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Vacation Rentals as a Second Home: Tips for Actually Making Money

by Editor | ezLandlordForms
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When considering a vacation property as a rental investment, the equation for determining a successful investment is blurred by your own personal use of the property.  But making a list of what your ideal vacation home will include, and what you hope to gain from it as a rental, can help you decide when it can be worth the plunge.  Follow these tips to help you make the right choice in a vacation rental investment.

Determine what you are looking for as an investment

First, do take a good look at the location and rental history in the area.  You may want a farm-style house in the country, but how attractive will this be to renters? If the mountain cabin you desire is too far from the ski resort and other local attractions, will it draw enough vacationers?

Even if you select a very popular area that you think will attract plenty of renters, research the history and vacation rental market of the surrounding area.  What kind of nightly/weekly/monthly rent can you expect, in each season?  What is the vacancy rate like?  What kind of new construction and additional supply is scheduled to go up in the area?  High vacancy rates may force reduced rental pricing under the current rates, to avoid facing many weeks or months of vacancies.

This may not rule the property out for you.  Much will depend on how much of a return you require to make the investment work.  If you already have several successful vacation rental properties, you may be able to afford a larger risk for something that meets your unique desires for your own use.

A rental property will also come with tax implications.  The money you receive from the rental is income.  This is an area where you will need to consult with a tax professional to understand exactly how the income affects your financial situation.

Unless your vacation property is very close to your current residence, you will need to hire maintenance and cleaning personnel to handle your rental.  You will have to factor this into your overall costs.  If you currently live in or near an attractive vacation area, look at properties near you.

Choose a home that you will enjoy and meets your needs

Part of the potential return on investment is the use of the property as a vacation home for yourself and your family.  Consider your family’s vacation desires; if you want to spend your time boating or fishing, obviously you want to be near water.  If you love winter sports, Florida is not where you want to look.

You will want a vacation rental home in a location that you can get to easily.  If you have to fly to reach the property, it will significantly reduce the amount of time you can realistically spend there.  Likewise with long drives – you want a property that you can visit without any additional stresses of getting there.

The first rule of thumb is renting a similar property to see how it works with your vacation ideals.  Think about how much time you will spend enjoying the home, and consider your future use.  You may currently want a property that allows your entire family to enjoy vacations together.  However, several years from now, your children may not be vacationing with you.

Look at what you can realistically expect in the size and accommodations to make sure your investment meets both your current and future needs.  However, if you choose a property with a solid return, you can use it only for rental income if your personal needs change.

Stay within your budget and understand what the full budget involves

Investments present risks and vacation rental properties are no different than any other investment.  You also want some personal benefits from your property.  Vacationing should be an enjoyable experience, not one that instills financial fear.  Do not overextend your budget no matter how great the opportunity appears to be.

Beware of overestimating how much rental income you will receive.  This is a critical mistake that many novice buyers will make.  Just because one property rents at full price and is always occupied does not mean that your property will.  Again, look at the history for the area and make sure you compare identical properties.

In addition to your monthly costs of owning the property, be sure to calculate in:

  • cleaning costs
  • ongoing maintenance costs
  • a cushion for property damage and normal wear and tear
  • costs for property management and advertising
  • vacancy rates
  • Do not forget property taxes and insurance, which also must cover additional liabilities

Once you have considered the costs, add up what you can save by using the property yourself for vacations.  Draw a realistic conclusion about what the property is likely to cost you or earn for you each year, and make an informed and rational decision about whether that bottom line is acceptable every year for years to come.

Take your time to investigate the opportunity completely

Is someone trying to sell you a “golden opportunity”?  The words “scam” and “rip-off” are often synonymous.  If an investment company is offering the property, take a serious look into the company’s reputation and history.  If the opportunity sounds too good to be true, red flags should be waving.

Finally, when you are considering a vacation home, think about it like you would any investment.  This means that you could benefit from discussing your situation with a financial advisor.  You are not looking at buying a playhouse for your backyard; you are looking at investing a significant amount of money in an additional home.

Related Reading:

Common Mistakes of New Vacation Rental Owners

The Skinny on Micro-Cottages: Rental Income, Mobility & Minimalism

Considering Converting a Residence into a Vacation Rental?

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