With summer in full swing it is prime time for vacation season. Right now, you may be reading this on the front porch of your vacation home with the sun just coming up and a cup of coffee by your side. You have been coming to the same spot every summer and just started considering owing a property to call your own. While owning in your favorite summer destination sounds great in theory, reality may be a different story. There is more to a good rental property than location. A popular summer destination certainly helps, but you need to evaluate the numbers, management and cash flow to see if it really makes sense. Here are five important things you need to weigh if you are considering a vacation rental purchase.
- Big picture market view. There is a big difference in enjoying a house two weeks a year and owning it. When you are on vacation everything seems a little better and a little less tolerable. You may not even notice some of the clear deficiencies in the area. As much as you love going to the same location every summer if you want to buy you need to do your due diligence. Take a look at all the same demographics you would for a property two towns over from where you live. Evaluate home sales numbers, tax changes, school growth, crime rates, employment and more. Look at peak and off-peak rental numbers and talk to residence of the town. The people that live in the area year-round can provide a real glimpse of where the area is and where it may be headed. As much as you love somewhere for vacation, owning there may not be so appealing.
- Short and long-term numbers. There are many things to consider when planning a vacation. This is one of the times of the year when finances may not be your chief consideration. You are more inclined to pay for comfort and convenience despite the cost. When evaluating a vacation rental, you need to look past just the peak summer months. Almost every hot spot can charge well above average rents during peak season. If you look at the numbers only during these times you may think the property is a slam dunk home run. The reality is that for every peak season there is also an off-peak time. How the rental performs during the off season usually determines just how valuable the property is. You need to do your homework and talk to a local rental agent or property manager and ask how the market does year-round. From there you should be able to get an idea of how profitable the property is despite the fluctuating rents. You should find out if you can rent per week during the peak season and if so what is your potential upside. Vacation rentals are obviously great in the main season, but demand can’t just fall off the cliff during the off-peak times.
- Return on Investment. You should never buy a property simply because you like the area. In your head you may think that you will use the house a few weeks a year and make money in the other weeks. This idea only works if the numbers make sense. Because of the inflated peak rent amounts home prices will be higher. A property near the beach in a summer town may be 30% higher than the same property five miles away. You can get more rent, but your initial investment will be significantly higher. With a vacation rental you need to understand the seemingly hidden costs associated. For starters, if you are near the water your homeowner’s insurance will be higher and you will have a flood insurance payment. You will need to furnish the property, and have it cleaned at the end of every lease. The cost of utilities will be higher and there are certain liabilities that will fall on your lap. This doesn’t mean the property won’t make sense, but you need to know what you are walking into before making an offer.
- Management team. One of the hardest parts of owning any property outside your primary investing area is managing it. Since you can’t just run to the property every time there is an issue you need to surround yourself with a competent team. You will definitely need a property manager and you should have a handyman, electrician and plumber you can call in a pinch. You should also have a snow removal company and a landscaper that can commit to you when you need them. These people will reduce your monthly cash flow and impact your bottom line.
- Legalities. Before you fall in love with the idea of buying you need to check the legalities. There are many towns that have specific renting rules and regulations for rental properties. It is a good idea to put a call into planning and zoning just to make sure you can do everything you have in mind. You may have visions of parking changes or house modifications you want that can improve demand. There may only be certain times when you can renew rental applications or there may be specific rules you need to follow to avoid fines. If you really love the area you need to talk to the town.
Vacation rentals can really be a great way to bolster your portfolio. However, always invest with your head and not your heart. There is a big difference in vacationing in a town and owning a rental property.
