If one of your dreams is to buy a home and then rent it out short-term, then there are some things you’ll need to know before taking the plunge. An ideal vacation home typically doesn’t look exactly like a typical permanent residence, so you’ll want to make sure you’re considering all the potential pitfalls and maximizing return on your investment.
Buy a rentable home
If you aren’t going to be living in your new home in your favorite vacation spot year-round, short-term rentals are the best way to have frequent access to your home. But every area is a little bit different so you’ll want to do some research and make sure that short-term rentals are allowed in the place you want to buy.
In addition to local laws and guidelines, it’s not a bad idea to look up similar-sized homes nearby on Airbnb or VRBO to get a feel for the short-term rental standards. Some communities have a more upscale feel than others, and you’ll want your property to look just as polished as the competition, so ask yourself how much work it would take to get the home up to local standards when you’re walking around with a real estate agent.
And always pay close attention to the basics (like plumbing and electricity) when it comes to a vacation home. It can be difficult to maintain a vacation home because there isn’t tenant continuity, and if a pipe bursts on an offseason, you might not know about it for days or possibly weeks. The best way to avoid a problem like that is to buy a place that is already in good to excellent condition and then do appropriate maintenance.
… But be careful about relying on rental income
The problem with counting on short-term rental income is that you really don’t know what to expect. Vacation spots that have seasonal “rushes” will be pretty busy during the months when people want to visit, but if you don’t plan for the downtime, you could wind up financially pinched.
Or are you buying at a price peak and that the home’s value will decline instead of appreciating after you buy it? These are great questions to consult with your agent.
Understand the taxes
You can deduct mortgage interest on your second home (although recent tax changes that affect mortgage interest deductions apply to second homes, too, so this has changed for high-end properties between $750,000 and $1 million in sales price). And there are other tax advantages, but you’ll need to make sure you’re following all the rules.
One of those rules concerns how long you can spend in your vacation home: You can only occupy it for two weeks or 10 percent of total rental days (whichever is greater). That could be as much as a month in an area with constant short-term rental turnover, but don’t surpass that two-week occupation timeframe if you aren’t certain that you won’t be penalized.
And if you rent your vacation home out for more than 15 days a year, then you’ll need to claim that income with the IRS and pay taxes on it, including some taxes you might not have considered (lodging tax and tourist tax come to mind).
Don’t forget the ‘hidden’ costs
On top of the typical homeowners’ insurance and property taxes in addition to the mortgage, there are other costs of owning a vacation home. Insurance is usually more expensive, for a start; insurers figure that someone occupying a property is going to be more likely to find and fix a potentially big problem before it escalates than an absentee owner, and they charge accordingly.
Speaking of a potentially big problem while you’re away, have you thought about who’s going to watch and maintain the home for you? Vacant homes are more attractive for certain crimes, too, so you might want to invest in some light timers and regular pop-ins from a local to make sure everything is safe.
And you’ll need to maintain the utilities at the home even when you’re not there, and possibly get the lawn mowed and the flowers watered, too. There could be homeowners’ association (HOA) dues, specific local taxes, and other expenses involved.
Talk to somebody who owns a vacation home in the area, an experienced real estate agent, or both to get a full rundown of the costs of vacation homeownership that haven’t pinged your radar.
Now that you’ve seriously considered all the potential costs, you can set a realistic price range for a vacation home that’s within your means. Talk to professionals (like us!) to nail down what is a smart investment for you.
Remember: There’s no substitute for experience
Before you choose a vacation rental property, you need to find the right community. That will differ according to both your tastes and your budget.