What is the best way to make a profit renting my vacation home? To start, you can buy a property on the basis that you will stay there periodically but it is primarily for rental. Or, you can buy a home that is truly your vacation home and you just want to earn some money when you are not in residence.
The difference here is subtle but important. Some people look for a home that suits their style and they decorate it for their purposes. These people may use the property multiple times per year and for longer stays. Others just want a place for the occasional weekend and they would like it to pay for itself and possibly make a profit.
Still, others start out looking for a property that will become a full-time vacation home, and of course, that property should be profitable the first year.
Most vacation rentals are owned by individuals who have purchased a second home for vacations and decided to earn extra income to offset costs. If you already own a second home in an area that attracts visitors and are interested in earning some offsetting income you may be in luck. Renting your vacation home is something to consider.
I will expand upon this as you read on. Before getting into the second home issue, you should understand the difference between owning a vacation home strictly for earning income as a business and your second home used for the occasional family getaway with rental income supplements.
Purchasing as a full-time rental
Purchasing a property for the exclusive purpose of renting it out as a vacation rental is a completely different proposition than buying a property to use periodically (these are called second homes). You can pay cash for your vacation rental or you can finance it. If you are buying it exclusively for business purposes, you will be required to put at least 20% down and possibly 25% depending upon the lender and the property.
If you finance, you will have a mortgage which along with taxes, insurance, maintenance, management fees, utilities, and other costs must be offset by income. Very few properties can generate sufficient income to cover the debt and ongoing costs plus generate an adequate return on invested capital. particularly if the property is financed.
I have owned many vacation properties, some were purchased as second homes intended primarily for our enjoyment with supplemental rental income. Others were purchased exclusively as vacation rentals.
Before you attempt to buy a property exclusively to rent it, consider the costs and weigh the income/loss against the use of your money elsewhere e.g. stock market. Aside from risks, you may be better off placing your money in other investments. Run an analysis to make this determination. Our real estate broker partners can walk you through the analysis with their exclusive KEYLADDER property investment system.
Paying cash is one strategy, and OPM is another
If you pay cash for your business vacation rental, you may turn a profit. Depending upon your ongoing costs e.g. taxes, insurance, maintenance, HOA fees, property management, fees, etc. Without mortgage debt, the picture is vastly different.
On the other hand, paying cash reduces your return on investment. Leveraging is the best way to obtain investment property. Your ROI will be higher since you are using other people’s money and your guests will pay off the mortgage. Again, this may not work for most properties even in ideal settings if the cost to operate can not be overcome by higher rental income.
Back to your vacation home that is rented for part of the year to supplement your income or reduce your costs. Frankly, this is the very best way to own a vacation rental that earns income. Starting with the fact that you can buy your second/vacation home with as little as 10% down. The main assumption should be that you can afford the costs of this property without any income. Start here with your math.
Example of Second Home Analysis
I was just researching to find a good example and found a newly built home one block from the beach in Gulfport, MS. The property is 1.750 sq ft with four bedrooms and two bathrooms and places to park four cars under the building. This is a single-floor building that is elevated to meet flood requirements and obtain lower insurance rates. The property is in an excellent location near restaurants and casinos.
The seller wants $319,000. I ran the data through the KEYLADDER system and found that with a 20% down payment the property would lose about $286 per month.
This means that as a second home that you can visit during the year and rent it the remainder of the year, you would be expected to pay $286 each month out of pocket after deducting the income from all expenses. Many people would look at this as a great investment. It looks better than I am explaining here when you deduct property taxes and interest payments as a qualified second home. With just 10% down the shortfall would be $443 per month.
Keep in mind that two other things are happening. The property is growing in value and the principal on the mortgage is being paid down. The estimated return on investment with 20% down is about 100% over five years. Not bad. You can see that this property is not a profitable investment on a monthly cash flow basis so I would not recommend its purchase as a straight investment if it is financed.
The hardest thing is determining the income
The hardest thing for a buyer of a second home who wants to rent it when not in residence is determining income. Two factors are the price per night and the number of nights per year. Prices will vary depending on the time of year.
You can take the time required to survey other properties in the area and determine what similar properties are receiving based on the season and other factors. You can also check their calendars to determine how often they are booked. Your research will not allow a look back as the calendars do not usually retain past data for you to see. Don’t be captivated by the high season income as the reason to buy your second/vacation home. Remember its peak income for a short period.
If you need the additional income that renting to others provides, avoid using your property during the high season or events. If you can afford the cost of the property without renting, by all means, use it when you wish. It’s hard to eliminate the emotional aspect of believing that your property is the best in the area and it should rent for more or rent more often. Your property as viewed by others is the key.
It takes time to build a reputation
It will take time on third-party sites e.g. Airbnb for your property to build a reputation. During that time, your rents will be lower than others with lots of reviews. You can help kick-start the process if you hire a property manager with a high status on third-party sites. People will look at a property and see that the managers have a high status and at least with Airbnb, they list other properties managed by the same company. People may find yours by clicking on those links.
Essentially, you ride the “coattails” of the property manager with a high degree of success. After a while when your property has earned high marks from guests, your property will rent more often and you can consider raising the rate. Guests want to stay at highly-rated properties and read what others have said.
Should you decide to use your second home as a vacation rental, be sure to lock up everything personal that may get broken or disappear. We recommend putting a lock on a closet door. This is also a place where the property manager can store linens if yours are used for guests.
The grounds should be kept in great condition. You should contract with a gardener or through the property manager to ensure that your grass is always looking good and weeds are pulled and plants are tended to. If you live in an area that requires watering, install an irrigation system.
How much of the year will my place be rented?
People ask, how much of the year should I expect my property to be rented? There is no magic formula. Every area is different. The best that can be said here is that if your property is located very close to tourist areas it has a better chance of being rented more often.
A good example is a 3 bedroom, 2 bath house that is within a block or two of the beach. This property would usually rent more often than properties a few miles from the beach or even a few blocks further away. Walking distance is important.
Swimming pools are great in areas where people expect to spend warmer days e.g. the South or West. Properties with pools offer more amenities than a condo without one for example. As mentioned above, the key season will generate the highest amount. Shoulder seasons will generate some income and low seasons will probably not generate sufficient income to cover costs.
If you are considering buying a property for a second home and renting it when you are not here or renting a property you already own on the Gulf Coast contact us. We would like to manage the property for you. Christie’s can also put you in touch with our strategic partners which include Logan & Anderson Gulf Coastal Realtors to help you find your dream second home.
We can help you create a budget and determine an approximate income for the property you desire to acquire. As mentioned above, very few properties will earn enough as a stand-alone investment to cover all costs if the property is financed. Should you desire to create a vacation rental as a stand-alone profit center, we can assist with a list of items you will need and the approximate cost to set up a property.
Second home tax deduction vs a business
A few list items. You will be able to deduct the mortgage interest and property taxes as an investment or a second home. Consult your CPA for the impact on your tax obligation. You may be able to deduct some costs associated with the property such as insurance, maintenance, and even periodic travel to the property. The benefit will depend upon your financial situation so again, seek help from your CPA.
Should you decide to purchase a second home and use it as a vacation home and also rent it with the intent of later retiring in the property, there are some great tax benefits to consider. As a full-time resident living on the property, you can receive a homestead deduction. If you are over 65 there is a larger deduction that is quite beneficial in reducing your property tax bill. Your CPA can discuss how to convert a second home to a permanent home if it was rented.
Keep in mind that non-residents must pay a tax when their vacation property is sold in Mississippi. If you decide to move here and have established residency here, you can sell your vacation house without paying that non-resident tax. Yet another reason to do some planning with your CPA.
A suggestion you may want to consider. Stay at a vacation rental or two or three in an area you like. Regardless of whether you are going to buy for your use or full-time income property, get a feel for the area and talk to professionals who manage vacation homes. Here comes our advertising.
Consider taking a course on investing in short-term rentals
If you plan to invest in short-term rental property consider taking the KEYLADDER Short-Term Rental Investment course. This course will take you through every aspect of investing in a short-term/vacation rental property. The cost of the course will be earned back many times over through the unique information provided. Click here
Gulf Coast Property Management can manage your vacation home and help you achieve your goals of earning income on that property. We can also fully set up a property that you have purchased from acquiring furniture to decorating. We offer turn-key solutions to people who do not reside in the area but who want to be sure that their property is well cared for.
Christies Gulf Beach Properties is the marketing arm of Gulf Coast Property Management and your property would be listed on the Christiesgulfbeachrentals.com website and VRBO and Airbnb and others as part of our program. Or if you just want someone to keep an eye on your vacation home when you are not there e.g. having the lawn cut etc., we can do that too.
Contact us through this website or call 228-215-3234 if you are interested in working with us.
One last point, if you are looking to purchase a property, please consider using our Real Estate sponsoring agency Logan-Anderson, Gulf Coast Realtors. We will work with them on a smooth transition from purchase to set up. Contact Bill Anderson at Logan-Anderson at 228-215-3234, he and Sean Logan are experts at finding vacation rental properties. Bill owns several that we manage for him.