Vacation Rental vs Debt Payoff vs Retirement Investment

[blahblahblah]

Was recently presented with an opportunity that initially seemed reckless but is perhaps a wise move long term, would like some thoughts on it.

Currently saving 20% for retirement and paying minimum on home.  Debt snowball is picking up momentum and in position to have another 20% to allocate in coming months.  The options being considered are

1) Investing in a vacation rental that takes 25% of monthly income for mortgage, property insurance, taxes, utilities and HOA.  This is located within driving distance in an area that brings us joy and we would be happy to spend any non rented weekend there and at least 1 vacation week a year.  Comparable places rent for $150-$250/night and are in moderate to high demand 6 months of the year.  Booking the rental 120 nights per year at $150/night covers monthly expenses + small savings.

2) Pay down the mortgage

3) Invest in retirement/stock market

Looking forward to your responses.

[redbirdfan]

Seeking a bit more information.  Does the 25% include the cost of repairs and a cleaning service between rentals?  Make sure you take into account any increase in taxes for the operation of a business (if applicable).  Make sure you are factoring in mortgage interest rates for an investment property (if applicable).  I would strongly recommend an umbrella insurance policy if you will be renting out the property.  You don't want to be personally liable if a renter slips and falls on a step.  Will this investment require a down payment from you?  If so, what would that do to your EF?  Are prices appreciating in the area?  Will you be disappointed if the rents don't cover monthly expenses?  Do you have any plans to relocate any time soon? 

Options 2 and 3 are easy and 100% passive.  Option 1 could have more upside but it will require more work on your part.   



     

[Blonde Lawyer]

Following as we are also considering investing in a vacation home rental property that we would rent out on a weekly basis at a price that would cover all carrying costs.  We would be flying distance or all day driving distance though.  It's the only way to ensure year round rental at high rates.

[waltworks]

Just FYI, property management on a vacation rental will run ~50% of gross. Yes, 50%. So cut your income number for the property in half right up front.

You will also have loads of vacancies even during prime season (last minute cancellations, random gaps, etc) for all sorts of reasons.

So bottom line, I'd assume you'll lose money, probably a significant amount of money. Might be worth it, might not. How much does it cost to rent a place for a week a year and just do your vacation in someone else's money pit?

-W

[blahblahblah]

Seeking a bit more information.  Does the 25% include the cost of repairs and a cleaning service between rentals?  Make sure you take into account any increase in taxes for the operation of a business (if applicable).  Make sure you are factoring in mortgage interest rates for an investment property (if applicable).  I would strongly recommend an umbrella insurance policy if you will be renting out the property.  You don't want to be personally liable if a renter slips and falls on a step.  Will this investment require a down payment from you?  If so, what would that do to your EF?  Are prices appreciating in the area?  Will you be disappointed if the rents don't cover monthly expenses?  Do you have any plans to relocate any time soon? 

Options 2 and 3 are easy and 100% passive.  Option 1 could have more upside but it will require more work on your part.   



   

Good questions, certainly need to look into this more.  My understanding is that the HOA fee covers property management and basic repairs as it is within a resort area but that I would be responsible for major repairs from the studs in (truly not sure what to budget for this, input welcome).  Umbrella insurance factored in with vague Google quote.   Down payment would come from an investment that I am not happy with, prospectus is only for 2-3% annual growth (didn't make the best choice there, poorly informed decision) and would leave comfortable EF.  Prices are going up and I think 120 nights/year rental is reasonable as it's in a popular  ski town.  Don't plan to relocate and don't mind if rent doesn't completely cover cost.  Truthfully hope to get to a point in next few years where renting it would optional (by investing income from the vacation rental in a single family home in the metro area to move into and then renting our current metro area condo for the income instead, complete rookie here though!).

I'm willing to work!  Not in a rush to make a decision as there seems to be properties meeting what we think we're looking for fairly often.  Most are under contract within a week of listing, further suggesting to me this is a good long term investment.

[waltworks]

If the HOA covers property management you have found some sort of miracle condo.

I am guessing you are looking at a condo-tel sort of setup. The HOA does indeed "cover" management for most of those - provided you keep your unit up to standard ($$$) to remain in the rental pool and surrender 35-50% of your gross rental income to the hotel.

Get WAY more details. I live in Park City and rich people do indeed buy ski condos all the time - but they don't make money on them. Quite the opposite, but who cares if you're a Russian billionaire? Properties being bought up in a resort community is NOT an indication that you'll do well renting a place out.

-W

[blahblahblah]

Walt- appreciate the insight, thanks.