The Real Cost of Owning a Vacation Rental Home

March 27, 2010 at 10:45 PM 15 comments

So you read yesterday‘s post and still think you want to own a vacation rental home. Now you just need to figure out whether or not you can afford it. How much money does it take to own a second home and how much money will you earn from it? I’ll walk you through the details of our second property to uncover the real cost of home ownership.

As I mentioned yesterday we purchased our rental home near the height of the housing market. We secured a 30 year fixed rate mortgage at 6% through a credit union that required 20% down. These days I highly doubt you could attain a mortgage on a second home without putting down at least 20%. The down payment came from a bunch of stocks and mutual funds that my husband and I had been holding onto for years. A large chunk came from company stock that would now be worthless.

Most people think that you can earn enough money in rental income to cover the cost of the mortgage. While this might be the case in warmer vacation spots where you can rent year round, it is certainly not the norm in a place like the Outer Banks of North Carolina. In North Carolina the typical rental season is between ten and sixteen weeks, depending on how close to the ocean your home is located. The majority of rentals occur in June, July, August and September. Real estate agents may quote you all sorts of year round rental numbers, but most homes rent primarily during that time frame. Due to the short rental season most people cannot make enough money off of their home to cover the mortgage.

If you are interested in purchasing a vacation rental home definitely ask for the latest rental rates and history. This is the best indication of the how much rental income you might be able to earn. Rates on vacation homes vary widely. The homes in our area, of comparable size and age, rent between $2,000 and $3,500 per week during the peak season. The peak season in North Carolina is roughly eight weeks long, so we charge less before and after that time period.

A home that rents for $2,500 during the peak of the season may rent for as little as $800 during the off-season. While $800 a week sounds like a decent number, you must keep in mind that you will rarely rent your home during these non-summer months. If we incurred no other expenses and rented our property twelve peak and shoulder weeks our rental income would cover roughly six months of our mortgage. Of course, there are many expenses that further reduce our income.

For example, if you do not live in the vacation area you will probably need the services of a rental agency, which will help you find renters, clean the home weekly and be available to listen to all customer calls and complaints. The commission rate is typically in the range of 16-30% in North Carolina. At other vacation spots it can vary widely. At 30% the rental company is taking almost a third of your income.

In my opinion the commission is a huge rip-off. The rental agency is relatively good at getting renters into your home, but they aren’t much good for anything other than that. The agencies almost never hold tenants responsible for broken items, so if something is destroyed or stolen the owner almost always ends up paying for it. As an owner you may expect to pay between $50 – $150 a year to replace small appliances like toasters, coffee makers and blenders.

If you own a pool and/or hot tub you will need to pay for a weekly pool cleaning service. We typically pay between $100 and $150 per week just for those services. Unless you do the work yourself you’ll also need to pay additional fees to open and close the pools. That can cost between $300 – $500 total. Of course, you can charge renters more for the use of your pool and hot tub, which does boost overall revenue.

As an owner you will also be responsible for paying any laundry related fees. For example, if a renter spills chocolate sauce all over the rugs in your home, the rental agency will send the carpets out for cleaning and then mail you bill. The same occurs for bedspreads, curtains and any other item that might need laundering.

If you want to keep renters happy you will also need to replace bedding, curtains and even art work every few years. No one wants to sleep on an ancient bedspread or look at stained and tattered drapes. We typically spend between $100 – $200 on items like this each year. I search Burlington Coat Factory and Marshall’s for inexpensive designer items and replace at least one bedspread and a handful of blankets each year.

You will also want to set aside a budget and/or time to clean your windows, repaint your home and perform other home maintenance projects. While you might allow paint chips or outdated bathrooms in your home, you should be aware that renters will not be fond of it. The costs for home maintenance can range from a couple of dollars for a can of paint to a few hundred dollars for bathroom remodeling.

Lastly, if the money you get from renting your home does not cover the cost of renting it, you may be able to post a taxable loss on Schedule E. The tax laws for rental properties are extremely complex and since I’m not an accountant I’d highly suggest you speak with a CPA. There are also lots of good articles on the Internet that can explain the differences between passive and active income and between rental properties and personal residences. In each of these situations different tax laws will apply.

At the end of the day our rental income doesn’t come close to covering our mortgage and expenses. If we purchased our property at a different point in time we might be closer to hitting the mark, but as it stands now we have a long way to go before our property becomes profitable.

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Decisions to Consider Before Buying a Vacation Rental Home My Favorite $2 Purchase

15 Comments Add your own

  • 1. me in millions  |  March 28, 2010 at 12:58 AM

    This is super interesting. I'd def like to hear more about your experiences.

    Reply
  • 2. samba  |  March 28, 2010 at 3:48 PM

    We don't live near our vacation rental properties on Sanibel Island (but will soon!) so there is no choice but to have managers on island. That said, I get 90% of my rental guests through my own efforts and both the condo and house are rented 75% of the year. I work hard to get the rentals, but it's worth it to me for the ROI and the fact that when they are my bookings I only pay the agencies 10 percent instead of 25%. The agencies coordinate the bookings, cleanings and repairs, and they do a decent job of it. I would never rely on them to get all my rental guests, however, as I do a much better job than they ever could. It's my business, not theirs, and I put a lot of time into it!

    Reply
  • 3. One Frugal Girl  |  March 28, 2010 at 4:01 PM

    samba — that's an interesting business model, a smaller commission rate if you bring in the rentals yourself. We actually have to pay the same commission rates whether or not they find the renter and like you we find the majority of renters, so it's a total rip off. In fact, not only do we find more renters, but we do things to make sure they return. Our rental company doesn't reward us for either of these activities.

    Reply
  • 4. Anonymous  |  March 30, 2010 at 3:56 PM

    This sounds like a lose/lose situation. Buying a vacation home that you can't use in peak season because you have to rent it out to earn income to cover the expenses, only the rental income you collect can't cover the expenses (thus a loss) and you have to hire contractors to do weekly updates plus annually replace items. Plus you bought the vacation home at the height of the housing market.

    You people don't sound too bright.

    Hope no body falls, trips or gets hurt on your 'vacation' nightmare 'cause when they do, you folks will be wiped out.

    Idiots.

    Reply
  • 5. Anonymous  |  March 30, 2010 at 5:30 PM

    That seems unnecessarily harsh Anonymous. Simply because rental income might not cover the mortgage does not mean they are losing out on the property.

    For one, her family can stay there anytime its vacant, leading to cherished family memories. For two, she could still be making a decent return on her investment if the rental income + appreciation is greater than the interest portion of the mortgage payments (combined with any fees, taxes or other expenses).

    Reply
  • 6. Anonymous  |  March 30, 2010 at 9:52 PM

    Cherished family memories? Are you for real? You can make 'cherished family memories' right in your own backyard. Give me a break!

    What I detest most are bloggers (frugal) who give out financial advice and paint rosy pictures. The Other Banks are a hurricanes' nightmare!

    She can use the place when it's vacant? Yeah! Like the off seasons. Brilliant. Happy memories shivering off your butts.

    I'd like to see a profit & loss statement on this overpriced/bought rental property.

    The only thing you got right are the losses you can claim off your tax returns but those are limited to only a few years. Plus now, rental income is on the chopping block to be heavily taxed. How much will be left for her?

    Very bad, bad, bad business deal/investment whatever! If you like to spend time on the Outer Banks, R E N T and choose whatever weeks you want to.

    Geeze.

    What kind of family memories are you going to created when mommy & daddy start pulling their hair out of their heads when they get swamped with bills, bills, and more bills.

    Have a happy vacation life.

    What a joke!

    Reply
  • 7. One Frugal Girl  |  March 31, 2010 at 3:01 AM

    Grumpy Anonymous Commenter – Let me try to address all of your issues.

    First, I actually prefer not to stay in North Carolina during the peak weeks and months of summer. The best and most quiet time is September, so I'm not missing out on anything by allowing renters to stay during that time.

    Second, my husband and I don't need the rental income to cover the mortgage. The WHOLE POINT of this article was to demonstrate that rental income won't cover the mortgage, so clearly we don't rely on that money to pay for it.

    Third, it's not the worst idea to buy a house at the peak of the housing market. If you know anything about the economy you know that the peak of the housing market was also the peak for the stock market. We cashed out on stocks that are no where near their 2005 value. In fact, some of those stocks lost 90% of their value since that time.

    Fourth, in order to rent a vacation home you must have liability insurance. We have a very large policy that would cover us if someone was injured while vacationing at our home.

    Fifth, as I mentioned before the whole purpose of this article was to point out that owning a vacation rental property is not always profitable and that contrary to popular belief the rental income will not help you pay all the bills. The whole point was that owning a home is NOT the rosy picture some people make it out to be.

    Sixth, again the OBX are most beautiful in September and October. The water is warmest, the crowds have all dissipated and the air temperature is often just right, not to hot and not yet cold.

    Seventh, we do write a good portion of our expenses off of our taxes. No one can predict the future of tax law, but for the time being we take advantage of them.

    Lastly, not everything in life has to make you money. After all, you aren't going to make money by renting a beach house for two weeks every summer, but it doesn't mean you aren't going to go on vacation.

    I do not think of my vacation home as an investment. I think of it as a place I love to go. My husband and I are fortunate enough to be able to afford two homes without relying on the rental income of the second one. So I love my home for what it is… a place for my family and I to spend quality time together.

    Reply
  • 8. Anonymous  |  April 1, 2010 at 1:13 AM

    Anonymous-

    Hope no body falls, trips or gets hurt on your 'vacation' nightmare 'cause when they do, you folks will be wiped out.

    General liability and umbrella insurance policies are very affordable these days. I'm sure they carry multiple policies to address these items as anyone that owns a rental property would be concerned with such things.

    What I detest most are bloggers (frugal) who give out financial advice and paint rosy pictures. The Other Banks are a hurricanes' nightmare!

    You should check your facts before you making statements like that.

    The last hurricane to make landfall was an 85mph storm on August 3, 2004. There have not been any other 75+ mph tropical systems that have made landfall in the past 6 years in the area. The last major storm (CAT3 or higher) that made landfall was Emily (September 1, 1993) with 100mph winds. I would not characterize 1 major landfall in 17 years as a "hurricane nightmare."

    But if you want to rant and rail about the ills of home ownership on the Outer Banks I will gladly yield the floor to the village idiot.

    PS – here's your data. It took about 2 minutes to retrieve from the tropical prediction center.

    YEAR MONTH DAY STORM NAME WIND SPEED(KTS) PRESSURE(MB) CATEGORY
    1 1991 8 19 BOB 95 957 H2
    2 1992 9 25 DANIELLE 45 1004 TS
    3 1992 9 25 DANIELLE 55 1001 TS
    4 1992 9 25 DANIELLE 55 1007 TS
    5 1993 8 31 EMILY 100 962 H3
    6 1993 9 1 EMILY 100 960 H3
    7 1995 6 6 ALLISON 40 995 E
    8 1995 6 7 ALLISON 40 992 E
    9 1996 6 20 ARTHUR 35 1005 TS
    10 1996 6 20 ARTHUR 35 1005 TS
    11 1996 10 8 JOSEPHINE 45 988 E
    12 1996 10 8 JOSEPHINE 45 986 E
    13 1997 7 24 DANNY 30 1004 TD
    14 1997 7 24 DANNY 40 1000 TS
    15 1998 8 27 BONNIE 60 980 TS
    16 1998 8 28 BONNIE 65 983 H1
    17 1998 8 28 BONNIE 75 985 H1
    18 1998 9 4 EARL 50 998 E
    19 1998 9 4 EARL 50 1000 E
    20 1999 9 16 FLOYD 70 967 H1
    21 2000 9 23 HELENE 35 1010 TS
    22 2000 9 24 HELENE 40 1008 TS
    23 2001 6 15 ALLISON 25 1009 SD
    24 2001 6 16 ALLISON 25 1007 SD
    25 2001 6 16 ALLISON 25 1007 SD
    26 2001 6 16 ALLISON 25 1007 SD
    27 2002 10 12 KYLE 30 1012 TD
    28 2002 10 12 KYLE 40 1009 TS
    29 2004 8 3 ALEX 85 974 H2
    30 2004 8 3 ALEX 85 972 H2
    31 2004 8 13 BONNIE 25 1008 TD
    32 2004 8 13 BONNIE 25 1008 TD
    33 2004 8 14 CHARLEY 60 1000 TS
    34 2004 8 15 CHARLEY 40 1012 E
    35 2006 6 14 ALBERTO 35 1002 E
    36 2007 6 3 BARRY 40 994 E
    37 2007 6 4 BARRY 40 992 E
    38 2007 9 9 GABRIELLE 50 1004 TS
    39 2007 9 9 GABRIELLE 45 1006 TS
    40 2007 9 10 GABRIELLE 40 1007 TS
    41 2007 9 10 GABRIELLE 30 1008 TD

    Reply
  • 9. Renee  |  April 12, 2010 at 3:36 AM

    We just spent 3 days at the Outer Banks. It was the first time for us "off-season." Wow what a difference! What a great difference! No traffic, no lines in the restraunts, did I mention no traffic. We left the beach and were home in just over 3 hours on a Sat. Un-heard of in the summer! I highly recommend it and hope to go back next spring break!

    Reply
  • 10. Ian  |  September 24, 2010 at 1:13 PM

    I feel for your cry, Frugal Girl. But that is business' league; there are always ups and downs. Down times should be taken positively, in order to innovate, give better service and expect great customers and loyal customers in return. You have to accept the fact that kind of business is a seasonal type, like in New York. Apartment rental short term is a booming business during summer when people go out of town or out of the country and choose to stay in vacation apartments. New York City's summer creates new business and twist for the leisure of the tourists in town. Like for example organizing an event, promos and packages, and renewed amenities for better service in short term furnished rentals. NYC's business line is pretty alive during summer. I suggest that you too should take advantage of the season to generate more income.

    Reply
  • 11. Anonymous  |  September 29, 2011 at 2:34 AM

    This was a helpful blog.

    I'm looking at a vacation rental in the Finger Lakes Region of upstate New York. Our best season is July 4th through Labor Day.

    What is your vacancy rate during the Summer season? Do you always have it fully rented in July and August?
    How long did it take you to get to the high occupancy rate you currently enjoy in July and August?

    Reply
  • 12. One Frugal Girl  |  September 29, 2011 at 3:08 AM

    @Anonymous – We've never had a problem renting in July & August, but sometimes we don't book fully in June. We typically rent 10 of the 12 peak summer weeks and sometimes an extra a week or two in May or September.

    Reply
  • 13. Anonymous  |  October 23, 2011 at 7:48 PM

    Thanks frugal girl for the info. I am considering purchasing a vacation condo myself. Although I do not plan to depend on income to make payments either. I agree with you on the summer month renting. It is way to hot here for me in June/July/Aug for me to want to bother with being at the beach, which is perfect renting time for me. The tourists, traffic, and lines all make me want to stay home. You covered a wide variety of costs associated with owning. One question, do you find it worth it to allow renters to come into your vacation home? In other words, are damages/thefts a frequent occurrance? The managers dont require damage deposits as they do here in Florida? Between damage deposits of 500, 250 per pet fees, you wouldn't think damage or thefts would be to frequent. Does it cover all of your time/effort/damages and still give you a reasonable profit for your headaches?

    Reply
  • 14. Steve Anson  |  April 14, 2013 at 2:12 AM

    Hello. Really appreciate your balanced and common sense approach to owning a vacation rental. I’m looking for a really large property (8+ bed ideally) that can double as a company house (for meetings, retreats…) and generate vacation rental income when we’re not using it. It needs to be nearby a major US airport. Where do you suggest I look? Thinking about Park City UT.

    Reply
  • 15. Bethany  |  January 9, 2014 at 5:43 PM

    Thanks for the info!! I had a few more questions if you don’t mind answering them. How did you decide upon your property management company? How large would you set the radius when purchasing rental properties (i.e. distance from the beach, city, amenities, etc.)?

    Thanks again!!

    Reply

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