Should You Buy a Vacation Rental?

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Vacation rental

One reader asks:

“You talk a lot about rental property — but focus on tenants with traditional long-term leases.

I’d love to hear your thoughts on vacation property. Is this a worse/better investment? Short-term rentals at a premium price during a vacation season? Would you consider this a riskier proposition?”

Renting out a vacation home is one step away from running a hotel.

Your customers expect things that normal tenants would never ask a landlord for: clean towels, rolls of toilet paper, organized kitchenware. You’ll spend a lot more time responding to customer requests, cleaning during the “turnover” period, and scheduling check-ins and check-outs.

People will contact you to ask about availability, amenities, location, pet policy and other questions. A fraction of those people will decide to reserve the home, which means you’ll need to take a deposit (“Yes, we accept Visa”) and send them reservation paperwork. You’ll need to schedule the cleaning crew. You’ll also need to provide furnishings: couches, beds, tables.

The customers will call you at midnight to say their GPS can’t find the location, or the key isn’t at the designated spot, or to ask how to operate the thermostat. They’ll write reviews on Yelp saying the wireless internet is too slow or that the floorboards creak. You’re also likely to endure higher vacancy rates. And in the rental world, nothing is more expensive than vacancy.

You can hire property managers to handle the day-to-day hassles, but they’ll charge a LOT more than “normal” property managers. Many will ask for 50 percent of your income, and that rate is reasonable, since they handle so much more turnover and so many more responsibilities.

Treat Your Business Like a Business

Do I sound like a pessimist yet? That’s intentional.

When you’re contemplating an investment, start with healthy skepticism. Assume it WON’T make money and try to prove yourself wrong. This helps you avoid a massive mental trap: confusing ‘hopeful thinking’ with a business plan.

But now that we’ve practiced healthy skepticism, let’s move onto the pluses –

Vacation rentals (and their close cousin, extended-stay hotels) can be lucrative, if you buy the right place at the right price and manage it well. But I wouldn’t call it an “investment.” I’d call it a “business.”

“Uh, Paula, businesses are investments.”

Yes, but not all investments are businesses.

Some investments are totally passive. Just buy some S&P 500 Index Funds and ride the bull-market wave! Wheee!

Other investments, like owning rental properties, are akin to managing a business. You schedule inspections. You hire and fire plumbers. You spend an afternoon installing blinds. Even with a manager in place, you’re still the Chairman and CEO.

And that’s fine, because index funds and rental properties are two totally different ballgames. Just be aware of the differences from the first inning. Many businesses fail because of neglect.

Here’s the thing: If you want to quit your day job and run a business, you could enter the vacation rental field. Or start an ice-cream shop. Or open a pet food store. And you’d have to do all the due diligence related to the viability of that business in your place and time.

If the math works out, and you’re willing to put in the effort – go for it! Live like no one else for a while, so you can reap massive rewards.

But if you just want to own a beach house that collects rent when you’re not around, I’d seriously think twice.

Your Vacation is Not Your Business

I recently talked my parents out of owning a vacation rental. They wanted to buy a condo in Florida.

“We’ll vacation two or three months a year, and rent it out when we’re not there! The rent will cover most of the expenses! And maybe it’ll go up in value!”

I slapped my forehead. They were expressing code words for: “I don’t have a strategy. I want it all.”

“You’re waayyy better off buying a house in DeKalb County, Georgia, collecting an annual rent of 20 – 33 percent of its total purchase price, and using those profits to take a vacation,” I told them.

They were committing the classic error of emotional investing. They wanted to “feel better” about their vacation condo by thinking: “It pays for itself!”

But hope is not a plan.

Why Do You Want It?

So … are you looking at a vacation rental because:

#1: You want to buy a vacation house, and you’d like the emotional satisfaction of having the house pay for itself?

#2: You see a huge demand for short-term rentals, coupled with low rental supply and reasonable home purchase prices?

If your answer is number one, forget it. If your answer is number two, rock on! Awesome! Now we’ve got something to work with!

The next logical question is: After accounting for vacancies and management, which will take a HUGE chunk out of your bottom line, will you make more money on this property as a short-term/weekly rental, or as a long-term (traditional one-year-lease) rental?

Only a spreadsheet can answer that. Call a few property management companies to see what percentage of the rent they charge. Don’t assume you’ll go with the cheapest one. It’s better to hire a stellar manager than a doofus who you’ll have to micromanage.

Scout around on Craigslist, VRBO.com and airbnb.com to find the competition’s weekly rental rates. Poke around on Zillow and Trulia to discover purchase prices of homes.

Then create a spreadsheet with three different scenarios, each containing different vacancy, maintenance and repair estimates. The answer will quickly become clear.




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17 Responses to “Should You Buy a Vacation Rental?”

  1. Spencer
    15. May, 2013 at 11:30 am #

    We’re kind of taking the middle road and just renting out our regular apartment on AirBnB. It’s worked out great. So far this year we’ve made over $1500! I think our price per night might be a bit low because we get inquiries constantly. It’s a lot of fun to meet new people and to have already paid for a month’s rent for just renting out our couch while we’re there or renting out the whole place while we’re gone.

    • Afford Anything
      15. May, 2013 at 11:43 am #

      Renting out your OWN home (the one that you live in) is an awesome idea, and one that I heartily encourage. You bought or rented the home assuming that you’d earn $0 from it, so anything that’s greater than $0 is a bonus!

      I’ve lived with roommates my entire adult life, and it’s the single most important financial decision I’ve ever made. If I weren’t living with roommates, I’d be using airbnb to rent out rooms.

      I agree — it’s tons of fun to meet new people this way.

  2. Anne @ Unique Gifter
    15. May, 2013 at 5:01 pm #

    I live in vacation-rental land and virtually no one does the math to see if it works out. (Spoiler alert, unless you bought ~10 years ago, it doesn’t.) Everyone seems to think fractional ownerships or rental pool condos are these fantastic money makers. If they are, it sure isn’t here.

    • Afford Anything
      15. May, 2013 at 6:06 pm #

      @Anne — “virtually no one does the math to see if it works out” — Sigh! People work so hard for their money, but they don’t take 30 minutes to crunch some numbers that could save a them from a $10,000 mistake. It never ceases to amaze me.

  3. Mrs. Pop @ Planting Our Pennies
    15. May, 2013 at 6:31 pm #

    We live in a vacation zone, so it’s a fairly common option that people consider. But the reality is that most people don’t stop to consider that if they want to use the place as a vacation spot, they likely want to come down during the same weeks/months when other people do as well, thus limiting the overall earning potential of the unit pretty significantly.
    You’re also very much subjected to comparisons with hotels, which is why I know someone that put in a pool (which has a VERY low ROI) at their rental quadplex despite it being across the street from a beach. Their competition was a hotel another block down the way and it had a pool, so renters started to want a pool. Year-long renters would not expect that in that area.

  4. Rob
    15. May, 2013 at 7:43 pm #

    Thanks for the reality check!
    I’ve been thinking (not too seriously) about buying a vacation home, or cabin really, in a area that I love. It would be near some relatives who could use it too. In my plan they’d share some of the cost and ownership. Eventually, hopefully, it could be shared by our descendants.
    I figure there might be a possibility to rent it out part of the year via VRBO or something similar. The problem is that I think there is a clear split between where I’d like my cabin, and where a lucrative rental would be.
    Thanks for reminding me what I’m looking for: a place to relax, not a place to make money.

  5. kross
    16. May, 2013 at 11:03 am #

    Having rented vacation homes for 2 weeks the last few winters in Florida, we fell in love with the idea of owning our own. So I spent quite a bit of time crunching numbers, at first glance it does seem attractive, but once you consider the costs and complications of owning a property a considerable distance away from your home it loses some of its charm, the main deal breaker for me was that as a Canadian, owning an income property in Florida triggers income tax in the USA, and becomes too complicated for the limited gain. we decided to continue renting for our annual vacation, and in 4-5 years when we become true snowbirds, and spend most of the winter there, we will look at buying a property, however it will not be an income property, only our personal vacation residence.

  6. Margaret
    16. May, 2013 at 11:48 am #

    Thank you, thank you, THANK YOU!!! I have both feet in the #1 category and I needed somebody to say to me just what you said.

  7. Daisy @ Young Finances
    18. May, 2013 at 11:18 am #

    This article came at an interesting time for me. My dad has recently come into a large sum of money and he’s terrible with it. He goes and stays in a hotel almost every weekend to relax at his favorite vacation spot, and it costs him upward of $500/weekend. I was going to suggest that he just buy a condo in that area (about $180,000) and rent it out. I think he could do a lot of the work because he doesn’t really work, but then he may get overwhelmed. My parents do this with part of their property that they live on, and it’s overwhelming for them.

  8. Rich Schmidt
    24. May, 2013 at 8:22 pm #

    For the past dozen years or so, whenever we vacation anywhere, the thought of buying a place there is in the back of my mind. I think it’s because one of our first big vacations (not counting our honeymoon) was to a place in Jamaica that had a caretaker family living on-site. The wife cooked and cleaned, and the husband was our chauffeur/butler/host. My in-laws won the vacation in a charity auction and took us with them. Clearly, the owners of that property had found a family they could trust to manage it for them. I have no idea if it made money for them or not, but I suspect it did.

    And that (trustworthy management) is the main reason we’ve never taken the plunge. Without it, there’s no way I’d want to own any rental property far from home, short-term or long-term. And since we don’t live in a vacation destination, any vacation rental would be far from home.

    • Fabian E. Kulynych, P.E.
      01. Feb, 2014 at 12:03 pm #

      So True! It’s highly critical to have a professional and trustworthy management team in place to profitably succeed in owning vacation rentals from afar. An easy place to start is to ask several, local real estate agents that specialize in vacation rentals and see if there is a consensus on whom to use.

  9. S. B.
    13. Jun, 2013 at 6:38 pm #

    Of course the flip side of this is that being the renter is sometimes an awesome deal. By renting a house, we’ve been able to stay at some really great locations with lots of room. When the week is up, the mortgage and maintenance of the property is not my problem!

    • Afford Anything
      14. Jun, 2013 at 10:37 am #

      Heck yes!!!!! There are many, many circumstances in which it’s MUCH better to rent than buy. :-)

  10. Karen Sams
    30. Jul, 2013 at 4:33 pm #

    We wrote a blog post on whether you need a property manager or not for your vacation rental. As mentioned in this post, unless you want a second job, you’ll need someone to manage it.

  11. Rita Weber
    31. Jul, 2013 at 5:38 pm #

    I got a very bad experience with vacation rentals. We have to be alert about terms and regulations. Its very importante know all about the properties and ask to the people about their experiences.

    Thanks for share

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  1. Personal Finance Round Up #56 — Money Life and More - 18. May, 2013

    [...] Anything shares her view on vacation rental properties… owning them that is. I think I’d have to side with her, and I LIVE in a vacation [...]

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