Owning a vacation home is a great accomplishment for many – whether they plan to use the properties as retirement homes, frequent personal getaways or vacation rental properties. A second mortgage for a vacation home is, of course, a debt each borrower should take on with caution to avoid excess financial risk.
Vacation home buyers who invest in properties as rentals to earn passive income should factor in the high costs of running a vacation rental property.
Vacation Rental Basics
From a lending standpoint, no more than 75 percent of the gross revenue from a vacation rental is used to qualify for the cost of the mortgage (mortgage costs, taxes and insurance). To limit vacancy which gouges revenue, buyers should consider properties in locations with year-round appeal. Such highly-desirable locations raise the investment price, but are more likely to remain occupied.
Owners who plan to use their properties for some personal use should consider the tax implications if they surpass the number of acceptable personal use days. As long as owners meet the personal use versus rental use guidelines, vacation rental property owners can deduct mortgage interest, property taxes, casualty losses, insurance premiums, property management fees, utility costs and depreciation for the percentage of days the vacation home was used as a rental. Their deductible rental expenses may exceed their gross rental income (passive loss). Without meeting the guidelines, the properties become personal residences and owners cannot deduct such losses.
Here are seven expensive costs of renting out vacation homes.
Beyond the mortgage, taxes and quality insurance coverage, the owner is responsible for all utility bills. Water, sewage, garbage, electric and natural gas are all variables that renters may abuse during their stays. Many rental properties also offer cable television and wireless internet.
Next, each property needs to be furnished. They’ll need beds with an extra set of linens, a comfortable couch, dining table and a fully stocked kitchen with pots and pans, paper towels and dish soap. Most properties offer bathroom amenities such as towels, toilet paper, a hair dryer and small-sized soap, shampoo and conditioner. Additional furnishings might include an iron, broom and dust pan, television, telephone and trash bags.
Owners should budget to replace naturally-worn items as well as lost, broken or stolen furnishings. Another big issue renters may face is lack of storage. Vacation rental homes just have plenty of storage room for tenants.
Vacation rental owners must apply time and resources to appeal to renters and reduce vacancy. They should hire vacation rental photographers to take professional photos of their properties and advertise online. Owners might build websites as well as list their properties on rental sites such as Homeaway.com, VRBO, Vacationrentals.com, TripAdvisor, Flipkey, Airbnb.com and Craigslist. All listings and sites require upkeep to run smoothly, list accurate pricing, amenities and vacancy dates. Owners risk higher vacancy if reservations are difficult to book.
4. Professional Documents
Owners should consider hiring lawyers to draft rental leases and damage protection contracts.
5. Process Payments
Owners must process payments from their tenants and pay any staff, property managers or bills. They may want to hire an accountant to ensure they have the necessary licensing for their rental businesses and are properly collecting lodging taxes.
6. Local Staff
When vacationers arrive at their properties they need to be checked-in and given access to enter. They’ll likely have questions throughout their stays, possibly even urgent concerns. Upon leaving, they’ll need to check out, pay and return their keys.
Alternatively, some owners choose to pay for high-tech digitally-coded locks to set expiring access codes to eliminate key handoff. And instead of providing local staff, they field all communication individually and hire local handymen to respond to maintenance concerns. Payments can be set up online or mailed in advance. However, all of these arrangements must be paid for by the owners.
7. Local Maintenance
While on vacation, renters desire immediate repairs on anything that may negatively affect their stays. Owners need to have local handymen on call for emergencies. They’ll also need to hire cleaning services to replace linens, wash towels and dishes, remove trash and tidy up between guests. Owners might also hire landscapers or gardeners to maintain property exteriors. If owners live nearby, they may choose to handle these repairs personally to save money.
Collectively, renting out vacation homes can cost owners significant amounts of their revenue. The total cost to maintain a vacation rental – including time, money and energy – may make the revenue not seem much like “passive income.” Owners who choose to avoid the burden of management may opt to hire property management companies, freeing up their personal time but reducing owners’ revenue. Consider all of these costs and thoroughly research the vacancy rates of comparable properties before purchasing a vacation rental.