Is Owning a Vacation Rental a Good Idea?
I suppose the answer to this is complicated and really depends on one’s goals with the vacation rental, how much work one wants to put into the rental process and the cost / benefit analysis of purchase price and rental income.
I will use my vacation rental as an example. We own a vacation rental on the Big Island of Hawaii at the upscale Mauna Lani resort. We purchased it in 2014 when prices were still somewhat depressed from the great recession. We put down 30% and have a second home mortgage with rate less than 4% for the rest. We have large HOA (about 1400 per month) due to the fact that in Hawaii the HOA takes care of all exterior elements including landscaping, exterior paint, roofing, common areas such as fitness center, pool, beach club etc. But considering we are not on island for 10 months of the year, we are happy to pay someone to manage all of that for us.
We advertise our home on Vrbo and Airbnb. Those websites have changed a lot over the years and charge the renter more than they used to but people are still using them. I have seen a huge shift in the past few years away from Vrbo and much more to Airbnb. A general rule of thumb is that foreigners will use Airbnb as will younger (millennials and younger) Americans but baby boomers and some genX will use Vrbo. It has been fascinating to watch this evolution. We also do have quite a few return renters that will just contact me directly after their first year.
The big question that one has to answer which will directly affect if you lose money on the vacation rental itself or break even (assuming you have a mortgage), is how involved do you want to be with the management of your rental? First thing you need to look at is the IRS code – https://www.irs.gov/taxtopics/tc415 and then discuss with your accountant. You must take the rules of this very seriously. There are a few more issues to discuss with your accountant as enumerated here: https://www.marketwatch.com/story/own-a-vacation-home-heres-how-the-new-tax-law-affects-you-2018-12-03 How much you can write off on your taxes and the passive activity loss is directly affected by your activity.
So what that means is that for the best tax benefit, you need to actively manage your vacation rental – that means taking the bookings, communicating with guests, keeping maintenance log, and doing as much of the work yourself at least to get up to the 750 hours per year. If you have a booking agency deal with your guests, you are not actively managing your property and while you may have some tax advantage, it is no where near where it would be if you did it yourself.
Another large factor is just income vs expenses. Before purchasing a vacation rental, I would check occupancy rates pretty carefully. Can the home be rented all year long? Are there seasonal adjustments in rates and what are the rates? Does the number of nights rented per year times rate cover your expected expenses? What about the weather? We picked our location on the Big Island partly because of its very strong rental history and the consistent weather. It is always in demand as there is no rainy season, no mud season etc. We are also rarely affected by flight delays as there is no snow coming this way. As a result, we enjoy high rates of occupancy.
But to be in demand as a vacation rental, one has to maintain your home carefully. Things cannot be broken, everything should be sparkling clean, it should be well equipped. We regularly upgrade and repair elements in our home so it is pristine. As someone who manages her own rental, I watch the reviews carefully and strive for perfect reviews every time. The only way to achieve that is pay attention and make sure you visit your place. In my opinion, anyone who is self managing needs to visit once a quarter at least.
Let’s take money out of the equation though. What do you get for a vacation rental? For us, we are happy to meet up with our family members who live apart from us in a place that has years of happy memories. Even though we enjoy travelling to new places too, there is something special about everyone knowing we are going to favorite place that is stress free – knowing what to expect has a lot to do with the lack of stress.
In the end, everyone needs to take a look at the cost benefit analysis and weigh the work against financial impact versus your happiness that you get from enjoying your second home.
Written by: Liz Nitz, Windermere Real Estate Downtown Bozeman