Are you considering buying a second home? Are you thinking of renting the home to offset the costs? The decision to consider renting a vacation home is fairly common. If you are one that is “toying” with the idea, there are a number of things that you should consider before making a decision.
First and foremost, you should talk with your accountant and understand the tax implications. Remember, if you rent your home for 15 days or more per year, you will likely pay taxes on the rental income as well as losing the ability to count some deductions. Additionally, renting more than 15 days per year will result in the lender classifying the home as a rental property. This will impact the type of mortgage loan that you can get and the down payment required. Lenders require larger down payments for rentals than second homes and the interest rates are typically higher.
There is also the decision of how you will title the home. Will you own the home personally or will you want to title the home in a LLC for liability reasons? If you have a renter fall and hurt themselves, you will likely not want them to sue you personally. You may want to title the home in the name of a LLC or business entity to limit liability. This will most certainly have an impact on financing options. Typically, a buyer that wants to title a home in the name of a business will not qualify for any government sponsored or government backed programs and will need to seek a portfolio loan from a bank. This will typically require 25% down payment on average and the rate is usually higher than traditional financing.
If you plan to rent a home, you should do a lot of research on rentals in the location that you are considering. You need to decide if you will be doing nightly rentals or weekly rentals only. Will you be wanting to rent monthly or longer-term in the “off-season”? Call local rental management companies and inquire about the rental rates for similar properties in terms of beds and baths. Of course location and views also play a large part in the amount of rent you can charge. If you are buying in a beach community, you will obviously get higher rent for an oceanfront home than you would get for a home on the 3rd row back. Of course, you will also pay more to purchase an oceanfront property and so you will need to run the numbers to make that type of decision.
Many buyers search for properties with an established rental history so they will have a better idea of what can be charged in terms of rental income. The benefit to buying a previous rental home is that often times they are sold furnished. This can save you time and money in many cases and allow you to use/rent the property sooner. If you decide to go this route you will also need to understand whether or not previous rental reservations will need to be honored. In order to make that determination, you should talk with the listing agent and understand any legal issues with prior rental contracts and how this will affect you as the new owner.
One of the biggest decisions when renting your vacation/second home is to determine if you will manage the rentals yourself or hire a company to do the management. So, do you self-manage or hire a professional? There are pros and cons for both but you must make the best decision based on your circumstances. If you manage the rentals yourself, you can save the 25-30% management fee which is substantial. However, you have to be prepared to handle all of the little details that become cumbersome very quickly. For example, how will you handle check-in? How will the renter get and return the keys to the home? How will you handle the cleaning? If you have someone checking-out and checking-in on the same day, you must coordinate the cleaning crew to be there and finished in a short time frame. What happens if the crew does not show-up and the home is not cleaned and turned for the new renter? What happens if you get a 9 a.m. call on a Sunday morning that there is a plumbing leak? You must understand that you may get a lot of calls from the renters on a variety of issues ranging from the sheets not being clean to the toilet is overflowing or the air is not working. Additionally, you will be in charge of marketing the property for rent and procuring all of the renters. This task has become much easier with the introduction of internet sites such as VRBO.com. In summary, the biggest reason that homeowners decide to self-manage rentals is to avoid paying a professional an average fee of 25-30% of the rental income to manage the property. The biggest con is that the homeowner can become very busy dealing with all of the details and tasks that go along with renting. This is even more challenging if you are doing nightly or weekly rentals.
If you decide that from a logistics perspective or a lack of time perspective to hire a rental management company, you will pay for that luxury. The fees are typically 25-30% of the rental income but that can vary greatly by area. For example, if you own a unit in a condotel, you may pay 40-50% in fees. The pros to hiring a professional is that it frees up your time and avoids any hassle to you. If you hire a management company, you should interview several and ask them statistics on their performance with regards to occupancy. You should also compare fees and understand what that includes. From there, you can determine which company to hire.