plunge. By talking with experts and people who own (and rent out) their vacation homes, you’ll learn what’s involved in this endeavor, and the risks. That way, you can enter this adventure with your eyes wide open and, yes, maybe even make a profit!
1. Why do you really want a vacation home?
So before looking for a vacation home to purchase, first consider your reasons and goals for wanting one. How much do you plan to use it personally, and what will you do with the home the rest of the time?
According to Steve Schwab, founder and CEO of Casago, a vacation rental and property management platform, common reasons people purchase vacation homes include the following:
They have a place to stay in a favorite travel spot.
They have an eventual retirement home.
They establish a way to make money by renting the home out.
They have the home as an investment that they can rent out now to cover the mortgage and property taxes, and later sell for a profit.
Just keep in mind that some of these goals might clash and be hard to juggle.
Avery Carl, a real estate agent and owner of five vacation rental properties in Tennessee, cautions against getting too emotionally attached when purchasing a vacation home as an investment.
“If there are any personal emotions tied to an investment property, the owner will never maximize its cash flow potential, and owners will end up getting upset over minor issues like makeup on towels,” says Carl, who works with investors to acquire their own vacation rentals.
“My advice is not to rent it out if it’s a personal vacation home that you have an attachment to, and if it’s an investment, keep your emotions separate—it’s a business.”
2. Do you have time to manage a vacation home?
Many homeowners underestimate the time and work involved in owning a vacation home, Supplee says. The time commitment includes marketing the home, setting up listings on booking sites, keeping up maintenance, dealing with guests checking in and out, and handling guest requests.
“Some people buy a vacation home and find that they didn’t buy a vacation, they bought a job,” Schwab says.
Carl, who manages five properties, says she spends about an hour and a half per week on each.
Additionally, self-managing a property means being on call 24/7 in case renters have any questions or problems from broken air conditioning to nonworking Wi-Fi.
3. Will you self-manage the rental, or hire help?
Some vacation home owners may enjoy handling the management process themselves. For others, especially if they live some distance away, hiring a property manager can be well worth the expense.
Schwab suggests owners tally up how many hours a week they spend managing their vacation home and divide the hours by a property manager’s fee. That can help homeowners determine whether a management service is worth the cost.
Even if you don’t plan to rent out the home to vacationers, hiring a property manager to keep an eye on the home when you’re not there is a good idea, especially if you live far away. This will ensure that the home stays clean and in good repair.
4. Do you want short- or long-term renters?
While renting out your place on Airbnb or VRBO might be the most lucrative option, it does have its downsides, including higher cleaning fees, more wear and tear on the home, and more frequent vacancies as renters come and go and bail during the offseason.
If you don’t want to deal with short-term vacationers, you can also try to rent to a long-term tenant. But finding longer-term renters can also be tricky, especially if the home is located in a popular seasonal travel destination, Supplee says.
“Long-term renters in these areas are far and few between,” she explains. “My area, the Pocono mountains, does not fetch high rents in the long term.”
Long-term renters also take away some of the flexibility that vacation home owners often enjoy, Schwab says. It would limit how often you could enjoy the home yourself if a tenant signs a six-month or one-year lease.
So how do you decide? If you want your rental to remain profitable, as a general rule it should earn at least 1% of its purchase price per month, Carl says. For instance, a $100,000 home should rent for $1,000 a month for a good return.
For short-term rentals, Carl suggests that your net operating income should be around 20% higher than your carrying costs (more on what those are next).
5. How much will this vacation home cost to maintain?
Vacation homes come with mortgages, taxes, and insurance, just like any other home. But, there will likely be additional costs such as maintenance, repairs, utilities, and other locality-specific charges. Turning the vacation home into a short-term rental brings even more expenses, including the following:
Cleaning fees could be $152 per session, according to Home Advisor.
Home maintenance is typically 1% to 4% of a home’s price.
Insurance premiums could be as much as 15% to 20% higher.
Property management typically costs 10% to 40% of the gross annual income.
Homeowners association fees vary drastically, ranging from $150 to $700 per month.
“It is important to understand that vacation rentals have a higher operating cost than traditional rentals,” Schwab says. “The normal wear and tear to vacation rentals is disproportionately higher than long-term rentals due to the high turnover of people constantly moving in and out.”
Supplee urges vacation home owners to factor additional costs into what they plan to charge to rent out the home.
6. What are the tax implications of renting out a vacation home?
The taxes associated with vacation homes can be complex, and vary based on how the property is used and how much time it is used personally versus being rented out. It’s always best to talk to a tax professional about your unique financial situation, but here’s an overview of what to expect.
In general, the amount of personal use dictates whether the home is truly classified as a rental property.
“If you have a vacation home that is rented [out] for more than 14 days during the year and your personal use does not exceed the greater of 14 days or 10% of the rental days, the home is then classified as a rental property—or, a business for tax purposes,” Supplee says.
When the home is considered rental property, rents received are reported as income. But you can deduct many of the expenses of renting out the property, including maintenance, insurance, taxes, and interest, according to the IRS. New tax rules also offer some benefits for rental property owners. Here are some of the tax benefits of owning a home.
Article originally appeared on Realtor.com.
