You’re leaning toward taking the plunge and buying a vacation rental home. You’ve already envisioned how you want the interior to look, and you’ve even done some rough math to estimate much income the property could pull in.
Don’t get too far ahead of yourself, though. There’s much more you need to consider before putting down your hard-earned money toward the purchase of a vacation rental home.
“Purchasing that home at the beach or the reclusive cabin in the mountains takes a bit more than just wanting it and jumping in,” says property management specialist Denise “Deni” Supplee, operations director at Spark Rental and co-founder of Snap Landlord.
Give thought to the following eight factors when you’re looking at buying a vacation rental home.
Location is one of the cornerstones of buying and selling property, and that includes vacation rental homes.
Nancy Brook, a realtor in Montana and Florida who owns two vacation rental properties, says deciding where to buy a vacation rental home isn’t just about you, although that is a consideration. More importantly, it’s about where potential renters want to spend time.
In other words, the vacation rental home should appeal to you, the owner — since you might be staying there, too — as well as the renter.
“These places don’t always have to be typical vacation destinations, like beach towns and ski resorts,” Brook says. “Tourists will visit cities for conferences, business meetings, doctor’s appointments or even shopping. Some people will want to use a furnished place for weeks or even months when they move to a new city before lining up more permanent housing.”
If you’re not overly familiar with an area you’re mulling for a vacation rental home, how do you figure out whether renters would be drawn to it? Brook recommends searching vacation rental listings online, and talking with the local chamber of commerce and local real estate agents to get their thoughts.
Are you planning to take advantage of the vacation rental home when renters aren’t there? If so, you might want select an area that’s not too far from your permanent residence. Otherwise, it’ll be a struggle to get away to your getaway.
“The distance of the vacation rental property from the primary residence is going to be a strict determinant on how many times a year it will be visited and used,” says Vicki Patterson, chair of the Texas Board of Realtors.
In addition, how much time are you thinking of putting into upkeep and maintenance of the property? If you’re intent on going the DIY route, you’ll want to be within a reasonable driving distance to take care of things like an overgrown yard or a broken toilet.
Marc Carver, principal at the Carver Property Group, a high-end real estate agency in the Atlanta area, warns that in many cases, DIY upkeep and maintenance can gobble up much of the time you’ve carved out for relaxing at the vacation rental home, “which is surely not what you expected when you dreamed of vacation home ownership.”
When pondering the upkeep and maintenance of a vacation rental home, keep in mind the size of the property, Patterson says. A bigger home will demand more TLC (and more visits).
What if you want to wash your hands of the upkeep and maintenance hassles? Then be sure to hire a trusted property manager to assume the burden.
Brook suggests investigating local laws to make sure vacation rentals are permitted in the community where you want to buy a vacation rental home. Some community ordinances restrict short-term vacation rentals; if you violate the ordinances, you could be fined or lose your license.
Once you buy a vacation rental home, you’ll have to hang onto it for a while to maximize the investment.
Carver emphasizes that homes “are not liquid investments, and if you decide to sell, it may take several months or even years to get the price you want.”
Unless you’re flush with cash, one of the drawbacks of buying a vacation rental home — which for most people would be a second home — is the not-so-little matter of paying for the property, according to Carver.
Depending on the location, condition and market value of the property — along with the buyer’s financial status and credit history — a typical 15- to 30-year mortgage for a non-owner-occupied property usually requires a 20 percent to 30 percent down payment, Carver says. Then, of course, there are the monthly mortgage payments.
Aside from property taxes on the vacation rental home, other taxes will come into play.
First and foremost, you must include federal income tax in your home-buying equation. As a result, it’s critical to familiarize yourself with IRS rules and regulations about vacation rental homes, Supplee says.
“People often forget to consider the tax implications of long-term income when purchasing a vacation rental,” says Jacob Dayan, co-founder and CEO of Community Tax, a provider of tax debt resolution and tax relief services. “After the first year, taxes from rental property revenue can really add up. It is important to consider these costs when budgeting for your new property.”
If you’ll be renting out your property for more than 14 days a year, you’ll qualify as a landlord and be required to report rental income to the IRS, according to Dayan. However, this means you can deduct rental-related expenses, such as the costs of upkeep and maintenance.
Dayan notes that if you stay at your rental property for 14 days a year or more than 10 percent of the total rental period (whichever is greater), the property is considered a personal residence.
In that scenario, you’re able to deduct expenses up to the level of rental income, but you can’t deduct business-related losses, he says. “People often run into trouble by forgetting this rule and deducting losses from their personal residence,” Dayan says.
Federal taxes won’t be your only tax concern, though.
In many places, you’ll be responsible for collecting sales or lodging taxes for your rental property, Brook says. Check with state and local government agencies about the requirements.
The National Association of Insurance Commissioners recommends reviewing the policy for your existing home to see whether any of that coverage could be extended to your vacation rental home. However, the Nationwide insurance company says, if you’re renting out your vacation home for money, that’s considered a business activity and probably won’t be covered under the existing policy.
A rider or endorsement on your current policy might suffice if you’re renting out the vacation home only on occasion, Nationwide says. But if you rent it out more frequently, you might want to contemplate a stand-alone commercial or business liability policy.
Nationwide warns that a policy for a vacation rental home typically costs more than a policy for a primary home because the vacation property is vacant more often and is more susceptible to insurance claims.
So, you’ve picked out a home that you’re convinced will be ideal for short-term vacation rentals. But you’re going to have to attract renters, right?
Before you sign the mortgage paperwork, explore how you’re going to list the rental property. Will you do it through an online platform like Airbnb, HomeAway or use a full-service vacation rental manager like TurnKey Vacation Rentals who will market your property on 50+ sites? Or are you going to market it mostly through Facebook or Craigslist?
“In most cases, it’s easier to use a property manager to handle the details of listing your property, especially if you are not located near the rental. They can not only coordinate the advertising, but also coordinate cleaning and maintenance of your property,” Brook says.