Are you thinking about buying a vacation home? It can be a great way to maximize your time off and minimize the costs of visiting your favorite vacation spot. But if you -- like many owners -- are planning to rent the home out when not using it, you may be in for a financial shock. Many second home owners find that the costs spin out of control and the rental income doesn't earn as much as they thought it would.
To help manage those costs, here are 5 tips to keep in mind when buying a vacation rental home.
Work With a Local Agent
No matter how often you've vacationed in a particular place, buying and managing property there is a whole different experience. To understand facets like the best places to invest in, how locations differ in tourism or how the offseason affects the area, it's good to work with a local real estate agent and perhaps a local property manager.
Think Like a Renter
When looking at a vacation rental home, don't just think about what you and your family want in that home. To make any money renting it out, you must also appeal to potential renters. While you may want seclusion, for example, most vacationers want something close to shops and restaurants, beach access or nightlife. If your vacation style differs greatly from what will lure most renters, you may need to think carefully about whether you want a strictly personal or a business investment.
Understand the Taxes
Not all rental properties are treated the same for tax purposes. There are big differences between how you can treat deductions and income based on such things as how often you use the home personally, how long it's rented out each year and what type of profit or loss you earn. Knowing these differences will help you decide how to balance personal and rental use as well as what documents you need to track during the year. Planning for the tax implications up-front could have a big impact on your own income taxes when you file, so discuss your potential vacation rental business with a qualified tax preparer before deciding.
Have the Right Insurance
Cover your assets by ensuring that you have the correct homeowner's insurance for the type of property you are buying. Personal homeowner's coverage generally doesn't cover a rental home that is used for business transactions, yet a business umbrella policy may not cover the personal aspects of the home either. Many companies offer specialty home insurance such as "vacant home insurance" and "seasonal or vacation home insurance." Since your property may be empty or outside your control for much of the year, it's important to have sufficient coverage both for emergencies and for damage. Contact a local provider, such as Accredited Insurance Group Inc, for further assistance.
Stretching your family budget to buy a vacation home -- even if you plan to recoup some money through renting it out -- can ruin your financial situation if anything bad happens. First of all, make sure you can pay enough of a down payment that you don't pay mortgage insurance (generally required when you finance 80% or more). Also, be sure you know what the property taxes and utilities will cost for the home and area... and be ready to downsize your plans if they are too high. Finally, recognize that rental income may not cover all your expenses, so don't buy something you can't afford to pay for comfortably all year long.
Following these basic ideas is the first part of good planning when looking at vacation properties. While renting a vacation home may not be the best choice for everyone, it can be a great asset for your family and your finances -- if you choose well and manage it smartly.