Are Vacation Houses A Smart Investment?
There is nothing quite like spending time with friends and family at a vacation rental property. In fact, there is a chance that some of you are reading this right now sipping coffee overlooking your favorite morning spot. As much as you may relish your time spent there it doesn’t necessarily mean you should make it part of your portfolio.
There is a big difference between a vacation rental and one in your local market. A vacation rental can have tremendous upside, but it can also be a financial burden in the wrong area and with poor management. Spending a few days, a couple weeks a year is much different than being a landlord hundreds of miles from home. Like everything else in real estate, you should evaluate the situation
prior to diving head first into it. Here are a few pros and cons with a vacation rental property.
Pros
- You Love The Area: One of the main reasons to pursue a vacation rental is because you love the area and want to spend time there. You can play with the numbers to make the case that going to a property you own throughout the year can quickly pay for itself. Regardless if you are talking about a house on the beach or one near a ski resort, you will make priceless memories with friends and family. Numbers aside, your love of the area must be paramount. This must be a property, and a market, you can see yourself going to every year. If not, you will quickly regret the decision and look to take the best deal you can get and move on.
- High Seasonal Demand: In order to maximize your ROI the property must have high seasonal demand. Where most traditional rentals are done with a year long lease a seasonal rental is typically weekly. In peak rental periods you can get a much higher rent than at other times throughout the year. It is not uncommon to get a bulk of the annual rent in a four-month period. The high demand points in a lease alone make vacation rentals very attractive. Unless there is a drastic change in the market you can bank on demand being there year in and year out.
- Rental Property Benefits: If you own a rental property you know just how much of a benefit they can become tax time. For whatever reason, many investors don’t know that these same benefits are afforded to rental properties. In fact, given the distance to the property and generally higher price tag the benefits of a vacation rental may be even greater. Never make an investment property decision solely for tax write offs, but it is something that should be at least put in the conversation.
Cons
- Price: There is a reason you pay a premium to rent a house near your favorite beach or close to a mountain. There are only so many properties in these prime locations. Primarily because of supply you will pay a premium for ownership. The same property a few towns over will be hundreds of thousands less than one near the water. What makes ownership in these areas difficult are lender investment property guidelines. As a non-owner-occupied property you need at least 20% down payment, credit scores over 720 and low debt to income. Even if the rental numbers work the price tag and loan guidelines can be prohibitive.
- Management: Owning a single-family property fifteen minutes from your home has a handful of management challenges. Think of what goes into a seasonal rental a few hours from where you live. Without question the backbone of a vacation rental property is the management. The property manager will act as your eyes and ears in your place. They will handle the constant flow of tenants, moving in and out weekly, cleaning, maintenance and everything else a rental entails. With most rentals you should anticipate a 10% monthly management fee. Given the nature of vacation rentals this number is often higher. This will eat into your cash flow and make the bottom line far less attractive.
- Periodic Improvements: With your average rental you have four or five people living in the property over the course of the lease. With a vacation property you will have dozens just in the peak periods alone. With more people constantly in your property there is more everyday wear and tear and the increased likelihood for improvement demands. Where the normal washing machine can last several years, one in a vacation property has a fraction of the useful life. The furniture will get beat up, the floors scuffed, and the walls dirtied. None of these items are enough to hold a security deposit, but must be updated if you want a steady flow of tenants.
Like any other property you should always let the numbers be your guide. It is important to always consider the low demand months with the property before making a decision. A popular summer destination may be a ghost town during the winter leaving your property vacant. Whatever you do never let the intoxication of a beautiful vacation prompt you to act irrationally.