Answers to frequently asked questions from current and prospective vacation rental owners about buying vacation real estate.
Investing in Vacation Real Estate
- Is vacation real estate a good investment?
- Is now a good time to buy a vacation rental home?
- Where can I buy a vacation rental that will cash flow?
- How much can I expect to make in rental revenue from my vacation rental each year?
- How can you predict if a market will appreciate over time?
Where to Buy
- Is it better to buy a vacation home in a popular vacation destination or in a more remote area?
- What are the best places to buy vacation rental properties?
- Is it better to buy a vacation rental that is close to my primary home or farther away?
- How do I decide where to buy within a given market?
Choosing the Right Vacation Property
- What amenities should I look for in a potential vacation rental?
- What is the ideal number of bedrooms and bathrooms?
- How important is a view?
- How do I determine a home's rentability as a vacation rental?
- Is it a good idea to buy a fixer-upper as a vacation rental?
- What should you research before buying a vacation property in a certain market?
- Is it better to buy a condo or a single family home?
Financing Your Vacation Home Purchase
- Can you use an IRA when buying a vacation home?
- When buying a vacation home, how do you determine whether it should be classified as a “Second Home” or “Investment Property?”
- I already own a cabin rental and am thinking of buying another. Should I buy a second vacation cabin in the same market as the first or should I buy somewhere new?
Q: Is vacation real estate a good investment?
A: Owning real estate is like investing in blue-chip stocks. Real estate very rarely loses in the long-term, especially in vacation markets. Real estate has almost no socioeconomic boundaries. The average middle class family owns at least one piece of real estate. You don't have to be a millionaire to invest. With a little money down and good credit, most people can reap the benefits. The best part of investing in real estate is that we're using someone else's money to help cover or at least offset the costs of owning our vacation property.
Q: Is now a good time to buy a vacation rental home?
A: Despite the current economic conditions, it might actually still be a good time for you to invest. Of course this is a personal decision, but in many markets vacation homes are still a solid investment if you're in it for the long-term.
Q: Where can I buy a vacation rental that will cash flow?
A: This is a tough question to answer because everyone's financial situation is a bit different. In addition, different vacation home buyers will be interested in different vacation destinations and have varying levels of dedication to marketing and managing the rental. The key to finding a rental property that will cash flow is to research both home prices and average rental rates in areas you're interested in. Other factors for rentability include location within the market, size, condition, amenities, and curb appeal.
Q: How much can I expect to make in rental revenue from my vacation rental each year?
A: It's hard to make a sweeping statement that will apply to all homes and homeowners. That being said, vacation rental homes tend to bring in around 5-15% of the home's value in rental revenue annually. For example, a property valued at $250,000 can bring in anywhere from $12,500-$37,500 in annual rental revenue. The exact ratio of revenue to home value depends on your region and the level of effort you put into marketing and managing your rental.
Q: How can you predict if a market will appreciate over time?
A: Property value growth is an important consideration when buying a vacation rental because most vacation home owners are in it for the long-term. You'll make money with rental income, but it would also be nice to know whether you're in an area where homes are appreciating. Your real estate professional can obviously shed some light on the current market conditions and how property values have increased or decreased in recent years. You'll also want to do some research on your own by studying values of other homes in the area. Most counties will allow you to review property tax records and parcel data online. This will enable you to examine how the taxes have increased or decreased over the years, and also the changes in the value of the home (or homes in the area). In addition, you'll want to research the homeowner's association to check for hidden fees or special assessments that could factor in to the price of the property you'd like to purchase.
Q: Is it better to buy a vacation home in a popular vacation destination or in a more remote area?
A: Where you buy a vacation rental will likely depend on your budget and your personal preference. A cabin or cottage in a more remote destination will probably cost less, but could be more difficult to rent. A home in a more popular destination will likely cost more, but in the end may be easier to rent.
Q: What are the best places to buy vacation rental properties?
A: The best place for you to buy a vacation rental is in a market that your family enjoys and will want to visit every year. If you buy a house you love in a location you love, chances are there are other families out there that will love it too, and you get to enjoy it when you're not renting it out.
Q: Is it better to buy a vacation rental that is close to my primary home or farther away?
A:There are pros and cons to each. If you are nearby, you can more easily deal with maintenance and upkeep, but also will feel more inclined to drop everything and drive to your vacation rental if there is a problem. If you choose to buy somewhere farther away, you'll be forced to rely on others. The key is to hire competent housekeepers and maintenance people.
Q: How do I decide where to buy within a given market?
A: Once you settle on an area for your second (or third or fourth home) you have to brainstorm all of the reasons why travelers vacation in that market. If there are certain major attractions, you don't want to purchase a home that is far away or inconvenient to these attractions. For example, if you want to buy a cabin in the Gatlinburg or Pigeon Forge area of Tennessee, you'll probably want to factor in the distance to Dollywood and to the main streets when searching for a potential cabin rental property.
Your options will obviously also be limited by your budget. As with most real estate decisions, the best investments tend to be in the best locations—and tend to come with a higher price tag. Your challenge will be to weigh your personal needs and wants versus your rental expectations. Research the prices of others homes in the area to make sure the location is right for your budget.
Q: What amenities should I look for in a potential vacation rental?
A: The must-have amenities largely vary by region. If your home is in an area where most rental properties include a hot tub, then that is something you need to factor in. This is common in the northeast and in other cool mountain areas like Gatlinburg, Tenn. You also have to look at what renters are looking for or what they're able to get. For example, in markets like Orlando, a majority of vacation properties come equipped with game rooms to attract families. This might not be a priority for your family but once travelers see it is common in the market, they might not settle on a house without one. This is something to consider so that you can stay competitive in the market. Lastly, remember your price range. If a home with a pool or hot tub is simply not in your budget, you may have to buy a property without the must-have amenities and then price your home accordingly to attract a different group of renters.
Q: What is the ideal number of bedrooms and bathrooms?
A: The “ideal” property size depends on the vacation market and the types of traveler groups that frequent the area. For example, in a market like Las Vegas that tends to attract couples, a smaller home or condo rental in a prime location might be ideal. However, in an area like Orlando that draws families with kids or even two or more families traveling together, a larger home with extra beds/bedrooms and a game room might attract more renters. You also want to consider the size of other homes in your area. If the market is saturated with 3 bedroom homes, you might consider a smaller or larger size to give you a competitive advantage over other homes in your area. While you want to cater to the majority of renters coming to your area, there is a lot to say for providing a niche that isn't already available in your location.
Q: How important is a view?
A: For many vacation home buyers, the view is an amenity in itself and an important piece of the puzzle. The key is to consider how it will affect your renters. A home with a view will cost more, but you can also charge higher rental rates. On the flip side, a home with no view will cost less, but you won't be able to charge as much as a home with a view. Therefore, consider the types of renters your home and location will attract. Will they be more price conscious, or are they looking for a more upscale experience?
Q: How do I determine a home's rentability as a vacation rental?
A: First, find out if the home has been rented as a vacation rental in the past. If so, ask for the property's rental history and ask the owner and/or property management company about their experience renting it. If a home has not been rented as a vacation rental, talk to other owners or property managers in the area to see how other rentals in the neighborhood or complex perform. Lastly, take a look at the location on HomeAway, VRBO, or VacationRentals.com to see the size of the properties, what rates the owners are charging, and how booked their calendars are. This should help gauge your rental potential if you';re looking at similar homes. Using these resources you should be able to ask specific questions and learn about the market as far as peak seasons, the off season, whether the area commands nightly or weekly rentals, typical prices, and number of weeks booked.
Q: Is it a good idea to buy a fixer-upper as a vacation rental?
A: Whether or not to buy a fixer-upper is really your call. While you may be able to buy a fixer-upper at a rock-bottom price right now, it may require a significant amount of time and money to make the property rentable and could require significant ongoing maintenance, which is especially difficult if your primary residence is not nearby.
Q: What should you research before buying a vacation property in a certain market?
A: If you intend to rent out your vacation property, one of the first things to check would be restrictions on short-term rentals. There are some markets that won't allow short-term rentals at all, and some require certain permits. Your real estate professional should be able to help, and you can also contact the planning department of your local government office to find any zoning restrictions. Properties on government-protected land are also tricky when it comes to rentals. Kauai, for example, has some strict requirements for homes on agricultural land. This is something else you';ll want to discuss with your real estate agent or the local government before purchasing. Another consideration is the cost to insure the home. Unfortunately, many vacation home destinations are in what are considered high risk locations. Near the water can mean risk of hurricane and on the mountains can mean risk of blizzards and snow storms. These high risk areas translate to higher insurance costs, so evaluate those prices before settling on an area.
Q: Is it better to buy a condo or a single family home?
A: There are pros and cons to each property type. A condo will obviously provide for easier maintenance from afar and also shared maintenance costs with other owners in the complex. You'll also be able to advertise the extra amenities in the complex. For example, you might not be able to afford a home with a pool, but if you buy a condo, your guests will have access to the pool in the complex. Vacation condos are also usually built in the best locations because the developers have enough money to invest in that land. At the same time though, there can be limits within the homeowners associations when it comes to rentals. You'll also lack privacy because you';re sharing walls with your neighbors.
A single family home, on the other hand, will provide for much more privacy. In general it can also be less expensive per square foot. However, you have to maintain the exterior and the grounds yourself. You might also have some association limitations in this case as well. And lastly, determining the rental demand is more difficult because it's harder to compare apples to apples. In a condo, you can talk to a neighbor with the same floor plan, but homes typically have too many variables to really compare.
Q: Can you use an IRA when buying a vacation home?
A: Yes, you can use your Individual Retirement Account (IRA) to purchase a vacation rental home. It's called a Self-Directed IRA. Realize though, if you use a Self-Directed IRA, there are some very strict federal guidelines. Notably, you are never allowed to stay in that home. It's to be used strictly as an investment. You'll also need a custodian to manage the account. To find a custodian or learn more about using Self-Directed IRA's to purchase vacation homes, just Google “Self-Directed IRA.”
Q: When buying a vacation home, how do you determine whether it should be classified as a “Second Home” or “Investment Property?”
A: Mainly for mortgage purposes, you need to determine whether you will be using your vacation home as a second home or as an investment property. This makes a big difference in the kind of mortgage you should buy. You must realize that this is only a question for mortgage purchases; how you claim your property on your income taxes is a completely different issue.
With a “second home loan” you must be able to qualify under the second home's terms. Generally it means you have to be able to afford it just as you would your first home. Under this loan, there is no consideration for potential rental income. Typically “second home loans” have around the same interest rates as a primary home loan.
An “investment property loan” is a mortgage where everyone concerned knows you are buying the property strictly as an investment. Accordingly, certain factors come into play. The bank will want to know the rental history of the property, which will be taken into consideration for your affordability factor. Also, these types of loans are considered by the lender to be higher risk. So the risk for the bank translates into higher interest rates and higher fees for you.
Q: I already own a cabin rental and am thinking of buying another. Should I buy a second vacation cabin in the same market as the first or should I buy somewhere new?
A: If you already own a second home and you're interested in another, you might consider buying in the same market as your current vacation home since you're already familiar with the area. However, this does not allow for diversification or a variety in your own family's vacations. Some owners choose to have a beach house and a ski lodge or a cabin in a cooler climate so that they can stagger their busy seasons, enjoy different kinds of vacations, and also manage risk in case of any natural disasters. But this also means more research to really learn each area.
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