Newbie question: vacation rental?

[tammyLav]

Dh and I would like to supplement retirement investments with a possible rental income property, but we are new to the game and just gathering information and researching options at the moment. Up to this point, we have been thinking of moving to a house that we can find space for a rental unit in the basement or something like that (we are easily commutable distance from the city), but a new possibility has come up and I was hoping to get your thoughts.

We have a friend who has a 2 vacation rentals on a lake in a popular ski area. He has shared his business plan and profit margins with us, and I am very impressed at the ROI he seems to be getting out of his properties.  According to his records, his units are rented more often than the 30% number I have seen discussed elsewhere on the board. Especially in summer and winter, he said things are booked nearly every week. His business model was used on the first property, and then replicated on the second. Profits have far exceeded his projections thus far by wide margins. I have not gone into detail in looking at his business plan yet, but would naturally do that in the coming weeks as part of my information-gathering on the topic.

As I have literally nobody else irl to ask for secondary opinions on this, I immediately decided to ask the most knowledgeable folks I know of... the mustacians :) (thank you!) I'm hoping you can help me clarify  my thoughts on this.

I will give, as an example, a specific lake-front rental property my friend and I were discussing (as a side note, he has no financial interest in us investing in this property, so think he was pretty objective in the conversation... initial market research seems to support the numbers he was suggesting)

• -Price: approx 200k for 3 bdrm, which can then be converted to a 4 bdrm eventually (dh would do all home improvements)
  
  -We are thinking about investing between 30-50k between closing, down payment & reno up front, and would be looking to have it up and rentable by the summer season
  
  -Target market: vacationers from the city and surrounding areas
  
  -Rental price (based on what my friend charges for his units, and some market research) approx 2k/ week
  
  -Rental across 3 seasons: skiing, summer lakefront, & fall foliage/vineyard tours. Some rentals in spring, especially later in the season.
  
  -at 100% vacancy, we can still cover the mortgage cost comfortably
  
  - as a side note, purchasing a house big enough to create a rental property in the area where I live will be about 4-500k, so there is a steeper hill to climb to get into my local market

The property in question is about 2.5 hours away, so close enough to go if there is a problem, but we would probably be looking into a service for cleaning, and then otherwise manage things ourselves.

So what are your thoughts on this? It would seem from reading other threads on the topic, that I should stay away from vacation rentals, but then I see a real example, replicated on both properties, of someone who is making it work well. On the other hand, this would be our first income property purchase, and I don't want to get sucked into a money pit. I am trying to view this with a skeptic's eye. Are there more questions I should be asking but am not? I can, and will, read a stack of books on the topic, but I know nothing beats real world experience.

Thanks for your help!

[MKinVA]

What are the monthly expenses? HOA? Lake access fees? Also, you will be paying all utilities on a vacation rental, so figure those in, too. Plus find out what the rental company's take will be. Localities sometimes, often, tax you as a hotel. So there may be a tax per night's rent to pay to the town. We pay a tax to our town on business equipment, in other words, the effing beds! Most localities have found a way to tax you out of making money on vacation rentals.

[tammyLav]

Oh no, tax on beds? That's terrible. There are no HOA fees. I need to look into the particulars like this more, because I don't know the other answers to your questions, but this gives me a place to start.

[ioseftavi]

Someone in my close family owns a significant number of vacation rentals (double digits).

Please remember that doing vacation rentals means - if you want to avoid huge vacancy expense - you will become a part time vacation rental real-estate agent.  Instead of a normal rental, where you might be turning units when tenants move out once every 12-48 months, perhaps, you will be turning units about 10-30 times per year.  Yes, even if you outsource cleaning, etc, you're going to find that dealing with your many different short-term customers takes up plenty of time.

Having watched this person self-manage their rental properties (despite the fact that they outsource cleaning, maintenance, and repair) makes me want to shank myself.  I cannot imagine a more hands-on form of real estate ownership. 

I would not do this, no matter how the numbers look.  Most vacation rentals are money pits.  In the event that this property is not a money pit, it is still likely to demand a surprisingly large amount of time from you.

[Villanelle]

If you outsource cleaning, how will you handle turning over the keys?  My only vacation rental experience is VRBO, Homeaway, etc., and someone has always met us to give us the keys and walk through the property with us, and then met us again to collect keys.  How will you market the property?  (You friend will likely have some insight on this.)  Make sure you consider those fees as well.  Likewise, make sure you consider homeowners insurance and probably an umbrella policy if you don't already have one. 

[ShoulderThingThatGoesUp]

Why not live in vacationland and rent out your easy-commute house?

[jodelino]

I cannot say this with complete confidence, not knowing the details of your local market and the property you are interested in, but I think buying a vacation rental property and renting it out makes more sense as a way of partially funding your purchase of a second home that your family would also enjoy in the off-season or during vacant weeks, rather than as a money-making scheme.

My experience is limited to less than a year of managing a vacation rental property that I inherited, fully paid-for, nicely furnished, and near my home. I am covering my expenses and making some income, but if my expenses included a mortgage I would be very, very nervous.

Here are some expenses to consider: renters expect multiple nice TVs with full cable, and working wi-fi. Families in a lake house = lots of cleaning, lost towels, water damage on furniture (I rent only to couples without kids and there's no water nearby). MY VRBO listing package costs about $1,600/year.

I pay someone to help me with cleaning/managing, but we live nearby and can be there fast. Management companies charge about 30% and expect you to sign an exclusive contract with them stating that you will not rent it yourself, but that they will do all the renting.

Is the property in New Jersey? Property taxes there are very high.

A vacation property depends on a good economy and the popularity of your region. If the economy tanks, or your lake falls out of fashion, you might be in trouble.

Think carefully about this. You might try helping your friend with turnover between renters sometime so that you can see what's involved.

Good luck!

[4berrymom]

We own a vacation rental property in Garrett County, Maryland.  It's a 4 season type rental area with ski slopes for winter, mud in the spring, the lake in the summer and hiking / leaf peeping in the fall. 

House access - We have a programmable keypad that we use for access, so we don't have to bother with keys.  Then, if 2 or 3 families are renting, they don't have to worry about who has the keys.  We change the code regularly.  There are also WiFi enabled keypads you can use.

Rental agency - We rent on VRBO and Homeaway and I send out contracts and use the homeaway lease feature.  Previously, I used paypal and sent out leases myself.  I hated paying 8% and/or a per lease processing fee to someone else.  $1000 / year

County registration fee as a transient vacation rental and health department fee - $350 / 2 years plus annual $70 well check

Maintenance / cleaning - We have a local maintenance guy we can call; he also plows our road, so he is basically in town all winter and typically in summer also.    For cleaning, we started with an agency for the first year and got to know the cleaning company then switched to going directly to them instead of using the agency.  They keep a good eye on the place, too.

Unexpected costs - FUEL!  Our furnace burns kerosene and is EXPENSIVE!  Our first winter it was about $300 / month for weekends only.  Definitely not part of our budgeting / cash flow estimations!  We installed a wireless thermostat, so now we can keep a better eye on the local temperature and ensure nobody forgot to turn it off after their lease was up and the place had been cleaned.  But it's still more than double what we pay for where we live full time!

Snow plowing - again, beyond our wildest budget line imaginings.  Our first winter it snowed maybe 20 feet or so??  The house is on a dirt road with other houses, but both the road and the driveway have to stay plowed and keep cinders on it in winter since it is north-facing (ice).

CABLE / INTERNET - at our personal home, we cut the cable cord over 2 years ago to become more Mustachian.  We pay < $80 / month for very high speed internet (we are a household of 7 people with an au pair).  But since this is a vacation rental, I haven't felt comfortable going purely Netflix since some people are more "dependent" on their TV than we are.  Even with negotiating every year for a better rate, we still pay almost $180 / month for internet and cable TV.  That's a big $$ item to affect cash flow.

Replacement towels / furniture / bedding - it's been fairly consistent for the last 4.5 years, but we estimate about $1500 year for an annual furnace inspection, replacing sheets/towels (sleeps 18 people), broken dishes, paper products, etc and another $600 for random things (replacing DVDs, new alarm clocks, light bulbs, new outdoor chairs for firepit). 

Occupancy rate - since it's transient vacation rentals from 2 to 7 days, we have never had more than a 50% occupancy rate.  ranging between 135 and 180 days per year.  And up to 50 separate contracts.

Having said that, we also enjoy it for a ski weekend and a partial week or two during summer or fall, so it's been a great investment for us.  And our plan is long-term.  But it took 4 years and additional $50k investment (increasing from 3 bedrooms to 5 bedrooms) to see a positive cash flow.

Good luck with your decision!!