Is a Vacation Rental Property The Right Move For Your Business?
By Paul Esajian on November 17, 2014
With Thanksgiving right around the corner, winter will be here before you know it. In many parts of the country, people are already dealing with snow. Those tired of the crummy conditions are probably already thinking about escaping. Many areas, particularly in the Northeast, where skiing is prevalent, are prime locations for a vacation rental property. Perhaps those on the east coast want to relocate out west in search of warmer weather. There are a number of places to consider for a rental property. Regardless of the time of year, people will always want to relocate for an extended period of time. A vacation property may be just what they are looking for. Having said that, such an investment could be just what your business is looking for.
If you are considering the prospects of a rental property, you need to find out how popular the area really is. You may have found the perfect spot for you and your family, but it doesn’t mean everyone will share the same sentiment. Much like you would with any potential rental property, you need to do your due diligence and gather as much information about the market as possible. Skiing may be popular in the winter, but what can you do with the property in the “off-peak” months? What do you know about any new construction that would impact the demand for your property? Is the town stable? What have taxes done over the last five years? Start by looking at other rental properties on the market and see what the demand is and how they stack up to the area you are considering. If you don’t live in the area you are buying, it is even more important to do your homework before you get started.
Rental properties have different expenses than a traditional nine-month lease. It is critical, with a vacation property, to know all of the expenses and income streams before you start calculating cash flow. A good property can be rented weekly during the summer or winter months, but could have trouble finding someone in months with less demand. Will you bring in enough during the weekly periods that it can offset any drop off in slow times? How realistic is it that you will find week-to-week or month-to-month tenants? Where will you advertise and how will you find these tenants? If you are using a property manager, you will have to factor in their fee or make yourself available to answer phone calls from all prospective tenants. You will also need to have the property cleaned more often, stay on top of snow removal, furnish the property and maintain a steady stream of interest at all times.
Once you run all the numbers and identify a property, you may consider making an offer on you need to think about your financing. Based on demand alone, vacation properties will cost more than other investment properties. They are either near the water or a mountain that has access to seasonal recreation. Either way, they will often have an increased price tag that can be difficult to finance. If you are fortunate enough to have access to cash, you will dump a large chunk of your reserves into a property that is best served to hold for many years. You may be able to pull some cash out in a refinance, but even that may not be for at least a few years down the road. If you are looking at traditional lender financing, you had better be prepared to put down anywhere from 25-40%. Programs for second homes require credit scores over 700 and there will be an increase in the interest rate. There are programs out there for these types of properties, but the underwriting is much stricter than traditional loans and the guidelines are tougher.
Dealing with issues on a rental property you can drive to is much easier than one a few hours away. You not only need a property manager, but you need to have local contacts in your area. Plumbers, electricians, general contractors and handymen should all be lined up for when you need them. If you have to scramble around when something goes wrong, you are at the mercy of whatever price you were quoted. Many investors are not comfortable not being able to see the property if something goes wrong. Technology has certainly made this a lot easier, but there is something to be said for being able to physically see your investment.
The relationship between you and your property manager is critical with a vacation property. You need to spend the time and talk to as many candidates as you can before making a decision. A good vacation property will have constant turnover. Therefore, you need to make sure you are working with someone that can handle it. If you have to double check, you will slowly commit more time to this property than it is worth. The property manager, in many ways, will hold the key to the success or failure of the property you choose.
There is a big difference between liking a house you stay at one weekend out of the year and making the commit to buy it. A vacation property can be a tremendous asset to your portfolio, but they are not for everyone. There is much more due diligence and commitment needed for a vacation property than a rental property in your local area. The right property can be a real winner, but they may not be for everyone.