So you read yesterday‘s post and still think you want to own a vacation rental home.
I Want To Buy a Vacation Rental Property
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. Then you can decide if vacation rental ownership is right for you.
Owning a Vacation Rental Home
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.
Owning a Vacation Property in the Outer Banks
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. Owning a rental property in the Outer Banks may be a worthy investment, but keep in mind the rental season is limited by seasonal temperatures.
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, (at least in the first few years), to cover the mortgage.
Search for Rental History
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.
Review Peak and Non-Peak Rates
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 other expenses that further reduce our income; a lot of savvy renters now negotiate for lower rents and discounted rentals, which further reduces our yearly income.
Outer Banks Property Management Fees
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. Outer Banks property management fees vary greatly between companies so make sure to check their fees before signing any contracts.
Vacation Rental by Owner Outer Banks
You can also list your rental on Home Away or Owner Direct Vacation Rentals. Outer banks vacation rentals by owner charge much fewer fees. Remember, vacation rental property management fees will cut into your profits more than anything else. Make certain to compare prices before choosing your management company.
In my opinion the commission of large rental companies 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.
Consider the Cost of Services
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. It costs an additional $300 to $500 per year to open and close the pools in the off season. Of course, you can charge renters more for the use of your pool and hot tub, which does boost overall revenue.
If you live near your rental property you can save money by performing the pool cleaning yourself. A comprehensive list of pool cleaning tools can be found at Globo Surf. My husband and I don’t live anywhere near our rental home, so this isn’t an option for us. However, we do save money by opening and closing the pool. We set aside room in our schedule every April and October to visit our home and take care of these tasks.
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.
You’ll also be on the hook for lawn care services.
Don’t Forget About Replacement Costs
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.
Higher Utility Bills
Utility bills are always higher in vacation properties. Do you remember your dad telling you to shut the door when you were a kid? That doesn’t happen in a rental home. Because renters aren’t paying for the utility bill, they don’t care if the doors and windows are left open while the air conditioner runs on full blast.
A lot of guests purposefully turn the air conditioner to incredibly low settings. How do we know? We have a wireless thermostat and can peak at the temperatures while renters stay there. We never raise or lower the temperature for our guests, but we know when the air conditioner is kicking out sixty-degree air at the height of the summer.
Higher Insurance Costs
Your second home may require flood or wind insurance. If you think homeowner’s insurance is pricey, wait until you tack on the cost of this insurance. We pay over $3,000 for this extra insurance each year.
If you rent your home, you’ll also need an umbrella policy covering injuries and accidents that your guests may incur while staying on your property. If you rent through a rental management company, this insurance is required, but honestly, it’s wise to buy even if you rent directly.
Is Property in the Outer Banks a Good Investment
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.
Outer Banks Rental Profit
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.
Cost of Owning A Second Home
To learn more about the costs associated with owning a rental home click on any of the links below:
@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.
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?
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.
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!!
This blog has been usefull to me as well.
Because of the amount of hours, (over 750 documentsed hrs/ year), our VR qualifies for active real estate status, we are now able to deduct the expenses which has put us into a lower tax bracket. We needed to do this because of our High AGI.
Even with those deduction living in CA is expensive and I need to have a good financial picture of what is going on with this VR. My problem is getting a hold of the true expenses to make sure that the rates that I am setting cover those expense when everything varies so greatly from week to week, season to season, and year to year.
Does anyone have a tool, expense planner or some idea as to what I can do to get a true picture and make a better plan?
Thanks
Interesting article. I’m planning to retire to Palm Springs and I’m already scoping out a little second home for the summer months; a ski cabin! And unlike some, I’m not looking for my second property to be a cash cow, but it would be great if rental income covered utilities, taxes and other carrying costs. I’ll add in a bigger budget for replacing appliances and linens, thanks.
I married recently so moving out of a beautiful cabin in the North Georgia mountains. My husband owns a larger cabin 35 miles north of mine. We are considering keeping mine for vacation rental. It is near Alpine Helen and many gorgeous wineries in the area. Life is good! We don’t care to make a lot of money since the home is owned free and clear, just enjoy rental to offset expenses and perhaps list it on the home exchange program.
Thanks for all your good articles,
Mountain Daisy
Congratulations on owning your home free and clear! That’s great. I am not familiar with renting mountain homes. Do they rent year round or just certain seasons? Any reason you are thinking of renting versus selling and keeping the profits?
Thank you for this info. We are starting to think about a vacation/rental home at the beach not far from our home (but too far to comfortably commute to work). The article and even the responses to comments were helpful. If you have any advice for online resources for the tax implications of owning a VR it would be appreciated.
Great article. Vacation rental property can definitely help you in enjoying the leisure time but you have to manage many things for this. The rental for the vacation property should be considered first. It should even be according to the location.
This is great stuff to think about, one of the first reason people (at least me) think of investing in vacation rentals is “the cool factor” but we have to overpower that and think of the numbers, I love numbers.