We’ve all seen the shows on TV that promise rental income in return for your down payment on a vacation property. The real estate agent claims that the renters will pay for your home while you sit back and collect the payments. This may seem like a dream but the reality is that it isn’t that easy and won’t happen that fast. Buyers need to do much more homework before considering investing in a vacation property.
Here are 3 key things to consider before purchasing your vacation home:
1. Overall Monthly Costs of the Vacation Property
As a buyer, we can sometimes get wrapped up in the sticker price of a home without thinking about other monthly costs incurred. If the property has historically been a rental property, ask the owners for a spreadsheet of monthly expenses incurred. If it has not been a rental property in the past, ask the realtor or condo manager what the monthly expenses are like for a home like the one you are thinking of purchasing.
Things you want to think about are:
- HOA or condo fees and bills such as electricity, water, trash, lawn cutting fees, and snow removal.
- If you will be employing a property manager, what are their fees?
- If you are renting the property while you are not there, consider what the costs will be to replace furniture and kitchen items regularly as these things tend to get a lot of wear with short term renters.
All of these items, bills, and costs will go into the overall monthly expenditures.
2. Taxes and Insurance
You will be expected to pay taxes and homeowners insurance on your rental property just as if it was your primary residence. Be sure to Inquire about the tax rates in the area where you are planning to purchase.
Homeowner's insurance on vacation properties tends to be higher than on primary residences for a few reasons such as inconstant occupancy, the turnover rate of renters (if you are renting) and possibly location. The reasoning for this is, for example, if you have a leaky toilet, and there is no one staying there for a few days or even weeks, and it is not caught by anyone it will obviously cause more damage than if you are there every day.
If you are renting the home out for additional income, the likelihood of damage increases with occupants who may not know how to operate the heating and cooling systems or other items within the house.
Finally, if your vacation home is in a rural area, the location to a fire department or police station could impact your rates.
3. Regular Oversight
Most vacation homes are either rented when the owners are not using it or it remains empty almost all of the time. In either case, you will need to determine how you will have regular oversight of the property.
One option is to employ a property manager who looks after the property while you are away to make sure that everything is in good working condition. If repairs are needed, the property manager would also arrange everything for you. In some cases, the property manager may also be the person or agency letting the house for you while you are not using it.
While purchasing a vacation property is many people's dream, the key to making a good investment is to put together your budget first. It isn't just about the monthly payments on the mortgage, it’s also important to consider all the other details, too.
Decide what you can realistically afford every month. If you expecting to rent the home regularly, figure out what you'll do if you don't have any renters for months at a time. All your preparation will pay off in the end and provide you with the peace of mind you need when purchasing your vacation property.
Caldwell Trust can help make your dream a reality through our resources and expertise. Contact us for more information on how we can help you manage your investments and your money to be sure you’re prepared to live out your dreams.
