January 18, 2017
Should I Buy a Rental Property? Crunching the Numbers When Investing in a Vacation Home
My parents were definitely “numbers people,” so when buying a vacation home as an investment property, they performed tons of research to ensure they were making a wise investment decision. I remember my dad had folders with spreadsheets and calculations that he would pour over with my mother, carefully evaluating each property that they were considering to determine which one was the best investment.
So what do you need to consider as you decide whether a vacation rental home is right for you and your budget? Well, there are lots of numbers you’re going to need to crunch to ensure you’re making a financially sound decision. Some of these figures are hard to know until after you take the plunge.
Fortunately, there are resources available to help right here on Rented.com. Your soon-to-be property manager can also prove to be a vital resource in helping you really pin down accurate estimates for a number of figures. In addition, a property manager can help you devise strategies that will enable you to meet your financial goals with your vacation home.
What Figures Should I Consider When Buying a Vacation Home?
When buying a vacation rental, you’ll need to consider a number of points that just aren’t relevant when buying a typical home or another type of rental property. There are some considerations that are unique to vacation homes.
Let’s examine what numbers you need to crunch as you search for a vacation rental property.
Potential Income from Your Vacation Rental Home
When it comes to determining how much you could earn from your vacation home, you should consider a few key variables:
- What it costs to manage the property on a monthly and annual basis.
- How many weeks per year you can reasonably expect to rent the property.
- How much you can expect to earn annually from rental fees.
Realistically speaking, a local property manager is one of the best sources for this type of insight and information, as he or she manages numerous properties in a particular area and knows precisely what’s typical in terms of booking rates, property management costs, and annual income from rental fees.
Rented.com’s rental grader is also a valuable resource because it helps you see how much potential rental revenue your home could generate by comparing it to similar homes in the area. The rental income calculator allows you to figure in costs to estimate your ROI.
Once you purchase a home, you can get price quotes from local property managers on Rented.com who can offer information on how much they would charge you to manage your home (typically a percentage of the rental fee) and how much total income you can expect annually. Many of our property managers also offer a unique “guaranteed income” model, which guarantees you a specific monthly income regardless of actual booking rates. This can be extremely helpful because it allows you to determine the income you’ll see from your vacation home.
Mortgage and Interest Rate
Your monthly mortgage payment will be determined by the amount that you need to borrow, the term or length of the repayment period, and the interest rate. You can certainly reduce the total borrowed by negotiating a lower price on the property or by putting down more money as a down payment.
The best option is to get a mortgage pre-approval, which allows you to get a good feel for what you would pay on a monthly basis, including how much you would pay toward the principle and how much you’d spend on interest. A pre-approval is more comprehensive than a pre-qualification and assuming your financial situation does not change, you are essentially guaranteed a mortgage for a specific sum of money.
Pre-approval also gives you an edge as you seek to buy a property. If there is more than one offer, the seller is more likely to choose the buyer who has a pre-approval versus someone who has yet to secure a mortgage loan.
Property Taxes and Income Taxes
The property taxes are relatively easy to determine, as virtually any property listing on the MLS will note the annual property tax rate for the home in question. But understanding the tax implications of renting out your vacation home can be more challenging.
To accurately determine tax liability, you must determine three things: the anticipated income, the anticipated deductions, and what property category your home will fall into for tax purposes. Your future property manager can be instrumental in helping you to determine expected income, deductions, and rental home type.
With help from your property manager, you can explore the local demand for vacation homes, which can help you determine how many weeks per year you could rent out your home. (This is important because many vacation destinations have a distinct “off season” when you can expect few, if any bookings.) You must weigh the potential rental timeframe with your financial needs and your desire for how frequently you’d like to use your vacation home.
Mashvisor can also help real estate investors better understand markets, optimize rental income strategy, and evaluate expected returns from traditional versus short-term rentals.
Based on this information, you can determine whether you’ll be using it as a full-time rental (less than 14 days in the home annually, or your time in the home accounts for less than 10% of the total time the property is occupied in a given year), a short-term rental property, or a hybrid rental property. Each type of rental property is associated with different tax requirements, so you can work with an accountant to help peg down a fairly accurate figure for what you can expect to pay in taxes.
You’ll also need to work with your prospective property manager to discuss likely deductions, such as property management costs and maintenance fees. These figures will have a major impact on how much you’ll be paying in taxes.
Insurance is an absolute must-have for any vacation rental home due to the sheer number of people who will be staying on your property. Accidents happen, whether it’s a fire, a slip and injury, or another mishap. Therefore, you must have insurance on the actual property, in addition to robust liability coverage.
The insurance costs for a vacation home are typically a fair bit higher than what you would spend to insure your primary residence, so this is an important cost to take into consideration. Vacation homes also tend to be located in areas that have higher insurance costs, such as on the coast or in the mountains.
Most property managers can offer recommendations, helping you pick out the right type of insurance for your property and referring you to some of the best local insurance providers. In fact, property managers have a lot of insight and knowledge concerning what’s apt to be broken, damaged, and even what areas of your home are apt to lead to an injury at some point in the future. So you can work with your property manager to reduce risk, while simultaneously ensuring that you have sufficient coverage that will minimize your risk.
Management, Maintenance, and Marketing Costs
Property management, maintenance, and marketing costs can be quite significant for a vacation home, so you’ll need to work with your property manager to determine what you’ll be looking at in terms of expenses on a monthly or annual basis.
Property managers are a wealth of knowledge in this regard because they manage numerous local properties, which means they have a very accurate idea of what it will cost to oversee a property and what likely maintenance costs and other expenses you’re apt to encounter.
There are lots of miscellaneous fees and expenses that can add up, including advertising and marketing costs, incidental repair costs, costs to replace broken or stolen items, cleaning costs, pool care costs, and yard maintenance fees.
Other miscellaneous figures you’ll need to consider include:
- Homeowner’s association fees (link to HOA article) or condo association fees.
- Costs of any repairs or upgrades that must be performed before you can rent the property.
- Utility costs.
- Website design and maintenance fees.
In the case of repairs and upgrades, your property manager can offer plenty of wonderful insight into what areas should be addressed before renting the home. Utility expenses also vary dramatically from region to region, so this is another area where your property manager can offer information on what you can generally expect to spend on a monthly or annual basis.
In all, your future property manager can be extremely helpful as you crunch the numbers to determine if a specific home will work for you in a financial sense. Notably, you may need to pay an up-front consulting fee to work with a property manager in this capacity because property management contracts are property-specific. So your property manager will not technically be under contract until you actually buy the property.
Be sure to check out Rented.com’s income calculator and rental grader to get a better idea of what you can expect when buying a vacation home. If you’re searching for the ideal property manager for your newly acquired vacation home, begin getting offers from local property managers by signing up for a free account on Rented.com today.
Lead image: Pixabay user stevepb