I’ve heard it a million times, heck, I’ve even said it myself, “I am going to buy a house on a beach, and rent it out when I don’t want to use it. I get to go on vacation and tenants pay for it. Business combined in perfect unity with pleasure.”
Here is the musical version of what you may envision your vacations will look like:
Slow down there Jimmy Buffet, before you pull the trigger on your home away from home, let us run through the numbers as well as the qualitative factors that go into buying a rental/ vacation home.
The Math Behind A Vacation Home
Gross Income (Less Vacancy)
Be realistic here; often vacation homes rent on weekly or monthly terms and are very seasonal, this means you will experience a much higher vacancy rate than a typical apartment with a one-year lease.
As with vacancies, you will need to account for higher rates of commissions since you will most likely have high turnover.
Due to the high turnover, as well as you being an out-of-state-landlord, don’t count on something as simple as a leaky faucet to be equal to the cost of the parts to fix it. You will need to pay for a repairman to go to the unit and fix the faucet. Don’t underestimate repair costs or assume that all tenants will be as handy as you.
Keep in mind that you will also need to furnish your unit, which will result in higher overhead costs as the furniture will wear out more often that if you were using the unit exclusively by yourself.
These expenses will be very similar to if you were an in-state landlord.
When you sit down and run the numbers, does it still look like a pretty picture of palm trees and margaritas? Will this unit cost you money out of your pocket every year? Take the bottom line figure and divide it by how many nights you will be using the unit, compare this cost to what it would cost to rent a similar unit in the same complex.
Questions to Ask Yourself Before buying a Vacation Home
I hear a lot of people want to buy these vacation/rental homes so they can retire there when the place is paid off. In the mean time, they convince themselves that they are “locking” in today’s prices for future gain. I don’t know about you, but often times, I don’t know what I’m doing on my weekends. Forget peering into the year 2030 and ask me what state I will be living in. My point is that life happens and it is extremely hard to predict where you will be in the future. Think back to where you were in your life ten years ago, did you expect to be in your current situation a decade ago?
Is buying a vacation/rental home the highest and best use of your investable dollars? Would you be getting better return with your money elsewhere?
Do you want to lock your vacation time into this rental for the rest of your life? That trip to the Smokies, skiing in CO, relaxing on a beach in Hawaii? Consider those trips on hold because you will have a sense of obligation to go to your vacation/rental unit.
This article is not to say that you shouldn’t buy a vacation home. Just don’t buy on the grounds that you will be renting it out part of the year to justify your purchase.
Anyone have similar thoughts on this topic? Disagree? Leave me a comment.
If you have suggestions for topics you want me to cover in future articles, please let me know.
Thanks for reading.