You are leaning toward taking the leap and purchasing a vacation rental home. You’ve already envisioned how you want the interior to look, and you have done some rough math to estimate much income the property could pull .
Don’t get too far ahead of yourself, though. There’s much more you need to think about before putting down your hard-earned money toward the purchase of a vacation rental home.
Buying that home at the beach or the reclusive cabin in the mountains takes a bit more than just wanting it and leaping. Give thought to the following eight factors when you’re taking a look at purchasing a vacation rental home.
Location is one of the cornerstones of buying and selling property, and that includes vacation rental homes.
Choosing where to purchase a vacation rental home isn’t just about you, although that is a consideration. More essential, it is about where potential renters want to spend time.
In other words, the vacation rental home should appeal to you, the owner — since you might be staying there, too — as well as the renter.
These places don’t always have to be usual vacation destinations, such as beach towns and ski resorts. Tourists will visit cities for conferences, business meetings, doctor’s appointments or even shopping. Some individuals might want to use a furnished place for weeks or months when they move to a new city before lining up more permanent housing.
If you are not too familiar with an area you’re mulling for a vacation rental home, how do you figure out whether renters would be drawn to it? Consider searching vacation rental listings on the internet, and talking with the local chamber of commerce and local real estate agents to get their thoughts.
Proximity to Your Home
Are you planning to take advantage of the vacation rental home if renters aren’t there? If so, you might want select an area that’s not too far from your permanent residence. Otherwise, it will be a struggle to get away to your getaway.
The distance of the vacation rental property from the primary residence is going to be a rigorous determinant on how many times a year it will be visited and used.
In addition, how much time are you thinking of placing into upkeep and maintenance of the property? If you are intent on going the DIY route, you’ll want to be within a reasonable driving distance to take care of things like an overgrown yard or a broken toilet.
In many cases, DIY upkeep and maintenance can gobble up much of the time you’ve carved out for relaxing at the vacation rental home, which is surely not what you expected when you dreamed of vacation home ownership.
When thinking about the upkeep and maintenance of a vacation rental home, bear in mind the size of the property, A bigger home will demand more TLC (and more visits).
What if you want to wash your hands of the upkeep and maintenance hassles? Then be sure to hire a trusted property manager to assume the burden.
Investigating local laws to make sure vacation rentals are allowed in the area where you want to buy a vacation rental home. Some neighborhood ordinances restrict short-term vacation rentals; if you violate the ordinances, you could be fined or lose your permit.
As soon as you buy a vacation rental home, you’ll have to hang onto it for a while to maximize the investment.
Homes are not investments, and if you choose to sell, it may take a handful of months or even years to get the price you want.
Unless you’re flush with cash, one of the drawbacks of buying a vacation rental home — which for most people are a second home — is the not-so-little matter of paying for the property.
Based upon the location, condition and market value of the property — along with the buyer’s financial status and credit history — a typical 15- to 30-year mortgage for a non-owner-occupied property usually takes a 20 percent to 30 percent down payment. Then, of course, there are the monthly mortgage payments.
Aside from property taxes on the vacation rental home, other taxes will come into play.
First and foremost, you must include federal income tax in your home-buying equation. As a consequence, it is critical to familiarize yourself with IRS rules and regulations about vacation rental homes.
People most of the time forget to consider the tax implications of long-term income when purchasing a vacation rental. Both are providers of tax debt resolution and tax relief services.
After the first year, taxes from rental property revenue can really add up. It is important to consider these costs when budgeting for your new property.
If you’ll be renting out your property for more than 14 days a year, you’ll qualify as a landlord and be asked to report rental income to the IRS. However, this means you can deduct rental-related expenses, such as the costs of upkeep and maintenance.
If you stay at your rental property for 14 days a year or more than 10 percent of the total rental period (whichever is greater), the property is considered a personal residence.
In that scenario, you are able to deduct expenses up to the level of rental income, but you can’t deduct business-related losses, he says. We often run by forgetting this rule and deducting losses from their personal residence.
Federal taxes will not be your sole tax concern, however.
In many places, you will be responsible for collecting sales or lodging taxes for your rental property. Check with state and local government agencies about the requirements.
The National Association of Insurance Commissioners recommends reviewing the policy for your existing home to check whether any of that coverage could be extended to your vacation rental home. However, the Nationwide insurance company says, if you’re renting out your vacation home for money, that’s considered a business activity and probably won’t be addressed under the existing policy.
A rider or endorsement in your current policy may suffice if you’re renting out the vacation home only on occasion, Nationwide says. But if you rent it out frequently, you might want to contemplate a stand-alone commercial or business liability coverage.
Nationwide warns that a coverage for a vacation rental home typically costs more than a policy for a primary home because the vacation property is vacant more often and is more susceptible to insurance claims.
So, you’ve picked out a home that you are convinced will be ideal for short-term vacation rentals. But you’re going to have to attract renters, right?
Before signing the mortgage paperwork, explore how you’re going to list the rental property. Will you do it through an online platform such as Airbnb, HomeAway or employ a full-service vacation rental manager such as TurnKey Vacation Rentals who will market your property on 50 websites? Or are you going to market it through Facebook or Craigslist?
In most cases, it’s easier to use a property manager to handle the details of listing your property, especially if you are not located near the rental. They can not coordinate the advertising, but also coordinate cleaning and maintenance of your property.