Summer is here and everyone is out and about enjoying their vacation. Those who have disposable income and a fondness for travel may be tempted to purchase vacation homes to use personally or rent out to generate positive cash flow.
Vacation homes can save you money if you use them a lot, especially since hotel prices are skyrocketing. Plus the potential for value appreciation, rental income, and tax benefits can be a nice bonus. It’s true that owning a vacation home may require higher costs than a primary home for upkeep and insurance, but if you do your research diligently, you can generate an appealing profit for your vacation home.
Before you rush to buy vacation homes, you need to take certain things into consideration. Here I’ve provided for you everything you need to know about vacation homes and tips to help you invest like an expert. If you have any comments or personal experiences you would like to share, please feel free to write below.
Factors to consider before investing in vacation homes:
#1. Your goals
Why do you want to invest in vacation homes? Why do you want to buy a second home? Is it going to be an investment property, a potential place to retire, or a place to spend your vacations? Many people who own a second home use it for all three purposes: as an investment strategy to generate positive cash flow, as a future retiring place and as a place to enjoy a vacation with the family.
Think about what you want out of your second home. What features are important to you? Which location attracts you the most? You need to also plan a tentative budget, keeping in mind fees, taxes, insurance needs, renovation costs and year-around utility costs.
You should know by now that location is the heart of real estate investing. It is the cornerstone to buying and selling a property, and that includes vacation homes. Owning a vacation home comes with a two-in-one benefit: one is for your own personal use and the other is renting it out to guests to make money in real estate. When you want to choose the location for your vacation rental property, you want to think not only about yourself but also about potential future tenants.
The location you choose doesn’t necessarily have to be a typical vacation destination, like beach towns. People also like to visit cities for conferences, business meetings, doctor’s appointments or even shopping. Some people like to use furnished apartments when they move to a new city before lining up more permanent housing.
There are plenty of options to choose from when it comes to location. For example, a recent report from rented.com listed the top 5 cities for investing in vacation homes and to many people’s surprise, not all the cities were “vacation destinations.” Here is the list:
- Panama City Beach, Florida
- Chicago, Illinois
- Napa, California
- Tulsa, Oklahoma
- Memphis, Tennessee
#3. Short-term rentals regulations
The regulations concerning short-term rentals are constantly changing from city to city. Before you rent out your vacation home, make sure your second-home business complies with the laws and ordinances of your state. Check with city officials about zoning requirements for short-term rental properties. Review the current zoning status of the area in which your vacation home resides and be sure to learn about any proposed changes that may affect it. Additionally, you need to check with the homeowners association about regulations regarding vacation rentals in your area.
Many areas require that vacation homeowners apply for a business license or permit to rent homes on a short-term basis. Double check to see if that requirement applies to your area.
In some locations, safety and health code regulations are expected to be followed. Vacation homes have to follow the same basic safety requirements as long-term rentals and may also be required to complete safety inspections. There are also regulations concerning health issues such as linen sanitization, well-water testing, and pool maintenance. If you are planning on renting out your short-term rental as Airbnb rentals, then visit Airbnb’s website to review your city’s regulations.
#4. Think about seasonality
If your main goal is to obtain a high occupancy rate year-around, then buy in a place that does not depend on seasonality to rent. The seasonality of a market varies from location to location. It is important to be able to identify the factors that influence your area so you can understand the impact of seasonality trends on the current housing market.
#5. Purchase suitable insurance
It is essential that real estate investors make sure their vacation homes are adequately protected in case of any catastrophic events. The question that so many property investors ask is if a standard homeowner insurance policy will cover their second home. It is recommended to review the policy for your existing home to see whether any of that coverage could be extended to your vacation home rental. The National Association of Insurance Commissioners recommends reviewing the policy for your existing home to see whether or not any of that coverage could be extended to your vacation home rental property. However, if you are renting out vacation homes for the purpose of making money, then it is considered a business activity and probably won’t be covered.
Unless you’re oozing with cash, one of the drawbacks of buying vacation homes (which for most people would be a second home) is the matter of financing the property. There are various financing options and real estate investment loans to choose from but it all comes down to which financing method is more suitable for you.
- Conventional loans: These types of mortgage loans are offered through banks and credit unions and are similar to the loan you would get for a primary residence. You will be asked to put down an initial amount and then will be set up with a payment plan over a set amount of years (usually 15-30) with either a fixed or adjustable interest rate.
- Home equity: The second option available when looking to buy vacation homes is tapping into your existing home’s equity. Of course, this option requires that you already own property. There are two approaches you can take here. The first is cash out refinancing which works great when a home’s value rises leaving you with equity. The second is a home equity line of credit (HELOC).
- All cash: Of course this option is not possible for most of the people who are looking to buy a second home. But hey, if you have the cash, then why not use it!
Aside from the property tax on vacation homes, other taxes will come into play. First, you must include federal income tax in your home-buying equation. Many states in the U.S. require you to collect and remit sales tax. This sales tax is paid by your guests in addition to your rental rates. You collect them and hand them over to the government at a fixed interval.
So let’s say you found a home that you’re convinced is the ideal short-term vacation rental. You still need to attract people to your property right? This is where your marketing skills should come in handy. Think about how you want to list your property. Will you do it through home rental websites like Airbnb? Or will you market your property through social media websites like Facebook? In some cases, it is easier just to hire a property manager to handle the details of listing your property, especially if you are not located near the rental.
#9. Rent before you purchase
A good piece of advice from those who have experience in vacation homes is to rent out the property before you purchase it. Renting it out yourself will give you a better feel for the property. Stay for at least two weeks to make sure you don’t get bored on extended stays. Renting out the property before purchase will allow you to understand weather and crowd patterns. You can see if all the public amenities are easily reachable. In the end, if the property makes you comfortable and satisfied, then it will definitely please your guests.
#10. Analyze the property before purchase
To determine if your rental property will be a smart investment decision, you need to analyze the property before purchase. Real estate investors must conduct a comparative market analysis to determine the value of their income property and return on investment. So before investing in vacation homes, ask yourself will it be worth it. To help you efficiently perform real estate market analysis, check out Mashvisor! Mashvisor provides property investors with the best real estate investing tools like our rental property calculator that make performing a comparative market analysis an easy process.
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#11. Work with an agent who knows the area
Vacation homes can turn into risky investments if you are not familiar with the area or live far away from the property. That is why it is recommended that you work with a real estate agent who knows the area and can help you make smart investment decisions.
#12. Buy under your budget
Don’t fall into the common real estate investing pitfall of overpaying that many property investors tend to do. Avoid purchasing a property that is too expensive. Instead, buy a property that is below your budget. Buying a house with very high monthly carrying costs causes stress, and most people go on vacation to run away from troubles. If you decide to hire someone to manage your vacation home, you won’t have any wiggle room in your budget to afford it. Always look for properties that are suitable for your financial situation, both now and in the long run.
#13. Property management
Determine your level of involvement and how you plan on managing the property. Renting out vacation homes requires effort, time, and dedication to succeed. You can either hire professional property management companies or self-manage the property. Either way, there is a list of tasks that must be taken care of.
Tasks involved in renting out vacation homes:
- Advertising your rental property
- Responding to inquiries promptly
- Taking reservations and payment from guests
- Collecting and remitting sales tax
- Handling guest requests and complaints
- Scheduling housekeeping between guests
- Managing maintenance issues
#14. Calculate running costs for your property
Buying vacation homes comes with maintenance costs just like any other type of investment property. Many real estate investors will notice an increase in their property taxes and other running costs. Be sure to factor in such costs. Of course, running costs of vacation homes may vary depending on the type of property and the location. For example, beachfront houses may require more exterior maintenance due to the high humidity.
Buying vacation homes is an investment decision that requires much thought. These tips should help you invest in vacation homes like an expert!
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