Owning a vacation home can be a great investment, but you need to do your homework and research before you put a payment down on a property. I have been managing vacation homes in the Orlando area since 2006, and here are 7 tips I wish every homeowner knew before they purchased a property.
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7 Things You Should Know BEFORE You Purchase a Vacation Home
Yearly Income Might Not Be What You Expect
Recently I had a conversation with a homeowner who had been with us for about 18 months. He explained to me that he recently received his 1099, and that he did not feel his vacation home was performing as well as he was promised. Further into our conversation, he told me that his realtor promised him that this vacation home would bring him $35,000 a year easily after all his expenses.
I told him that in Orlando, those numbers are just not realistic, especially when he has a high mortgage on the property. I asked him if we could set up a call with the realtor who sold him the house. Unfortunately, the realtor no longer lives in Orlando. Regarding yearly income, get 3 or 4 people’s opinions on the rental income a property will produce on a yearly basis. Don’t just take a one person’s opinion, especially someone who stands to make a large commission from your purchase. I recommend talking to your realtor, a couple of property managers, and even vacation homeowners who own homes in the same subdivision as the house you are interested in.
Owning a Vacation Home is Just Like Owning a Business
When you own a vacation home, you must make sure expenses match up to income. Sure, you might purchase a property and have grand plans to do many upgrades throughout the property, but if your main goal is for the house to produce income, then you might need to do some of these upgrades in stages. When owning a vacation home investment property, you should always be looking for ways to increase revenue and decrease expenses.
You’ll Need to Spend Time on Rentals
You make money in a vacation home through rentals, so before you purchase a property, you should know exactly how you are going to go about getting guests to stay in your house. Most people rely heavily on their property manager for rentals. If this is your route, then you need to talk to many different property managers, and you will want to find out how they find guests, how many nights annually they think your property will be rented, and an estimate of your yearly net income. You will want the property manager to put this in writing to you, so in a year you can review it with them to make sure your house is performing to the levels that they set.
If you decide to do the rentals yourself, you can make more money. However, you need to make sure you have the time you can dedicate to talking to guests, making sure payments are coming in on time, and that the guests are getting their paperwork, such as directions, check-in instructions, etc. in a timely manner. It is important to note that if a potential guest calls you at noon about your property, you cannot wait until 5 p.m. to call them back. More than likely, they have moved on and booked another property.
Be Aware of Expenses
There are two ways to make money in property management: you can make money through rentals or repairs. Whoever you pick as a property manager, I suggest you make sure that they contact you for any repairs they are going to make to your unit that are over $100. This will make sure that at the end of the month, you are not blindsided with a huge repair bill you never knew about.
Pay Your Own Monthly Bills
Most property managers will try to persuade you to have them pay your monthly electricity and water bills, but I would strongly encourage you to pay these bills yourself. Here in Orlando, Kissimmee Utility Authority (KUA) emails homeowners a monthly statement on the tenth of the month and then drafts the money out of their checking account a few days later. The main reason you want to pay your own bills is that it is a good check and balance system for you. When you are paying your own monthly bills, you can tell when someone is staying in your house and when someone isn’t. Simply put, your daily electricity usage should coincide with your booking calendar.
Never Pay a Property Management Company an Escrow Payment
Most management companies here in Orlando ask the owner to pay them $1,500 to $2,000 to cover any repairs that might happen in the future. Never make this payment. In 9 years of doing property management, I have never seen a homeowner get back his full escrow money.
Be Conservative in Your Purchase
I could tell you horror story after horror story about people who have bought a vacation home, and their investment did not work out how they planned for it to. They got stuck with a vacation home they could not afford, and they could not sell. When you are looking to purchase a vacation home, look at all the monthly bills (mortgage, insurance, electricity, water, etc.) and make sure you are comfortable that you could pay the total amount even if the property did not bring in any income. Please remember, in the past few years we have had a terrorist attack, a financial disaster, and many hurricanes, which all had a short term impact on rentals here in Orlando. It is also important to note that if you ever had to sell a vacation home quickly, there are more buyers for a $100,000 condo/town home than there are for $500,000 vacation home.
Owning a vacation home can be a great investment, but you need to do your homework. Talk to as many people as possible. The last thing you want to do is buy a vacation home and then find out that owning it is not all it is cracked up to be.
What would you add to my list? Have any questions?
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