Author Topic: Short Term Vacation Rental Property?  (Read 1047 times)

Telecaster

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Short Term Vacation Rental Property?
« on: September 26, 2018, 06:59:54 PM »
 For various reasons, we have an enormous amount of equity in our house in Seattle and a low mortgage payment.  We're not far from our FIRE number, and would might actually be there if we sold the house and moved someplace cheaper, but we love Seattle and moving to a low cost of living area doesn't help us a ton because the mortgage/rent payment somewhere else would still be roughly equivalent to the existing mortgage in Seattle. 

One solution is to AirBnB the Seattle house part of the time (Airbnb rates are high in Seattle, and we have low mortgage so it would flow cash really well), and live somewhere else cheaper part of the time.  That would allow us to have to Seattle house throw off some cash part of the year.  Then do the same thing somewhere else.  Buy a place that flows some cash, so we could live in Seattle when we want (We love Seattle) and in the other place when we want. 

We were initially looking at places in the western US to stay reasonably close to family, but on a lark, I would looking at places in Hawaii and maybe found a fit!  (I realize Hawaii is also the western US).  I found a couple places with a condo unit for sale in a building that also had a condo for sale.  If you add up the mortgage, HOA fees, guesstimate on utilities, plus management fee, and a buffer, I get pretty close to the "double the mortgage rule."     On paper it works.

Talk me out of this.  Why is this a bad idea?











Mustache ride

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Re: Short Term Vacation Rental Property?
« Reply #1 on: September 26, 2018, 07:28:48 PM »
I think you're tricking yourself with cash flow. You can make any property cash flow. I can spend 500k and pay off a house that rents for 3k a month, which is phenomenal cash flow. I'm cash flowing 36k on this property, this is awesome! Yeah, but if you could sell the house and put the 500k in the market to make 7% a year that's 35k. Now that property doesn't seem like that good of a deal considering you're still paying taxes, repairs, property mgmt fees, etc. This is obviously a simplified example, but you get the point. You need to provide specific numbers if you want someone to give you a reasonable assessment.

cchrissyy

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Re: Short Term Vacation Rental Property?
« Reply #2 on: September 26, 2018, 07:33:09 PM »
Hawaii has very strict rules for vacation rentals.

I don't know the situation in Seattle but it sounds like you are overlooking the more obvious and easy thing to do, which is rent out your current place for $x while renting (not owning! not managing!) something else you live in for $x-y
« Last Edit: September 27, 2018, 01:35:12 PM by cchrissyy »

Kierun

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Re: Short Term Vacation Rental Property?
« Reply #3 on: September 27, 2018, 01:11:33 PM »
Don't forget to include taxes in your calculations for short term rentals in Hawaii.  You'll need to pay General Excise (GE) tax as well as Transient Accommodations Tax (TAT).  If the condo is on Oahu you'll also be tacking on an Oahu Surcharge Tax. 

waltworks

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Re: Short Term Vacation Rental Property?
« Reply #4 on: September 27, 2018, 10:29:40 PM »
moving to a low cost of living area doesn't help us a ton because the mortgage/rent payment somewhere else would still be roughly equivalent to the existing mortgage in Seattle. 

Uh, what are you trying to say here?

Say your place in Seattle is worth $500k. It's probably more than that, I know, but that's a nice round number. Say you owe $100k and your PITI is like $1200 a month or something like that if you were to refinance and only owe that remaining principal.

You can move to, say, Nowhere KS. House costs $50k. You have $300k left over after paying realtor fees/commissions/taxes and moving expenses. You have zero mortgage (though still some tax/insurance) and you have $300k in the market that throws off a completely safe $1000/mo per 4% SWR.

In this exaggerated scenario, you are $26k ahead every year by moving and presumably FIRE.

To answer your original question: It's almost certainly stupid to AirBnB your house. It might be illegal. It will certainly annoy your neighbors. Unless it's in a VERY desirable spot, it won't actually make as much money as you think (on nights it's not rented, you get zero, remember). It will require a metric ton of work on your part, or a ton of money to hire *reliable* people to manage it.

I have no opinion on your HI condo idea, except to say that if it seems too good to be true, it probably is.

-W

Villanelle

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Re: Short Term Vacation Rental Property?
« Reply #5 on: September 28, 2018, 06:14:16 AM »
Google for blogs and articles about people who have run vacation rentals.  It is definitely not a low-maintenance proposition.  And if you are living elsewhere, you'd have to pay someone to manage it.  Generally, vacation rentals will have much higher fees for that service than regular rentals because someone has to go in before every rental to make sure the place is okay, and they have to drop off keys or reset a key pad, make sure the shampoo is still stocked, etc.  And of course vacancies can be an issue (even more so than with regular rentals). 

You would like make at least as much money and have less of a headache just renting it as a regular rental and living elsewhere.  If you are willing to live somewhere else anyway, that seems to make sense.  You'd lose the ability to split your time between two places, but overall it seems like a much better plan. 

elaine amj

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Re: Short Term Vacation Rental Property?
« Reply #6 on: September 28, 2018, 07:59:25 PM »
Could you do each property as a longer term furnished rental (like a student thing for 8 months a year) or an executive rent with min 30 days? That way you can still stay there part time?

That sounds like less stress than an Airbnb or the like. Then again, a good property manager could remove the Airbnb stress.

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Telecaster

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Re: Short Term Vacation Rental Property?
« Reply #7 on: September 29, 2018, 01:37:37 PM »
@waltworks  Yes, my post was bit confusing.  I had a jumble of unrelated ideas all stirred up in there.  Let me try again:

If we sold the Seattle house, we'd comfortably hit our FIRE number--but then we couldn't live in Seattle, which we'd like to do, at least part of the time.  But if we don't sell it, we have to work for a few more years, so there's that. 

To that end, I've been studying the local AirBnB market for a while.   My neighborhood is fairly desirable for short term rentals:  Reasonable commute to downtown (think Amazon), as well as close to University of Washington and a couple hospitals.  And there is a general hotel room shortage in Seattle at the moment, with hotels charging crazy prices.    Based on my observations, I'm confident could through off a decent amount of cash--which we could then use to pay, or partially pay, for a stay in a lower cost of living area, like say southern Spain or maybe Columbia.  After a few months on the road, we could come back to home base.

The Hawaii idea is related but separate.   A number of short term rental companies provide calendars showing the pricing and availability of their units.  I then search for similar units for sale in the same building.  Now you can make an estimate for costs and profits.   I don't numbers handy, but it seems to make sense even allowing for a generous contingency for vacancies and unexpected HOA assessments etc. 

So, in theory we could live part time in Seattle, part time in Hawaii, and part time somewhere else.   Like I say, it seems to make sense and brings our FIRE date forward, but I don't want to rationalize myself into something.  I need to make sure I'm evaluating all the reasons not to do it. 

 @Kierun thanks for the heads up on the taxes.  And thanks everyone for your inputs. 

lhamo

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Re: Short Term Vacation Rental Property?
« Reply #8 on: September 29, 2018, 03:44:49 PM »
If you have a good commute to the UW, consider doing academic year sublets to  visiting faculty or new faculty/post-docs moving in who haven't been able to buy their own homes yet.  Lease term can run mid-Sept (or maybe a couple of weeks earlier if they have kids they need to get into schools) through mid/late-June.  You get the house back during July/August, which are the best months weather-wise here anyway.

Here's some ideas for how people market their properties:

https://www.sabbaticalhomes.com/Home-Exchange-City-Seattle-State-Washington-Country-United-States-of-America-US
« Last Edit: September 29, 2018, 03:46:29 PM by lhamo »

waltworks

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Re: Short Term Vacation Rental Property?
« Reply #9 on: September 29, 2018, 10:41:27 PM »
I'll flip the scenario on you - if you only want to be in Seattle for a few months a year, why do you want to own a place there? Why not rent when you want to be there, and own something where you'll be spending most of your time (or own nothing at all)?

I'd start by answering:
-Is your short term rental idea legal right now? Will it be in another year or two?
-Assuming 25-30% overhead for management and 25% vacancy (plus the usual PITI/capex/etc costs of owning your house), how much will you actually make? How much will you need to spend up front to make the place hotel-like enough to rent short term?
-How much equity do you have, and how much would you expect to make invested in boring index funds if you simply sold the house?
-Are the HI units actually rented for the prices quoted online? If so, for how many nights/year? Can you get the HOA to give you their reserve study? What will the tax situation look like (property taxes are INSANE in HI if you aren't a year-round resident)?

I don't want to rain on the parade here, but not "having numbers handy" is not a good sign. It appears that you are doing a sort of hand-waving calculation here, rather than digging down into what you'd actually spend/make and whether this would "through" off money sufficient to do what you want to do.

-W

clarkfan1979

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Re: Short Term Vacation Rental Property?
« Reply #10 on: September 30, 2018, 01:11:15 AM »
I'll flip the scenario on you - if you only want to be in Seattle for a few months a year, why do you want to own a place there? Why not rent when you want to be there, and own something where you'll be spending most of your time (or own nothing at all)?

I'd start by answering:
-Is your short term rental idea legal right now? Will it be in another year or two?
-Assuming 25-30% overhead for management and 25% vacancy (plus the usual PITI/capex/etc costs of owning your house), how much will you actually make? How much will you need to spend up front to make the place hotel-like enough to rent short term?
-How much equity do you have, and how much would you expect to make invested in boring index funds if you simply sold the house?
-Are the HI units actually rented for the prices quoted online? If so, for how many nights/year? Can you get the HOA to give you their reserve study? What will the tax situation look like (property taxes are INSANE in HI if you aren't a year-round resident)?

I don't want to rain on the parade here, but not "having numbers handy" is not a good sign. It appears that you are doing a sort of hand-waving calculation here, rather than digging down into what you'd actually spend/make and whether this would "through" off money sufficient to do what you want to do.

-W

It can be difficult to make money with the airbnb if you have to pay someone else to manage. It's a lot easier to make money when you are the one cleaning it in between stays.

I'm going to have to disagree with walk about Hawaii property taxes. Insane is a subject concept, so he could technically still be right.

I just bought a house for 603K on Kauai. Property taxes are $1,441/year. If I didn't claim it as my primary residence it would be $3500/year. If it's permitted as a legal vacation rental, property taxes might be as high as $5,000. I grew up in Lake County, IL were property taxes average 2.5%. The property taxes on a 603K house would be around $15,000/year. I would consider $15,000/year to be insane, not $5,000/year. However, that is just my opinion.

waltworks

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Re: Short Term Vacation Rental Property?
« Reply #11 on: September 30, 2018, 09:41:13 AM »
Yeah, my only experience is with taxes on Oahu (family have a house there and are always complaining about it, but I am guessing the house is worth like $3-4 million and they aren't full time residents). I'd defer to Clarkfan on that question. I do remember that it varies a lot between islands.

-W

clarkfan1979

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Re: Short Term Vacation Rental Property?
« Reply #12 on: September 30, 2018, 02:14:10 PM »
For various reasons, we have an enormous amount of equity in our house in Seattle and a low mortgage payment.  We're not far from our FIRE number, and would might actually be there if we sold the house and moved someplace cheaper, but we love Seattle and moving to a low cost of living area doesn't help us a ton because the mortgage/rent payment somewhere else would still be roughly equivalent to the existing mortgage in Seattle. 

One solution is to AirBnB the Seattle house part of the time (Airbnb rates are high in Seattle, and we have low mortgage so it would flow cash really well), and live somewhere else cheaper part of the time.  That would allow us to have to Seattle house throw off some cash part of the year.  Then do the same thing somewhere else.  Buy a place that flows some cash, so we could live in Seattle when we want (We love Seattle) and in the other place when we want. 

We were initially looking at places in the western US to stay reasonably close to family, but on a lark, I would looking at places in Hawaii and maybe found a fit!  (I realize Hawaii is also the western US).  I found a couple places with a condo unit for sale in a building that also had a condo for sale.  If you add up the mortgage, HOA fees, guesstimate on utilities, plus management fee, and a buffer, I get pretty close to the "double the mortgage rule."     On paper it works.

Talk me out of this.  Why is this a bad idea?

I think the sweet spot for airbnb.com is if you can build out a mother-in-law suite and rent out the main house at 50% occupancy. Get a permit to build out an extra large master bedroom with a bathroom and separate entrance. Do a wet bar that functions as a kitchenette. Avoid trying to do a full kitchen inside the house. It probably won't get approved by permitting. For Seattle you could try to go overboard with a full size outdoor kitchen which might be easier for permitting.

You will still have access to your main house 50% of the time, so you can still have friends and family over for parties and planned events. You live on-site so cleaning is not a big deal.


Telecaster

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Re: Short Term Vacation Rental Property?
« Reply #13 on: October 01, 2018, 08:47:53 AM »
I'll flip the scenario on you - if you only want to be in Seattle for a few months a year, why do you want to own a place there? Why not rent when you want to be there, and own something where you'll be spending most of your time (or own nothing at all)?

I'd start by answering:
-Is your short term rental idea legal right now? Will it be in another year or two?
-Assuming 25-30% overhead for management and 25% vacancy (plus the usual PITI/capex/etc costs of owning your house), how much will you actually make? How much will you need to spend up front to make the place hotel-like enough to rent short term?
-How much equity do you have, and how much would you expect to make invested in boring index funds if you simply sold the house?
-Are the HI units actually rented for the prices quoted online? If so, for how many nights/year? Can you get the HOA to give you their reserve study? What will the tax situation look like (property taxes are INSANE in HI if you aren't a year-round resident)?

I don't want to rain on the parade here, but not "having numbers handy" is not a good sign. It appears that you are doing a sort of hand-waving calculation here, rather than digging down into what you'd actually spend/make and whether this would "through" off money sufficient to do what you want to do.

-W

If we sold the Seattle house we'd net say, $600K in equity.  4% rule says that's $24K/year or $2/month.    That amount gets you a crappy one bedroom apartment in the 'burbs at best.  So we'd better off not selling and staying where we are. Again, we love Seattle, so we don't want to lock ourselves out. 

When I said I had numbers handy it was because I was on my phone.  Now I'm at my desk I can show a bit more work if you are interested.  Here's my methodology re: Hawaii, and keep in mind this is back of the envelope stage, we're not even close to putting an offer down, but it needs to work on the envelope before going any farther.   First, I look for a short term vacation rental condo.   Then I look to see if there is an equivalent condo for sale in the same building (pretty common).   Very often, management companies have calendars where you can see the rental rates, and dates when the condo is available, and often the calendar even looks back, so you can see occupancy in the past. 

For the most recent condo I looked at, the occupancy rate of the comp condo for the past four months and the next four months is over 85%.  After that, it drops down to about 50%, but presumably there is time for it to be booked.   For this study, I assumed 65% occupancy.   Sale prices is $500K (a bit higher, but that number looks a bit high based on comps), furnished (common in Hawaii), with new appliances.  Downpayment would be $100,000.   Here are my estimated expenses: 


Mortgage   $27,571.20
HOA         $8,604.00
Taxes       $1,937.00
Fee (.20)*   $14,400.00
Utilities    $2,400.00
Total        $54,912.20


*explained below. 



Now, income.  Assuming 65% occupancy at $300/night.  And there is typically a $200 cleaning fee per stay, so assuming three stays per month.  That's fair to add back in (I think), because the assumption is the 20% management fee includes cleaning. 

Rental   $72,000.00
Cleaning fee   $7,200.00
Total            $79,200.00


Subtract the expenses and the numbers aren't crazy on the back of the envelope.    Like I say, I'm just starting to research this, trying to figure out what I don't know.  Thanks all. 


cchrissyy

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Re: Short Term Vacation Rental Property?
« Reply #14 on: October 01, 2018, 09:57:17 AM »
about taxes
https://www.hawaiiliving.com/blog/tax-obligation-rental-income/

about if short term rental is even legal in hawaii
https://www.hawaiibusiness.com/lodgers-and-tax-dodgers/

365 nights  x  60% occupancy x  $300  I get  $65,700
I think those are over-optimistic. But even if you're right, FYI there might be a math error on your back of napkin bc that's not $72k.
edit - I see you wrote 65%

also, I don't know if your assumption that the management fee includes cleaning services and you can pocket the cleaning fee as more income is truly how that works. maybe the management companies charge you per cleaning as well.

also you need to add an expense row for one-time total furnishing and then for ongoing maintenance expenses.  I've done the vacation rental thing before and it's true, something breaks or goes missing almost every time. Nothing crazy, just, it adds up.

the last line item you're not including is the impact, if any, on your personal taxes.
« Last Edit: October 01, 2018, 10:01:54 AM by cchrissyy »

Kierun

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Re: Short Term Vacation Rental Property?
« Reply #15 on: October 01, 2018, 11:23:42 AM »
Now, income.  Assuming 65% occupancy at $300/night.  And there is typically a $200 cleaning fee per stay, so assuming three stays per month.  That's fair to add back in (I think), because the assumption is the 20% management fee includes cleaning. 

Rental   $72,000.00
Cleaning fee   $7,200.00
Total            $79,200.00


Subtract the expenses and the numbers aren't crazy on the back of the envelope.    Like I say, I'm just starting to research this, trying to figure out what I don't know.  Thanks all.
GET ~ $3,600
TAT ~ $8,100
Oahu surcharge (if rental on Oahu) ~ $400

$79,200 - $12,100 = $67,100

waltworks

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Re: Short Term Vacation Rental Property?
« Reply #16 on: October 01, 2018, 03:27:56 PM »
You are extremely naive about how much management will cost for a vacation rental. I would estimate 35-40% at the LOW end. Around here (ski resort) it's not uncommon for the management fee to be 50%.

And no, you are not going to keep any cleaning fees they charge.

-W

tralfamadorian

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Re: Short Term Vacation Rental Property?
« Reply #17 on: October 01, 2018, 03:32:32 PM »
Have you confirmed the 20% management fee or is that an estimate? When I looked at short term rental properties in a popular vacation area, it was 45-65%

Telecaster

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Re: Short Term Vacation Rental Property?
« Reply #18 on: October 02, 2018, 07:47:41 PM »

GET ~ $3,600
TAT ~ $8,100
Oahu surcharge (if rental on Oahu) ~ $400

$79,200 - $12,100 = $67,100

Thank you sir, that changes things quite a bit. 

jodelino

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Re: Short Term Vacation Rental Property?
« Reply #19 on: October 02, 2018, 08:41:59 PM »
I own a vacation rental and it works well for me, but I think your occupancy projections might be a bit rosy, especially for the first few years before repeat customers are established, and that you are overlooking many small expenses, such as:

Deduct about 3% from your revenue for credit card fees. Almost all of your rent will be paid with a credit card. I have a vacation rental that I rent both through VRBO and independently, invoicing through PayPal, and both take about 3%.

Licenses in my city range from $100 to $500 depending on the zoning of your rental.

Listing fees for websites or other advertising costs can add up.

Bedding and towels need to be high-quality and replaced often.

Major appliances, such as fridge and washer/dryer may need to be replaced more often than they are when under your care at home (and instantly if you have guests onsite, which means you won't have time to nurse along an aging appliance or shop around for the best replacement deals).

I'd recommend renting out your Seattle house and seeing how it goes before you buy a second vacation rental property.








Telecaster

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Re: Short Term Vacation Rental Property?
« Reply #20 on: October 02, 2018, 10:18:32 PM »
Have you confirmed the 20% management fee or is that an estimate? When I looked at short term rental properties in a popular vacation area, it was 45-65%

Depends on what the management company does.  My mother has a condo in a fancy area with a ski resort.  The management company handles advertising, booking, cleaning, light maintenance, provides firewood, and pays the local taxes.  Fee is 30%.  I'm remotely managing a long term rental right now.  There are expenses, but not a management fee. 


Cubert

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Re: Short Term Vacation Rental Property?
« Reply #21 on: October 03, 2018, 05:19:49 AM »
ALWAYS run the numbers. I prefer the Cash on Cash method to figure my return on invested dollars. With our Airbnb, there wound up being about double the upfront "preparation" expense vs. what I'd planned for. Good news is the place has done gangbusters in year one, yielding almost 18% return.

Let me know if you'd like to see the spreadsheet I use. Good luck!

jodelino

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Re: Short Term Vacation Rental Property?
« Reply #22 on: October 03, 2018, 09:52:03 AM »
A couple more considerations:

I would not want to rent out my primary home as a vacation rental because removing/storing/locking all personal items, clothing, paperwork, valuables, pantry items, etc. would be too much of a hassle. Try it once before going on vacation, and list your home for rental for your planned vacation period only to see if it's worth it to you. (You could try listing your home on HomeExchange.com, for lower-expectation travelers than the ones who are paying actual cash and then reviewing your property).

A long-term caution: if your retirement financial security depends on renting out your primary home for a good part of the year, what happens if one of you has an illness or injury where you would want to be in your primary home, near your doctors and community, for a year or two without interruption?

A plus to your plan, tax-wise, I think (though I'm not an accountant), is that you might be able to write off travel from your primary residence (Seattle) to the secondary one (eg Hawaii) against rent revenue as trips to manage the property, assuming you will do chores, repairs, purchasing, meeting with property managers, etc. when you are in Hawaii.

Also, I think someone suggested that the taxes you collect are deducted from the rents you receive, but, at least in my town, the substantial local hotel taxes are charged to the traveller, on top of the rent, and I collect and remit them on a monthly basis to the city and state (losing a bit, because they are paid with a credit card, so I receive 97% of the taxes, but then pay 100% of the taxes with a check).