Buying then renting out a vacation home?

[M Paquette]

I'm considering buying a vacation home in a very nice coastal area (US west coast), and am looking into various approaches to mitigate the ongoing financial impact and keep the property maintained. Yes, I am aware that this can be much like boat ownership, in that I might as well pile the cash up, soak in kerosine, and light it. I'm just trying to keep the size of the conveyer belt dumping additional cash onto the fire to a reasonable size.

Now, this place is in a fairly desirable area, and there are several property management companies that handle daily (2 day minimum) and weekly rentals, including linen and cleaning services, for a cut of the action of course. (Yes, the homes on these rental plans are operated essentially like a hotel spread over a few thousand acres, right down to paying the nightly hotel taxes to the county.)

The rental business would be sufficient to cover property taxes, insurance, and other regular expenses, with any remainder set aside for maintenance. I expect I'd have to regularly kick in additional cash for maintenance, whether or not I rented the place.

What I'd get out of this would be a vacation home that I could use during lower demand periods, which is being relatively frequently occupied, checked, and kept clean, without quite the gaping, cash devouring maw of the usual vacation home. It might be rented 80 nights out of the year, so there would be plenty left for me. (I don't mind using it during the week and being gone on weekends. Hey, retirement mean making my own weekends...)

The place is about a 90 minute drive from my regular residence, so it's not too hard to get to for now. That might change in 20 years, but that's 20 years from now. Heck, I might wind up living there.

Has anyone else done this sort of thing? Any problems, issues, or land mines to took out for?

 

[simple girl]

We haven't done this, but thought about it for a while. There is a yahoo list serve specifically for owners of vacation properties. Tons of great advice there (or at least there was a few years ago when I participated).

vacation_rentals : Vacation Rentals- For Owners & Renters

 

[DangerMouse]

We have been talking about doing something similar but in Hawaii. We haven't really worked out the numbers to see if it is a go or not, my biggest concern is how much we would actually see in rent after the outgoings were paid.

 

[fmhealth]

You may want to take a look at ..VRBO® is Vacation Rentals by Owner® Vacation Homes Rentals by Owner. I've used this site for Condo rentals around the country. Should give you a good estimation of what rentals in your area go for. Best of luck!

 

[A854321]

I don't know if you will be applying for a mortgage, but you will likely have to pay more points or a higher interest rate if it is a second home or a rental. You also need to check on the zoning laws for vacation rentals.

 

[kcowan]

I can't understand why people make these kind of investments. But I really appreciate them because it keeps the cost of renting down for the rest of us...

 

[2B]

I can't understand why people make these kind of investments. But I really appreciate them because it keeps the cost of renting down for the rest of us...

I agree. I've looked at buying a vacation rental but it is so much cheaper to just rent what I want, when I want and where I want. Your only hope of financial redemption is appreciation which is a fickle mistress.

 

[A854321]

Also, vacation rental are usually furnished in a very plain jane, spartan, sort of fashion, without lots of mementos, photos, artwork, or anything that can walk away. Absolutely no personal stuff unless it is securely locked away. I knew a couple with a rental at Tahoe and they told me they finally had to put in Walmart-type stuff because anything at all nice just disappeared or got broken. This is something to think about when you are trying to mix rental and vacation home together.

 

[free4now]

It's hard enough making a full time rental cash flow... I can't imagine how you could ever hope to do okay renting it out just a small percentage of the time. And there are IRS rules about how often you can rent it out if you want the tax benefits of it being your residence.

My parents have a rental vacation home, and it seems like a nightmare. As the previous poster alluded, you can't really keep nice things or keep it ordered. The practical effect is that the house is always in a state of disorder... no point in getting it clean when the renters will just make a mess. And you are constantly living out of a suitcase... you don't want to buy extra copies of all your possessions for the new home, when the renters just want free closet space.

 

[M Paquette]

Thanks, folks!

Lots of feedback, and some interesting viewpoints here! As I mentioned above, this is something I am considering, and I appreciate the feedback and information.

I've been looking at the website Simple Girl pointed out, vacation_rentals : Vacation Rentals- For Owners & Renters Bedbugs, ruined linens, etc. Yuck. The usual rental agreements for the area all require a security and cleaning deposit for excess mess, and include a post-stay cleaning fee as part of the base price.

I don't know if you will be applying for a mortgage, but you will likely have to pay more points or a higher interest rate if it is a second home or a rental. You also need to check on the zoning laws for vacation rentals.

This probably won't have a mortgage attached. Vacation rentals are definitely permitted.

I can't understand why people make these kind of investments.

Heh. I'm not treating this as an investment, unless perhaps I want to treat it as an illiquid junk bond, with the issuer (house) having the right to demand additional future unspecified sums from me. That's the biggest drawback to any property ownership, and I am considering using a rental program with a professional management firm as a partial hedge to reduce the risks.

Long term, this might become a permanent residence for me, with the sale of the current primary residence. There's a pretty good chance that the vacation home will show price appreciation over the next 10 years or so. (Whether that even keeps up with inflation is another topic.) Prices have dipped a bit from the 2004-2005 highs, and I expect them to drop a bit more going into 2008. The potential for becoming a permanent residence is the primary draw for doing a purchase instead of a rental, with the chance of seeing a net positive return over a few decades a distant secondary consideration.

The operation of the property as a vacation rental is just a way to try and reduce the negative cash flow of home ownership a bit. I'm likely going to buy a place here anyway, but wanted to hear from anyone who'd rented out a place.

I suppose I could just rent, but then I wouldn't have the option of calling up the rental office and telling them to take the place off the rental schedule next season and hanging out there for 3-4 months.

 

[Meadbh]

All of the above.

Be very clear about your primary objective. If you want a pleasant vacation home, spend the money and don't invite casual renters in who can trash it. If you want an investment, call it one, and when it happens to be available for your use, use it with low expectations.

My compromise is a fractional ownership. My primary objective is a wonderful vacation home to which I can retreat at regular intervals at minimal incremental cost. Rental conditions are stringent enough that riff raff are kept away, but the consequence is that I don't have a positive cash flow on the property. Any financial gain is due to property appreciation.