Buying A Vacation Home As A Rental

With a current market conditions being the way they are—that is, a shift towards a buyer’s market—now may be the right time to invest in a vacation home to use as a rental. However, before you rush out and buy a house on Cape Cod, you’ll need to complete a few pre-purchase tasks which include making sure your finances are in order, deciding on which home will be the most profitable, and enlisting the help of a property management company.

Your first step in investing in a vacation home to use as a rental is to review your finances and plan out a budget. Not only should you be able to afford a second mortgage and afford the upkeep for a vacation rental, but you should also have money saved in case of an emergency. As for a budget, you should use the following two formulas as a starting point:

1 week’s rent = 1 mortgage payment

rented 4 months = break even

Of course, these are just guidelines and your break even point may vary once you crunch the numbers. Also, keep an eye on insurance costs. In some vacation areas, weather-related disasters or other natural disasters have driven up insurance premiums. Make sure you leave plenty of cushion in your budget if needed.

Once your finances are in line, you’ll then want to consider what kind of home in what area is best. A vacation home’s size and location will more than likely make or break your investment. As a general rule, renters look for smaller houses—ones with three to four bedrooms—as opposed to larger multi-level and multi-room mansions. Also, keep in mind that all-important vacation home centerpiece: the view. As for location, even though you may have your heart set on a certain resort or vacation area, try to have an open mind. In many areas (such as Cape Cod), selling prices are far greater than rental prices. If you can, try to find a less expensive area that still has decent rental rates.

Finally, in your quest for the perfect vacation rental, you’ll need to take on a partner, namely a good property management company. A management company is essential for several reasons. Not only will a management company oversee the day-to-day business, but they can also handle problems should they arise. Also, a good management company will have plenty of connections—not only to local goods and services (such as repairmen), but also to potential renters. Of all the steps you need to take in buying and renting out a vacation home, obtaining the services of a property management company may be the most important step.

Much like investing in a house in order to sell it for a profit, you’ll need to treat your vacation rental as a business. If you do, the time that you spend in your vacation home will be much more enjoyable.  ∆