1: Why own a vacation rental?
Because it’s fun! If it doesn’t sound fun, it’s not for you.
We are a family of 5. Vacationing in hotel rooms was limiting, cramped, and stressful. We had been enjoying vacation home rentals, and timeshares as a family for more than 10 years before we purchased our first vacation home. We preferred vacations with our own kitchen and common area and separate bedrooms. When the kids were young, the timeshare in a resort was perfect. As they got older and we got more adventurous, condos in town (walkability) became the preference. We started noticing what we liked and didn’t like in our vacation properties. We started critiquing, which led to planning what we would do instead. Pretty soon we realized we wanted to join the club; we wanted to own and manage a great place for other people to enjoy.
Collecting rent is pretty fun too, but that is another topic.
Would you like to tour available property during your next vacation? Please let me know below if you have any further questions or comments!
2: Can I afford to buy a vacation rental?
For me, purchasing a vacation rental is the same as purchasing a second home. If I can not afford to purchase and maintain the home with my current resources, I can not afford the home. I need to get a mortgage, and although I’m hoping that after I get the property up and running, there will be cash flow, the bank can’t really factor that in when assessing my approval.
Maybe you have found a property that comes fully furnished and has an established rental income. Maybe the bank will factor in the rental history, but do you really want to over-extend?
My husband and I have often commented on the fact that the lower your mortgage payment is, the easier it is to pay for expenses with rent. For most of us, the rent may not cover all expenses, and the rent may only come seasonally, but that rent should definitely offset the burden.
There have been several years that I have reported a loss on my rentals on my Federal Tax Return. It is common to have a loss on a rental property because of depreciation, annuitization, and the hard fact that property is expensive to own and maintain. As a Real Estate Professional, this loss is deducted from the household gross income; thus lowering our federal tax liability. The lower tax liability has helped make owning a vacation rental a little easier.
Note: Things may change with new tax laws. I recently sat through a webinar about tax changes for Real Estate Professionals and the below was not mentioned as a change, so I am optimistic. I will update this post when I work on my 2018 taxes.
To be considered a Real Estate Professional, you do not have to be a licensed Real Estate Agent, but you do need to answer yes to these two questions:
1. Do you spend more than 750 hours a year actively involved in real estate (sales, management,etc.) and have you complete records for this time?
2. Do you spend more than 50% of your work-related time involved in real estate?
I recently spoke with an individual who owns a vacation rental with his wife. He is a professional in another field. He said the best advice his accountant gave him was to have one of the two of them handle all decisions and work related to the vacation rental. His wife takes care of all of the rental property business. As long as his wife can answer yes to the two questions above, any loss they have as a married couple filing jointly will be deducted from their gross income, thus lowering their tax liability.
3: Where should I own a vacation rental property?
Where you like to vacation, and people like to vacation with you!
Ahhh, a beautiful property in paradise. If you think owning a vacation rental is fun, and you are taking an active role in managing it, you will be spending some time there. You’ve also got to be able to sell it; so you better love it. Vacation rental zoning and permits, and access to property management will narrow your selection.
Annual family vacations become work trips. Some level of re-stocking the kitchen utensils and linens happens every time I am on property. My daughter is in charge of restocking the bookshelf. My son is in charge of restocking the video games and movies. I have gotten to know the local contractors and service companies. I have gotten to know the local hardware store too, there are always minor repairs to be taken care of.
And then we jump in the pool, sit in the hot tub, or walk on the beach. We own this!
4. I have a second home, why should I rent it out?
Houses that are lived in, tend to be healthier homes. plumbing that sits idle for extended periods of time will most likely surprise you when suddenly under pressure again. With all the rental, management, and communication options available to us today, I can’t imagine closing up my property and walking away for months.
5. Why would I want to own property outside of the USA?
Met so many people on the Caribbean Property tour and had so many great conversations. One nice gentleman from the USA asked me “Why would I want to own property anywhere else than the USA?” The only answer I had at the time was “That’s what we are on this tour to find out.” His very straightforward question has been bouncing around my head ever since.
I think up until that trip, I thought owning outside the USA was something I wanted to do, it sounded exotic and interesting. I’m still working on it though. Lots to think about.
Passports, citizenship, income taxes, weather, culture, diversity of investments, …