Buying a Vacation Home? Ask These 10 Questions Before renting It Out
Go Back To Previous PageThe biggest mistake vacation home buyers make isn’t choosing the wrong location – it’s assuming the property will easily pay for itself. Rental income can
certainly help offset ownership costs, but only if you’ve planned for everything that comes with operating a second home. Before you start browsing listings, make sure you’ve thought through these ten questions.
Your answers will help you decide whether a vacation home is the right investment for you – or whether another real estate opportunity would be a better fit.
Do Local Regulations Allow Short-Term Rentals?
First, check local regulations governing short-term rentals. Many municipalities around New York State have restricted short-term rentals in recent years, such as by requiring a permit, limiting the number of nights per year that a property can be rented, or banning short-term rentals in residential zones altogether.
You can check the local zoning authority at the New York State Department of State.
In addition, check with the local town or village clerk where the property is located before making an offer to purchase.
Does the HOA Permit Rentals?
This applies to homes located in a Homeowners Association (HOA), where such regulations may prohibit short-term rentals or require approval from the HOA Board. These HOA governing documents are usually very lengthy, and most provisions pertaining to short-term rentals are buried deep in the pages. Request all governing documents for review before signing any documents to purchase a property.
What Does Your Homeowner’s Insurance Actually Cover?
Typical homeowners’ policies do not cover rented homes. Such coverage may be available through a landlord policy or through a short-term rental endorsement to an existing policy. Your insurance broker can assist you in obtaining such coverage.
The Insurance Information Institute has also addressed the issue of home-sharing and its impact on your insurance.
What Occupancy Rate Can You Realistically Expect?
Others estimate their anticipated income by searching listings for vacation homes like the ones they’re interested in buying and extrapolating from the information posted there about how many months per year they’re rented, their average rental income, etc.
This doesn’t take into account the reality that the period around peak season will be the only time the property is booked 80-100% of the time (eg. The property is rented from late June until late September to a family of four for 7 day periods at $2,500 per week), while the remainder of the year the property sits empty, only collecting dust and becoming another unrented house on the street.
What are the long-term costs of maintaining a home when you’re not there?
When you’re away, your home can suffer serious damage from frozen pipes, ice dams, and heavy snow. To protect yourself from these types of problems, you need to have someone keep an eye on the place, someone who can deal with any emergencies that may arise.
That someone could be a local handyman, a member of your neighborhood, or even a full-time property manager, but whoever it is, make sure it’s someone you can count on.
What Are the Real Furnishing and Setup Costs?
Equipping your rental property for short-term tenants and ongoing long-term use will likely require substantial new furnishings and even some new fixtures. Most short-term vacation rental sites include photos of homes fully furnished for renters. Realistically, these additional costs should be added to the price of the home you’re purchasing.
For example, a three-bedroom home might need approximately $15,000 to $30,000 in additional furnishings and appliances to appeal to Airbnb’s high-rating-seeking guests.
How Will You Handle Your Short-Term Rental When You Are Not There?
Managing a property from a distance is harder than it looks. In order to run a good short-term rental, you need to be able to respond to guest inquiries and clean between bookings. You need a system for dealing with keys, and you need to be able to handle complaints.
If the property is far from your home, managing it yourself is likely to be too difficult; look for a property management company that specializes in short-term rentals.
Companies like Traverse Property Management and Larson Property Management approach this by listing the property on the websites you want and handling all communications with potential guests. They will also clean the property between bookings and deal with any complaints.
What Platform Fees and Management Costs Will Reduce Your Revenue?
Note also the fees charged by Vrbo and other short-term rental sites, as well as any fees charged by your property manager for tasks such as listing optimization and guest screening. These too must be factored into your financial projections before purchasing a vacation home that you plan to rent out short-term.
How Will You Handle Tax Obligations?
Short-term rental income and other home-sharing revenue is reportable on your tax return. See IRS Publication 527, Residential Rental or Real Estate Property, including the special rules relating to personal use days as opposed to rental days.
So, you’ll need to report your income on both your federal and New York State tax returns. In addition to following IRS requirements, make sure you understand New York’s rules for taxing rental properties. We suggest you work with a qualified tax advisor to make certain your vacation home rental activities are being properly reported for all applicable federal and state tax purposes.
What Is Your Exit Strategy If the Rental Income Falls Short?
This question separates buyers who have done their homework from those who are optimistic about a property’s potential rental income. The question is, if the rental income is not what you had projected, would you still be able to afford to carry the property?
In other words, is the property so wonderful and you have such affection for it that you would still want to own it even if the rental income did not materialize as you had projected? Remember, the rental income is just that, additional income that a property could generate. But the property itself should be a wonderful home that you would want to own regardless of the additional income that it could bring.
In the end, it all comes down to a good plan and a bit of caution. By doing your research before purchasing, you can be sure that your second home will perform as a vacation rental as intended. If you’re considering working with a buyer’s agent on your next purchase, learn how a broker commission rebate can put money back in your pocket at closing.
Georges has been working in Wall Street for the last 16 years trading derivatives with hedge funds. He has been an active real estate investor for over a decade. Georges graduated from HEC Business School in Paris and holds a master in Finance from ESADE Barcelona.
