When entering the real estate investment market, people often wonder, “should I rent out my vacation home?” While the idea sounds attractive to generate income and defray the costs of ownership, there are pros and cons to renting out your vacation home. Before you jump on the bandwagon, first consider these vacation rental tips for owners.
Pros of renting your second home
You probably purchased this vacation home to spend time in a location people enjoy visiting. During peak season for your property, you could potentially make enough in rental income to help pay down your mortgage or save for the future. When you’re consistently earning more than the home is costing you in mortgage payments, taxes and operating expenses, renting your vacation home can make a lot of financial sense. Be sure to do some research into the rental market in your location.
Certain tax advantages
Owning a vacation property can entitle you to some tax advantages if you meet certain conditions. If the property is rented out for more than 14 days a year, you may be able to deduct mortgage interest, insurance and some other expenses from your taxes. You may also be able to deduct depreciation, which could help offset repair costs and improvements. If you rent for less than 14 days a year, the IRS does not ask you to claim the rental income. Bear in mind, the tax laws can be incredibly complicated, so be sure to talk to a tax or mortgage advisor about the details of your situation. And remember, good record keeping is a must!
A place to retire
Earning rental income while paying down a mortgage now can lead you down the road to a more comfortable retirement. You will already have a home, in a location you love, waiting for you when the time comes!
Cons of renting your second home
In order to meet demand and maximize earning potential, you’ll want to have it on the rental market during peak season. This means you don’t get to use the property while it’s rented. Consider planning your own vacations in advance and blocking off the rental calendar availability for specific dates you know you’ll want to visit during the season.
It can be a lot of work
Owning a rental property means you’re operating a business. Weigh the pros and cons of the time it will take to manage the property, bookings, cleanings and guest satisfaction, plus tracking and deducting expenses and depreciation.
Keeping up with the Joneses
To compete with other properties and boost demand, you’ll need to make the home at least as comfortable and appealing as similar properties in the area. Another vacation rental tip for owners: If your vacation home is in a high-end rental market, for example, you’ll need to invest in high-quality furniture and kitchenware, the latest electronics, beds with quality mattresses and sheets, artwork and more. Plumbing fixtures should be top-notch, including showerheads that deliver strong, consistent water pressure. You’ll also need to pay someone to clean the house and launder sheets and towels after each guest stay.
There is always the risk that you won’t get an ideal renter. There are plenty of stories to tell about guests who threw a wild party or damaged property, furniture or electronics. Find a balance between having nice amenities that attract renters, but not so nice that they’re tempted to take something home with them as a parting gift. Yes, this is also your home – so you’ll still want it to be comfortable when you visit, but we wouldn’t recommend decorating with anything valuable or sentimental, and no family photos.
Finally, you need to check on the property often. If you don’t live close enough, you’ll need to hire someone to do so for you. Rental management companies can be readily found in popular vacation home rental destinations, but they will usually charge a percentage of the rental fee for checking on the home between guest stays. Interview a few of them as each one may provide slightly different services and fee percentages based on their level of involvement.
If you’re not handy or nearby, you’ll also want to find someone that can make repairs, further adding to your list of expenses.
These pros and cons are just the tip of the iceberg of vacation rental tips for owners. But the most important piece of advice we can offer: Do the math.
Determine how much you’ll pay for maintenance, utilities, taxes, insurance, repairs and amenities. Add more for preventive maintenance, cosmetic updates and wear and tear. If you opt for a property management company, factor in their fee. Then offset that with how much you can reasonably expect to see in rental income.
A conversation with your financial advisor is a good place to start. They know your financial situation and can help you consider all the factors when making a decision.