Make your vacation home pay for itself

November 5, 2009

I was doing some research on the Lake Tahoe Vacation Rental industry and came across this article from MSN.com explaining that your second home can pay its own mortgage and more!  This article talks about a ’stay-at-home’ mom that researched the industry and business and became successful at marketing her home and turning it into a positive cash flow and is helping others do the same.  I would encourage anyone who has a second home and is hurting during these economic times to read this article and consider using their home for some economic relief!  The original article can be found here.

Thanks-

CF


Don’t listen to the naysayers. Rentals can cover your second-home costs if you’re careful when you buy and you follow these 3 simple rules.

By Liz Pulliam Weston

The conventional wisdom is that you can’t make a vacation home pay for itself. Renting out your second home for a few weeks a year can help defray your expenses, sure, but most people find their properties fall far short of making a profit.

One former stay-at-home mom, however, is convinced that most vacation homes can generate positive cash flow, paying for themselves even before the potential tax benefits and appreciation are taken into account.

Christine Hrib Karpinski says she’s built a small empire of profitable vacation properties, along with a sideline business in teaching other people her techniques. She recently self-published a guide, “How to Rent Vacation Properties by Owner: The Complete Guide to Buy, Manage, Furnish, Rent, Maintain and Advertise Your Vacation Rental Investment.”

Karpinski sells the dream that vacation homes can be affordable for just about anybody who’s willing to put in the time and effort. Her three basic tenets:

  • Vacation homes need to be rented 15 to 17 weeks a year in many areas to break even. Karpinski bases that estimate on the assumption that one month’s mortgage payment would equal one week’s rental income in the peak season. More expensive homes would need to be rented longer.
  • Internet advertising is essential. You need to reach the widest possible audience of potential occupants to keep your place solidly rented. Karpinski posts each of her properties on three to five Web sites, at a cost of $100 to $150 per property per site.
  • Owners need to cut out the middlemen. Management companies take anywhere from 10% to 60% of rental income, making positive cash flow impossible, Karpinski says. She contends that handling rentals and maintenance isn’t that tough, even long distance. The Atlanta resident owns properties in the Florida panhandle, 300 miles away, and is in the process of purchasing another in North Carolina.

“We put $8,000 down on one property in the Panhandle (in 1998), and we’ve probably received $200,000 in positive cash flow and tax benefits,” Karpinski says. “Plus, that place has appreciated nearly $500,000 … and it hasn’t cost us a penny out of pocket.”

(You can write off mortgage interest and property taxes on a second home even if you don’t rent it out; if you do, you typically can deduct a portion of your other costs, such as utilities and maintenance. In addition, you can write off up to $25,000 in rental losses if your modified adjusted gross income is under $100,000. That particular tax break is phased out as your income climbs, and disappears entirely when your MAGI is $150,000.)

Second-home ownership on the rise

Karpinski’s certainly picked a growing market in which to promote her vision. The National Association of Realtors estimates that 445,000 second homes were sold last year, up 24% from 2001, as baby boomers in their peak earning years sought vacation properties (and alternate investments to their faltering stock portfolios). The association believes that nearly 7 million properties nationwide are now second homes.

The vast majority of these homes were purchased primarily for recreation, and only 15% of the owners surveyed rented out their properties even part-time.

That percentage is likely to climb, though, as soaring property values make buying a second home a more expensive proposition, says David Hehman, CEO of Escapehomes.com, an online marketplace for vacation home sales and rentals.

“More and more people are looking to rent to defray costs,” Hehman says. “The economics of owning are a lot harder if you don’t rent.”

Consider less expensive areas

But making a property pay for itself is a whole different matter, Hehman says. In many areas, weekly rental rates have remained flat even as sale prices rise, he says. The economics are better in relatively inexpensive areas such as Myrtle Beach or many areas of Idaho and Montana, he says, but most popular coastal and ski locations have already soared too much in value.

“There are very few (situations) where it’s going to pencil out as a cash-flow positive,” Hehman says.

In a few resort communities, a kind of rental backlash has set in, as year-round residents complain about noise and trash generated by transient visitors. In some Lake Tahoe communities, for example, vacation-home owners now have to pay a fee and obtain a permit if they want to rent out their properties for less than 30 days at a stretch.

“That can really restrict the income potential” of a property, Hehman says, because few busy Americans can afford that much vacation time.

Beware bad managers

Unlike Karpinski, Hehman believes a good property manager is all but essential if you’ll be renting out a vacation property, which typically is at least a couple of hours’ drive from the owner’s primary home. He advises talking to several real estate agents and other owners to find one that charges reasonable fees, aggressively screens potential tenants and stays on top of maintenance and repairs.

A bad property manager can be a nightmare, however. Consider the experience of Gayla Berry, who hired a property manager for her first vacation rental, a condo in Destin, Fla., a six-hour drive from her home in Jackson, Miss. The company rented the property for far fewer weeks each year than Berry needed to break even and once let the condo to a group of rowdy young people who set off the sprinklers in the master bedroom.

“The property manager kept telling me they’d take care of the damage,” Berry says. “When I finally went down there, the beer cans were still in my condo.”

What really irked her, though, were high bills for carpet cleaning and minor repairs, such as $25 for cleaning a VCR head, on top of 30% commissions.

“It’s like they try to nickel and dime you to death,” Berry says. “You wonder if one of their brothers or sons owns a carpet-cleaning business, and you don’t even know if the carpet’s actually being cleaned.”

Your purchase price is critical

With Karpinski’s encouragement, Berry fired the property manager a few years ago. Last year, she purchased a second unit that she also rents. Berry says she invests an average of five hours of work a week placing Internet ads, handling e-mails and taking care of any maintenance issues.

Both properties are booked solid through the summer and more than pay for themselves, Berry says.

“I don’t have a mortgage on the first (condo), but my yearly expenses like taxes, insurance, light bill, phone bill and cleaning are $6,000, and the rents (total) $22,000,” Berry says. “Even if I had a mortgage, it would be paying for itself.”

Get the latest from Liz Pulliam Weston. Sign up to receive her free weekly newsletter.

Preferred format:

Learn more about newsletters

But again, the price you pay for your property is critical. Marti Swift of Louisville, Ky., owns two units in the same Destin complex and both break even, but prices have nearly doubled to $550,000 since she bought her second unit last year.

Even by managing the properties herself and keeping them rented 75% of the year at $1,100 a week, she couldn’t find a way to make a third purchase in the complex work, so she’s bought two cheaper properties elsewhere.

Still, what started as a way to afford a vacation home has become a part-time business, Swift says, and she credits Karpinski’s help in making it possible.

4 big questions to ask yourself first

If you’re considering buying and renting out a second home, ask yourself the following questions:

  • Are you ready to do the research? You’ll need to come up with a lot of numbers, including an estimate of how many weeks the property is likely to be rented and all your monthly costs (including, but not limited to, mortgage, insurance, property and sales taxes, advertising, maintenance, repairs and cleaning). Talk with a number of real estate agents and other owners in the complex or area about their experience with rentals so you can more accurately gauge the demand and income potential.

You’d be smart to get a tax professional’s help to sort through the potential write-offs and what they could mean for your bottom line. You’ll also need to research any local laws, covenants or property restrictions that could affect your ability to rent the property.

  • Are you willing to give up the use of your property during the peak season? This is the conflict that keeps many vacation homes from being profitable. Demand for your property is likely to be the highest in the weeks your family most wants to be there.
  • Are you willing to put in the necessary work? You’ll be the one posting advertisements, answering e-mails and phone calls, screening tenants, hiring cleaning crews and calling plumbers. You may need to make some unscheduled, last-minute trips to the property if there’s an emergency (although Karpinski says most problems can be handled over the phone).
  • Can you hold on if things get tough? Real estate prices are booming in most resort areas, but there’s no guarantee that trend will continue. If appreciation slows or even reverses, it could take many years before your property rises in value enough to offset the substantial costs of buying and selling the property.
No tags for this post.

Comments are closed.