Owning a vacation rental property can be an exciting way to make extra income. However, it is also a significant financial investment. Affording a vacation rental home is one of the first concerns investors have before they begin to search for properties. As a result, you need to be sure that you can handle the costs associated with any of the properties you are thinking about purchasing. Following are a few of the steps you should take to make sure you can afford to buy a vacation rental property.
Evaluate the total cost of buying the home.
The first thing to do when deciding whether to buy a vacation rental is to determine the total cost of the property. The purchase price is the most obvious expense to consider. However, there are often other costs (such as closing fees and realtor fees) that can add to the total amount you owe.
Once you know exactly how much the total purchase price is going to be, you will also need to evaluate whether the purchase price requires you to get a mortgage. Sometimes, mortgages for these properties can be difficult to obtain. And sometimes, taking on a mortgage can harm your overall financial health. Before you commit to a property, take the time to consult with a financial planner, mortgage expert or bank. These experts will help you figure out whether the price of the property you are looking at is financially feasible for you.
Take into account all recurring fees.
In addition to the purchase price of a vacation home, there are often monthly or annual fees you must pay. For instance, if you purchase a townhouse or a condominium, you will owe homeowners’ association (HOA) fees every month or year. In addition, you will have to pay property taxes and homeowners’ insurance. You will also be responsible for utilities, trash services, and similar fees, even when you are not staying in the house regularly.
It may be tempting to discount these expenses because you plan to use your rental income to pay them. However, the ebb and flow of the vacation rental industry means that you may have months in which you need to cover these expenses with your primary income. Before you purchase your vacation property, make sure you can handle these monthly expenses year-round.
Evaluate the cost of maintaining the home.
Even if you are not living on the property full-time, certain maintenance jobs (such as lawn care) need to be carried out. These might be handled by an HOA, or you might be on your own. You will also need to pay for cleaning services after each rental, small repairs (such as changing light bulbs), trash services, etc. You must maintain the home to keep it welcoming for your rental guests. Sometimes you can hire a property manager to take care of these jobs for you and to keep an eye on the house between rentals.
Other maintenance fees may occur less often, but be much more expensive. For instance, a furnace that dies, a pipe that leaks, or something that is damaged by a guest. These things can all cost you quite a bit of money. In general, you should plan to put about 1.5% of the purchase price of your property into home maintenance every year. Adding this cost into the annual expenses associated with your property can help you with determine if the cost is something you are able to shoulder.
Evaluate how much renovation and furnishing is required.
You should also consider the cost of renovating and furnishing the property. Is the home being sold already furnished? Or do you need to add another $15,000 to buy furniture? In order to make your property appealing to potential guests, you need to make sure that it is up to date and matches the preferences of renters for your area. For instance, renters may prefer certain colors or styles, luxury details like granite counter tops and a flat-screen TV. You might even have to install a swimming pool to please typical renters in that location.
When you buy a vacation rental property, you should consider how much renovation it requires to make it rental-ready. The cost of furnishings can quickly add up, and the needs can vary. The home might already have beds and silverware you can use, or it might be too dated to keep. Estimate potential furniture purchases at your local stores to determine a budget.
Consider the cost of advertising your property.
When you buy a vacation rental property, you will need to invest some money into getting rental guests to your place. This may include paying for professional photos and paying for advertisements. These costs may not be much in light of the rest of the money you are spending on the property. But if your budget is tight, it can be enough to influence whether or not you are ready to buy a vacation rental property.
Evaluate how much rental income you can realistically bring in.
Of course, the affordability of your vacation rental property also depends on the amount of rental income you earn. While there are steps you can take to maximize this income, you need to have an estimate of how much money you can expect to make before you buy.
This might require a bit of online research and consultation with real estate agents. (Ideally, the home owner will also have vacation rental history to share.) You will want to know two things: How much rental properties like yours generally rent for, and how many nights a year they are occupied. Balancing this income with the total expenses related to the property can tell you how much you will make off the property every year and, therefore, whether or not your financial investment will be worth it.
Here are some more tips on how to set expectations:
- Compare other rentals in the area to see what typical rates are for the home size.
- Ask the listing agent or seller for rental history.
- Interview locals or people who frequently vacation there.
- Look at rental calendars to see how often other homes are booked.
Purchasing a vacation rental property requires you to carefully evaluate the costs associated with that property. Once you know your total purchase price, recurring fees, renting expenses, maintenance fees, and renovation and furnishing costs, you can compare those expenses to your expected rental income. The result should be a clearer idea of whether the property you are considering has the potential to be a smart long-term investment for you.
No Comments