Making Your Vacation Home Pay For Itself
A practical look at renting your vacation home Mark Fields

Perhaps you take a vacation at one of your favorite vacation destinations, and you attend one or two of the vacation rental open houses. You think, “Hey, this will be great. We can use our vacation home several times a year and rent it for the rest of the year. That way, the rental income will pay for our vacations and the cost of the vacation home.”

Sometimes it works out that way. Sometimes it doesn’t. This article explores some of the practical aspects of renting your vacation home.

Goals

The first question to ask yourself is: what are my goals ? It is very important to be clear about what you want to accomplish because, after all, this is a major investment. Let’s use this example: “I want to use my vacation home about one month a year plus several weekends. I want the rental income to cover my annual costs except for my mortgage. In seven years I plan on retiring to my vacation home.”

Add up those costs

Your fixed costs (those that will not vary because of rentals) include your mortgage, real estate taxes – say $2,000, home owner association dues – say $2,600, homeowner insurance – say $200, liability insurance – say $100, annual repair and maintenance – say $500, and minimum utility costs – say $3,000. Remember, utilities include telephone, heating and air conditioning, electric, water, cable TV, telephone, etc. All of these costs will vary according to your location, the unique vacation home, and the number of services.

Your variable costs (those that vary with rental/occupancy) include increased utility costs (say $10 per day rented) and rental operation costs (say 30% commission). The utility costs that vary include heating and air conditioning, electric, and water. These costs will vary by location and the weather.

The fixed costs (without mortgage) add up to $8,400. Your variable costs add up to the daily rental rate times the 30% commission plus $10.

Rental equation

If the average daily rental income, for both peak season and off season, is $160 per night, then you will net about $102 per night rented. That result is calculated by subtracting the rental commission (if you hire a rental agent, rates vary) and the increased utility costs.

To offset your fixed costs of $8,400 per year, your rental agent will need to rent your property 82 nights.

Reality check

The big question is: will the vacation home rent for 82 nights each year? The answer to that question depends on a number of factors including the tourism draw of the area, the amenities of the vacation rental, and whether the location is a two season or one season tourist destination. The first thing you will want to check on is the rental history of the vacation home if it has been rented in the past. If that information is not available, then you have no choice but to estimate the number of rentals. Rental rates vary dramatically from one area to another. If you list your property with a rental pool where rental income is divided equally amongst all properties, then your income results may be lower than otherwise.

There are 365 nights in a year. In this example, you have already reduced that number by the month you have selected for your own vacation. If you use that month in peak season, your income results for the year will be significantly reduced. We will assume that you vacation in the off season and will fit in weekend getaways when your vacation home is not rented. That leaves you 335 nights available to rent. Let us suppose that you can rent most nights during your 2 month peak season at 75% occupancy, 46 nights. That leaves you with a goal of 36 night’s rental during the rest of the year. Your shoulder season months may rent at about 50% occupancy yielding you 30 nights rented. All you have left now is 6 nights to rent, which will probably be weekends. There are now 7 months open with about 28 weekends available. If your off-season minimum rental is 2 nights, you will need to rent your vacation home 3 of the 28 weekends or 11 % occupancy.

So far, it is looking good . Given that there will be a couple of major holiday weekends in your off season, your vacation home should rent. But remember that your vacation rental success will differ from year to year. In some years you may beat your target, and in other years, you may not.

Other vacation rental costs

This is not a complete list, but it includes some of the most common additional costs most people do not think about.

  • Furniture, furnishings and equipping the vacation home
  • Linens and towels
  • Special assessments by the homeowner’s association
  • Major repairs or appliance replacement

Hire a rental agent or do it yourself ?

This is a very complex topic that is beyond the scope of this article. The author has written “Renting Your Vacation Home”, available for a fee for download. The author discusses, in detail, the factors that go into successful vacation home ownership and vacation home rental operations. Additionally, the author discusses the pros and cons of renting your vacation home personally or of hiring a vacation rental agent. A preview of the book will be on the author’s website soon.

Taxes

Your tax situation is unique. I strongly recommend that you seek the advice of a tax professional before you purchase your vacation home. Depending upon your specific circumstances, you may find that a rental vacation home is tax advantaged in your case. Your tax professional can advise you, amongst other things, about trusts, depreciation and capital appreciation/gains.

Property appreciation

Often vacation home owners find that rental operations cover some if not all of the annual costs while the appreciation of the property’s value over time can be substantial. You may want to consider factoring in an annual appreciation percentage to determine the total financial picture for your vacation home investment.

When all is said and done...

Owning your own vacation home and renting it out can be a rewarding experience or a disappointment depending upon your expectations. When buying for a combination of investment and personal use, it is always good to have realistic expectations, clear goals, and the advise of your tax accountant.

Your tax professional can prepare a budget forecast of the property over your holding period, which in the example given was 7 years. They can project all the revenue and all the costs plus the potential property appreciation. That forecast will give you a complete picture of the potential for your investment.

About the author

Mark Fields has owned and managed vacation rentals since 2002. Prior to the vacation rental agency, Mark had a long career as a chief financial officer with large corporations. His vacation rental business is located on the Web at www.birdie18guesthouse.com. Mark will not give you real estate advice, especially on appraisal or whether to purchase a specific property; that is the role of a licensed real estate agent or attorney.

Email the author at reservations@birdie18guesthouse.com

©2009 Mark Fields, all rights reserved