With summer in full blast, it’s vacation time! You might be reading this blog on the front porch of your vacation home, having a cup of joe. Visiting this vacation home of yours probably every summer, you may be thinking about buying a property here. While buying a home in your favorite summer destination sounds appealing, the reality can be more complex. A great vacation rental involves more than just a prime location. While a popular destination is a good start, you must also consider the numbers, management, and cash flow to decide if it’s really a sensible investment.
Overall market snapshotÂ
Enjoying a house two weeks out of the year isn’t the same as owning one. Everything feels both a little better and somewhat less bearable when you’re on vacation. You may not even realize there are some glaring problems in the area. Even though you enjoy going to that area every summer, you have to do your due diligence before buying your first vacation rental there. Check out the same demographics as you would for a rental two towns away from where you reside.
Short and long-term numbers
When planning a vacation, you’re more likely to pay for comfort and convenience and not worry about your finances too much. Rentals can charge significantly more than average during peak season, but there’s an off-peak period for each peak season. The value of your first vacation rental property depends on its performance during the off-season. Check the local rental market’s performance year-round and consider weekly rentals during the busiest times of the year. Demand for vacation rentals doesn’t disappear during off-peak seasons.
ROI
Never buy your first vacation rental simply because you like the location. It’s possible that you see yourself using the house for a few weeks a year and earn money in the other weeks. This strategy is only viable if the numbers add up. The raised peak rent amounts will result in higher housing prices. In a summer town, a property by the beach could cost 30% more than the same property five miles away. You can collect more rent, though your initial investment will be much higher.
It’s important to understand the potentially hidden costs involved with renting out a vacation home. To start with, your HOA insurance will cost more and you’ll have to pay for flood insurance if you live close to the water. At the end of each lease, you’ll be responsible for furnishing and having it cleaned. The utility costs would be higher and you’ll have to shoulder some liabilities.
Property Management
Managing a rental is probably one of the most difficult aspects of owning one outside of your preferred investing area. Because you can’t immediately head over to the rental whenever something does go wrong, it is definitely necessary to hire a property manager, and you should have a handyman, electrician, and plumbing, in case of emergencies. Plus, you want to have a landscaper and a snow removal firm (depending on the location, of course) that you can rely on when you need them. These people will reduce your monthly cash flow and affect your bottom line.
Legalities
Check the laws before you find yourself in the thought of buying your first vacation rental. There are lots of towns that have particular rental regulations and laws that apply to vacation rental properties. Planning and zoning is a smart idea to accomplish what you have in mind. You may see home improvements or parking arrangements that will increase demand. You might only be able to renew rental applications during particular periods of time, or you might have to abide by certain regulations to avoid penalties. Talk to the town if you really love the area.
Adding vacation rentals to your portfolio might be a pretty smart move, but always invest with your head and not with your heart. Vacation is not the same as owning a vacation rental property.