Many people who own a vacation property that they use only a few weeks out of the year earn extra income by renting it out to other vacationers who prefer to stay in a homey environment rather than in a hotel.
This is made possible because of the existence of a variety of online rental marketplace sites like Flipkey.com, HomeAway.com and Airbnb.com, to name just a few. These sites enable the average person to earn an income from travelers in competition with businesses such as hotels, motels and, bed and breakfasts.
While some vacation home owners rent out their property simply as a way to make an extra bit of money, others see it as a major money-making opportunity and decide to turn it into a full-time business. To do this, they seek out and purchase a property in a major vacation location, such as near Disney World in Orlando, Disneyland in Anaheim, or the beaches of Cape Cod, Massachusetts. They do this strictly to earn an income and not necessarily because they want to use the property themselves.
So, if you are asking yourself, “Should I invest in a vacation home or condo?” here are some things you should consider.
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7 Questions You MUST Answer Before Investing in a Vacation Rental
Can you legally rent out the property to vacationers?
Before you make the decision to purchase a property strictly as an investment, investigate several locations to find the best house or condo — one that is not only in a very desirable location to attract your potential renters, but also, more importantly, one that you will be allowed to use for that purpose!
Check the zoning laws for each location you investigate. Some local governments prohibit the renting out of an individual’s home to strangers. If there’s a homeowner’s association, they may not allow it either.
Can you afford the monthly payments?
If you purchase a vacation home as an investment, chances are you won’t be able to pay the entire cost of it in one go! You’ll have to make monthly payments on a mortgage. It may be some time before you receive a steady flow of renters at your property. Can you afford to make the payments until this occurs?
Will you be able to afford the taxes?
You will be paying two kinds of taxes on your investment property.
The first, of course, is the property tax and fees charged by local, state, and the federal government. Because your property will be in a highly sought-after location, the taxes will likely be quite high.
Your investment plan will doubtless be to make use of the income from your rental property to pay these taxes, but again, can you afford to pay them while you’re are waiting for your potential renter pool to develop?
The second type of tax will be on the income you receive from your renters. You must find out from your financial advisor if this income, if all goes as expected, will put you in a higher tax bracket.
Can you afford the insurance?
Anyone who owns a home needs homeowner’s insurance — and this includes people who rent out that home to others. It’s essential that this insurance includes liability, just in case anyone is injured while on the grounds of your property.
Once again, you’ll need to meet with the insurance agents of several companies to find out if a) they offer this type of insurance and b) what the premiums would be.
Can you afford the maintenance and repairs?
Depending on whether you are purchasing a condo — which typically will have its own maintenance crew — or a home, you will need someone to mow the lawns during summer and promptly shovel the snow and clear away ice during the winter time. The heating and air conditioning units should be serviced on a regular basis, and there should always be a contingency plan for plumbing problems.
The more expensive the home or condo, the more expensive the maintenance.
Should you partner with others?
After you’ve done your research and decided you want to go ahead with the project, you may wonder if you should partner with family or friends in order to be able to afford this investment.
If you do decide to partner with people you know, it’s essential that you nevertheless treat their involvement as a business. Form an LLC or other entity.
Make sure your lawyer draws up very clear contracts. Do not resort to merely a verbal or “handshake” agreement.
No matter how well you get along with your family or friends, going into business together typically brings into play a variety of stresses that can put a strain upon the best relationships if not resolved quickly.
It’s always best to have everything documented thoroughly to ensure that everyone understands their role regarding any eventuality — whether financial-related, regarding repairs, and so on.
As you can see, a lot of research goes into the purchase of a rental property for investment purposes.
It’s necessary to be very organized and analytical in your quest for the perfect property.
Once you have covered all the bases thoroughly and have decided on a particular property, there is yet one more option you should research!
Should you hire a management service to look after the property?
Whether you live in the same city or state as your investment property or not, you need to decide whether you’ll use a property management company to handle your business for you.
On the one hand, they will take a fee out of your earnings.
On the other hand, they will also handle everything for you and take away a lot of stress from the equation!
Depending on your agreement with them, they’ll put your property up on the various website portals and advertise it locally. They’ll take a look at potential renters, and they’ll handle any insurance claims.
You’ll have to interview a handful of property management companies to find one that’s the best fit for you.
If you’re in the market for a vacation rental, had you considered these questions yet? For experienced investors, would you add anything to this list?
Don’t forget to leave a comment below!