Author Topic: Vacation rental vs. Residential rental  (Read 5289 times)

retired?

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Vacation rental vs. Residential rental
« on: October 14, 2014, 07:48:59 AM »
I own one property that is rented out on an annual basis.

I am considering purchasing a property about 90 miles from me that is walking distance to the beach.  A few reasons I am leaning this way:

 - concerned about squatters or deadbeats.  Tenants in other house are very stable and I am not concerned with that one.  But, I have heard a few stories about renters putting up first/last and then not paying and owner having a lot of hassle getting them out.  Other ways to weed out bad tenants other than credit score?

 - could use on weekends or in the summer.  I understand the 14-day usage for deducting full expenses.

 - can buy a decent beach house for less than a decent house near my primary home.

I would use a mgt company for the day-to-day and perhaps use vrbo.com for additional advertising.

Pros/cons?  What are the different or additional considerations for owning a short-term (weekend, weekly, monthly) property in a beach area?


thebeachbum

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Re: Vacation rental vs. Residential rental
« Reply #1 on: October 14, 2014, 09:54:09 AM »
First of all, there are a lot of things you can do to screen tenets besides credit score.
-application
-credit check
-background check
-call previous rental references
-require a large deposit
-drive by their current residence
-call employer
Generally squatters and deadbeats, have been/are in other areas of their lives, avoid any red flags that come up in any of these areas.

Some other thoughts
-I property that is rented for a year at a time is going to be a much steadier form of cash-flow and income.
-Beach properties are very seasonal (ie rent out the weeks in the summer very easily for a premium, have a really hard time renting out the rest of the year)
-Property management for a residential rental is usually 10% for a vacation its anywhere from 30%-60% depending on the area. due to the weekly turnover, cleaning and stocking.
-people tend to party more/harder on vacation and since they don't live there don't care about damage as much.
-with residential rentals you have 1 tenet per year that you get to pick vs many tenets per year that you have little if any pick
-Everyone needs somewhere to live making house and rent payments one of the last things to give up in economic downturn vs Luxury items (ie vacations) are the first to go in economic downturn

retired?

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Re: Vacation rental vs. Residential rental
« Reply #2 on: October 14, 2014, 10:58:43 AM »
First of all, there are a lot of things you can do to screen tenets besides credit score.
-application
-credit check
-background check
-call previous rental references
-require a large deposit
-drive by their current residence
-call employer
Generally squatters and deadbeats, have been/are in other areas of their lives, avoid any red flags that come up in any of these areas.

Some other thoughts
-I property that is rented for a year at a time is going to be a much steadier form of cash-flow and income.
-Beach properties are very seasonal (ie rent out the weeks in the summer very easily for a premium, have a really hard time renting out the rest of the year)
-Property management for a residential rental is usually 10% for a vacation its anywhere from 30%-60% depending on the area. due to the weekly turnover, cleaning and stocking.
-people tend to party more/harder on vacation and since they don't live there don't care about damage as much.
-with residential rentals you have 1 tenet per year that you get to pick vs many tenets per year that you have little if any pick
-Everyone needs somewhere to live making house and rent payments one of the last things to give up in economic downturn vs Luxury items (ie vacations) are the first to go in economic downturn


Thanks for the screening tips.  Are there any guidelines to avoid being accused of discrimination?  I recall the first time I rented an apartment and asking "so, what make up of the people that live here?".  Office rep explained she couldn't really answer that and it was best to just walk through during the weekend.  i.e. anything she said might be construed as discrimination against one group or another.  "It's a young crowd" is discriminating against older.

I assume calling employer is simply to verify employment.  Can one ask "is Mr. Jones a reliable employee?"  I would bet many employers will only verify employment and not make comments.

Didn't know fees were that high for vaca......was thinking 25-35%.  Will have to verify.  With residential, aside from initial advertising, I would manage myself.  I've heard the advertising can cost 1 months worth of rent.  To actually manage (i.e. respond to issues, etc.) can be only 10%.

What info is on the application that could expose a poor lender?  I didn't use one with other house since the tenants are old family friends.  Thanks, again.

johnhenry

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Re: Vacation rental vs. Residential rental
« Reply #3 on: October 14, 2014, 01:01:55 PM »
I own one property that is rented out on an annual basis.

I am considering purchasing a property about 90 miles from me that is walking distance to the beach.  A few reasons I am leaning this way:

 - concerned about squatters or deadbeats.  Tenants in other house are very stable and I am not concerned with that one.  But, I have heard a few stories about renters putting up first/last and then not paying and owner having a lot of hassle getting them out.  Other ways to weed out bad tenants other than credit score?

 - could use on weekends or in the summer.  I understand the 14-day usage for deducting full expenses.

 - can buy a decent beach house for less than a decent house near my primary home.

I would use a mgt company for the day-to-day and perhaps use vrbo.com for additional advertising.

Pros/cons?  What are the different or additional considerations for owning a short-term (weekend, weekly, monthly) property in a beach area?

How does your existing rental perform??  What's it's value, what's the rent, and how much does it make you each year?

I've never seen a short-term/vacation rental that looked like a good investment.  Usually the cost is just too high to produce the necessary return.  The other downside is they require much more marketing and administrative cost than a place that rents for a year at a time.  Do you care to share the numbers on the beach property?

retired?

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Re: Vacation rental vs. Residential rental
« Reply #4 on: October 14, 2014, 04:05:30 PM »
Residential rental - 1600/month, taxes+interest+insurance = 2500+7800+1000 = 11300 = 942/month.  I assumed about 300/month maintenance....not knowing what could occur.

Maintenance (over three years) has been a little higher than expected due to replacing A/C (3600), replacing water heater (700), replacing garage door (600), water leak in secondary bathroom (~500, plumber and wall repair), new dishwasher (wasn't completely dead, but....500), new kitchen faucet (140). 

With beach home, price would be around 200-250k.  3BR/2BA and around 1200-1400 sf.  Haven't decided how to finance (cash, small loan, large loan).  Right now am collecting data.  A firm we used only charges 15% of rent for short stays and 20% for month-long stays....that is out of net.  Renter pays:  rent+local tax+pet fee if any+insurance if desired.  PM takes 15 or 20% of "rent".  Rent would be around 1600/week late Spring through Summer.  No clue on how often it would be occupied.

Prop taxes have been steady around 3600.  Insurance would be around $1-2k.  Have to pin down.

I place a certain amount of value on being able to use it when not rented.  e.g. we rent a beach house almost every year.  I'd add perhaps $1k in value for using it on empty weekends.

SnackDog

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Re: Vacation rental vs. Residential rental
« Reply #5 on: October 14, 2014, 05:09:38 PM »
Assume about 30% occupancy on the vacation rental and relatively high costs, as explained. You will be paying management fees, furnishing the place, paying all utilities plus cable and internet, etc.  I would not necessarily agree with the idea that short-term renters are more destructive than long-term.  Your liability exposure may be higher with the  larger number of renters, so bear that in mind.

Do it only if you can easily afford it on a 100% basis and are willing to incur all the costs and retirement deferral.  Then, any income is gravy which defrays cost. 

retired?

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Re: Vacation rental vs. Residential rental
« Reply #6 on: October 15, 2014, 08:07:02 AM »
Assume about 30% occupancy on the vacation rental and relatively high costs, as explained. You will be paying management fees, furnishing the place, paying all utilities plus cable and internet, etc.  I would not necessarily agree with the idea that short-term renters are more destructive than long-term.  Your liability exposure may be higher with the  larger number of renters, so bear that in mind.

Do it only if you can easily afford it on a 100% basis and are willing to incur all the costs and retirement deferral.  Then, any income is gravy which defrays cost. 

Thanks for the occupancy rate guideline.  The mgt company will be able to provide some data as well.  By 100% basis you mean as if it were not rented at all?  Certainly the conservative assumption and a good boundary.  RE retirement delay - we may consider "retiring" to the home after selling our more expensive primary home.  I'd have to compare to the lost investment returns.

UPDATE:  re expenses from the mgt company, I received some clarification.  The 85/15 split is after:

 - Linens
 - Exit Cleaning
 - Process Reservation Fee
 - 15% Hotel Motel Tax
 - Damage Insurance  (include rather than ask for a security deposit)

I understand renters are going to decide based on total cost.  Total rent could be 1600.  Deducting these five items would bring that down to about 1100 to split with the mgt company.  i.e. 935 for me or about 60% of rent.  I wouldn't say the other 40% is mgt fee since they don't get that, but presumably they make $$ off the cleaning, linens and insurance.

Thanks, guys/gals.  Assuming the 30% occupancy and 1400/week for a year-round, and keeping 60% of that results in $13k in rent.  From that, subtract off utilities, property tax and insurance and could be at 5k.....perhaps depreciation would result in no income tax.  AND, that is paying cash.

Starting to think I might only want to do it if I were close enough to "manage" it myself.

MKinVA

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Re: Vacation rental vs. Residential rental
« Reply #7 on: October 15, 2014, 03:56:49 PM »
Running a vacation rental is a lot of work. Are you going to run down there every week to clean between visitors? Provide them with linens? Fix things on an emergency basis? Also, you need to figure in the cost of replacing things that are stolen, broken, or lost. We have a vacation rental I have enjoyed using over the last ten years, I wouldn't do it again. Every time I go down, I spend time and money replacing things. Last time, a chair cushion was missing (someone probably took it to the beach), blender gone, can opener gone, window blinds broken, bicycle wheel bent, etc. you can count on replacing bed pillows, blankets, every year, at least. We had a wedding party rent our place and the groomsmen smashed the built in microwave, busted  a stair banister, and pretty much marked up every wall with dings and dirt marks. Thankfully, they paid for the damages and we had several days between visitors to fix everything.

retired?

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Re: Vacation rental vs. Residential rental
« Reply #8 on: October 17, 2014, 11:52:27 AM »
Running a vacation rental is a lot of work. Are you going to run down there every week to clean between visitors? Provide them with linens? Fix things on an emergency basis? Also, you need to figure in the cost of replacing things that are stolen, broken, or lost. We have a vacation rental I have enjoyed using over the last ten years, I wouldn't do it again. Every time I go down, I spend time and money replacing things. Last time, a chair cushion was missing (someone probably took it to the beach), blender gone, can opener gone, window blinds broken, bicycle wheel bent, etc. you can count on replacing bed pillows, blankets, every year, at least. We had a wedding party rent our place and the groomsmen smashed the built in microwave, busted  a stair banister, and pretty much marked up every wall with dings and dirt marks. Thankfully, they paid for the damages and we had several days between visitors to fix everything.

No.  I said Starting to think I might only want to do it if I were close enough to "manage" it myself.  And, I am not close enough.  Your experience doesn't encourage me....thanks for sharing.  I have steered towards local houses in the 150 range.  Won't use for vaca, but appear easier to manage and more profitable.