“Costs of owning and renting a vacation home can be very high,” says Todd Huettner, owner of Denver-based lending company Huettner Capital. “The hassles and costs of short-term vacation rentals are higher than most people expect. … People are way too optimistic about rental rates, vacancies, management fees, maintenance costs, and home value increases.”
Owners buying a second home in a different part of the country than their primary residence may be have to consider new climate issues, such as damaging blizzards in the mountains or corrosion from salty air in beachside communities, Huettner says.
The vacation-home market has made a full recovery in recent years, with prices returning to what they were in 2006, according to the National Association of REALTORS®. The median sales price of a vacation home increased by 4.2 percent in 2016 to $200,000.
The Wall Street Journal recently featured some important considerations for buyers who aspire to purchase a vacation property.
1. Check your reason for buying. Some buyers find that a vacation home can be a moneymaker. Sabrina Robinson of Santa Cruz, Calif., told the
Journal that she rents her vacation condo in Lake Tahoe to tourists year-round. The rental income covers her mortgage and utilities and generates a $20,000 profit annually.
But buyers of second homes don’t always want to become landlords. “Our buyers today are buying for a number of reasons, with the number one reason being lifestyle and use,” says Nick Cassini, senior vice president of sales and marketing for Four Seasons Private Residences in the Caribbean island of Anguilla. NAR surveys also find that vacationing is the primary motivation for buyers who purchase a second home.
2. Assess the location. Sales prices and rental demand can vary significantly between locations. “The owners who are most displeased are ones that rush the purchase decision because they are blinded by their dream,” says David Angotti, co-founder of SmokyMountains.com, a vacation rental listing site in Tennessee. “For example, they fail to understand location, view, features, and other amenities are critical to the overall revenue.”
Owners may also want to consider how far their second home is from their primary residence. Fifty-seven percent of vacation properties are located in beachside or lakeside communities at a median distance of 200 miles from owners’ primary properties, according to NAR.
“In our experience, living close is really helpful if something goes wrong, but there are a huge number of services out there to hold keys, offer concierge services, or otherwise help if you live further away,” says Laura Hall, communications director for Kid & Coe, a vacation rental website. “So anything is possible if you’re willing to pay for it.”
3. Budget for the true costs. Buyers shouldn’t just focus on purchase price, rental rates, and recent market trends when considering purchasing a second home. They need to be aware of other factors that can push up costs, such as fees for cleaning, management, routine maintenance, and repairs. For example, homeowner association fees can be more than $1,000 a month in some markets. Financial experts recommend that buyers also factor in real estate taxes, insurance costs, utilities, and state sales tax on rental income.
4. Consult the local rules. If the intent is to rent out a second home, be sure to check out local ordinances and homeowners association rules, which may reduce the pool of potential renters.
Source: “What to Consider Before You Buy a Vacation Home,” The Wall Street Journal (June 11, 2017)
