Vacation Real Estate Help?

[Greglong]

My wife and I want to start looking for a vacation house which will be rented out most weeks but we will also use it for our 2 week family vacation home. Are there rules about how many weeks we just rent the house in relation to how many weeks we personally use it?

We are just starting to look and hoping some people here maybe able to offer advice, tips, or even pitfalls.

1) While cash is king, we were told a low fixed rate mortgage may be ideal as the interest can be deducted.
2) We will hire a local company to maintain the house and sadly that's an expense we won't be able to avoid.
3) Should we form a company like an LLC to purchase the home to help us with liability issues?
4) Are there any tax credits or mortgage advantages being offered to a first time rental buyer?
5) My brother is very handy and works in home construction, if we let his family join ours on vacation (which we planned to do anyway), he will help me with any repairs At cost. Does fixing up a home help the market or potential rental price in as significant of a way as if someone were flipping a home, or is it often a a waste to put too much money into a rental property?

I will stop with the questions for now and ask if anyone can help with some of these issues, maybe all, or maybe something I didn't list here but should have. Thank you.
Greg

[Fishindude77]

We've had a lake home for about five years now. Talked about it, but have not rented it out yet. We're a little uncomfortable with strangers occupying the place, having to stash away our personal things somewhere locked up, etc.

I agree with having local folks do the upkeep and maintenance. Folks had a lake home when we were kids and it seemed like all we ever did was go there and help my dad do work on the place. I decided, if I couldn't afford to hire out the upkeep, I couldn't afford to own it. We've got a lawn guy, someone to put the docks and boat lifts in, a firewood guy, someone to take care of and store the boats, snow plowing guy, someone to maintain the sprinklers, someone to do weekly checks when we aren't there, etc. Nice to know all that stuff gets taken care of, and have met some great people in those lines of work. Those people will keep an eye on things for you and are also real handy to point you in the right direction when you need something.

Taxes can be higher than heck on a second home, as you won't get the mortgage exemption like you would on a primary residence, so check that out so you don't get surprised. Some people cheat on that and list the spouse as owner and their primary residence, but that is certainly not legal.

You know your family better than me, but I'm always leery about trading goods and services, etc. Someone can easily feel like they came out short on a deal, or feel they are entitled to more than you do, and it can really screw up a relationship. We just hire out the remodel work, so when we go to the lake it's goof off and relax time.

Don't cut yourself too tight on the budget, as there will be costs that you haven't thought about and upkeep and repair is just like your primary home, maybe more.

[Nika]

Good idea unless you are basing your financial plans and projections on assumptions that it will be rented out for any amount of time.

Renting it out would be great, but I certainly would not COUNT on that, and only treat that income as "extra".

[riverwed070707]

My wife and I want to start looking for a vacation house which will be rented out most weeks but we will also use it for our 2 week family vacation home. Are there rules about how many weeks we just rent the house in relation to how many weeks we personally use it?

We are just starting to look and hoping some people here maybe able to offer advice, tips, or even pitfalls.

1) While cash is king, we were told a low fixed rate mortgage may be ideal as the interest can be deducted. If you're operating it as a business rental the mortgage can be deducted, as can anything you put in for repairs, etc; however, the deduction is never going to be greater than the amount you spend in interest on a mortgage. If you can afford to pay in cash, do so.
2) We will hire a local company to maintain the house and sadly that's an expense we won't be able to avoid.
3) Should we form a company like an LLC to purchase the home to help us with liability issues?Its a good idea. This will protect your personal assets (house, cash, etc) should anyone decide to sue you for any reason or if the home goes into foreclosure
4) Are there any tax credits or mortgage advantages being offered to a first time rental buyer?No
5) My brother is very handy and works in home construction, if we let his family join ours on vacation (which we planned to do anyway), he will help me with any repairs At cost. Does fixing up a home help the market or potential rental price in as significant of a way as if someone were flipping a home, or is it often a a waste to put too much money into a rental property?This is a pretty generalized question. Guess it depends on the condition of the house when you buy it. I wouldn't put a bunch of money in up front. you can always make upgrades later. Assuming you buy in a desirable vacation location, if you price it right, it will rent. Making upgrades may get you a bit more for rent but its doubtful you'd see a substantial ROI. Look at other rentals in the area and see what they are offering and how they are priced to be sure you are in line with the market

I will stop with the questions for now and ask if anyone can help with some of these issues, maybe all, or maybe something I didn't list here but should have. Thank you.
Greg

I'd encourage you to think carefully about what you're motives are for buying. There are substantial costs involved in owning a vacation property (some of the PPs mentioned a few - removing the dock each year, snow removal, general maintenance, meetign guests and getting them keys, furnishing, etc.) and you need to be able to cover allthose without counting on rental income. We looked at purchasing a lake home last year and ultimately decided it was more work than it was worth for us and made more sense for us to buy a residential rental that would make more money and then we can rent someone elses lake home when we want a weekend away. It was the difference between profiting from the investment with minimal monthly work and breaking even with a lot of extra work.

[Greglong]

Don't cut yourself too tight on the budget, as there will be costs that you haven't thought about and upkeep and repair is just like your primary home, maybe more.

This is a great point. Thank you. Is there a formula I should use based on potential rent and purchase price?

[Greglong]

.... and you need to be able to cover allthose without counting on rental income. We looked at purchasing a lake home last year and ultimately decided it was more work than it was worth for us and made more sense for us to buy a residential rental that would make more money and then we can rent someone elses lake home when we want a weekend away. It was the difference between profiting from the investment with minimal monthly work and breaking even with a lot of extra work.

You made many great points. Thank you for explaining the answers for me.
Is there a general formula that I should use to find a potentially fair home to purchase? A formula which relates potential rental prices to a purchase price or even ROI, as a guideline? Thank you

[Fishindude77]

You can look on VRBO Vacation Rentals By Owner website and likely find something similar in your area to get an idea of what it will rent for. Each time a renter leaves, the place needs to be cleaned and checked out so it is ready for your return or the next guest. Most folks have a cleaning service they pay and an individual they pay to take care of odds and ends in their absence. These costs all come of the rental income.

If your place is seasonal the rental income will be best during prime times, and if you want to be there during prime time, deduct those weeks. I would think if you can get enough rental to cover taxes, utilities and some of the upkeep while still getting plenty of use yourself, you shouldn't complain.

I look at a second home as if it's a "toy" or "luxury". If I can't easily pay for it without crimping my style or budget, then I can't afford it. Expenses will come up, and things will break down. Things like roofs, wells, septic systems, paint jobs, etc. You need to have the money on hand to pay for those without stinging you too badly.

[Greglong]

I would think if you can get enough rental to cover taxes, utilities and some of the upkeep while still getting plenty of use yourself, you shouldn't complain.

Is this because you're assuming the house appreciates with time? Or because you're expecting to lose money but have a home for annual vacations?

[Fishindude77]

You've not mentioned where it's at, what you think it will rent for, what the purchase value is, if it's seasonal rental or year round, will initial remodeling be required, etc. Answer those questions, put dollar values on them, then do the math and you should be able to tell if it makes sense as an investment.

There are a few folks around us that do just that. I don't think it's a get rich deal by any means, but if they get some decent real estate appreciation they probably do OK when they cash out.

Biggest things I've been trying to make point of are:
a. Don't spread your self too thin to do this endangering the big financial picture.
b. There will be surprise expenses, and budget known expenses on the high side to be safe.
c. Don't pocket every dime you clear out of the place when things are going good. It will need a new roof or furnace some day.
d. It will likely be a long term deal.

Good luck !

[riverwed070707]

You made many great points. Thank you for explaining the answers for me.
Is there a general formula that I should use to find a potentially fair home to purchase? A formula which relates potential rental prices to a purchase price or even ROI, as a guideline? Thank you

Again, for me this depends on what your motivation is for buying. Are you buying to make money or are you buying to have a property to take a vacation? While a bit old, this is a good article about buying vacation home for the purpose of making money. If you're buying more for you and want the rental just to help cover expenses, then I would agree with Nika - run the numbers like you need to be able to afford it all yourself and take any rental revenue as a bonus.

If I were purchasing an investment property, I'd be looking at a number of factors but a quick and dirty calc is the the cap rate. Afford Anything has a good breakdown of how to calculate this. If I were buying a short term rental, such as a vacation home, I'd account for a much larger vacancy rate than if I were purchasing a long term rental - probably 50% vacancy for an all year rental and 75% for a seasonal rental. You should include an estimate on any services you're going to hire out as part of your expenses when doing the calculations.

As far as a "good price" its really going to depend on your location. Know whats on the market. I love zillow for comparing properties and understanding recent sales comparable to what i'm interested in.

[JustBill]

Have you spent any time at biggerpockets.com?

[Nika]

I was tempted to buy one myself - since these things (far away from NYC) are so cheap comparing to the apartment here. But, at current time I decided against it.


1) Maintenance. Snow plowing (I was looking in ski areas, but near water also has its own issues and is very high maintenance). Utilities, garbage, lawn care, repairs, TAXES, etc... all these things have to be taken care of either you are there or not). I did not know that snow must be plowed even if you are not there - for firefighter access in case of house fire.

2) Just because houses are listed on homeaway or such, does not mean they get rented out for any significant amount of time. Those listings are more like wish lists from owners.

3) I noticed that investing in vacation property is kind of like investing in stock market - they are very closely tied. When there is nice long bull run, they appreciate and people tend to rent them more. They feel they can afford it as they see investments rise, retirement accounts rise, and everyone is more confident. But when markets go down, people feel more insecure about their financial position or job and renting vacation house is the first thing to go. So if I was buying one, doing it during a bear market and selling it in a bull market is a much better strategy.

DH and I both have 6 weeks of vacation per year, plus work from home for him, compressed schedule for me, with every other Friday off for both of us. And even in that scenario vacation rent vs. buy did not hold for us mathematically. (Rent for the season seems to make most sense.) And if you only have 2 weeks... I'm sure you can stay at the Ritz for those 2 weeks cheaper.

PS. I was looking at Catskills and VT. VT is further and with much better skiing, but the commute and maintenance issue made me postpone.

Catskills would have been more for year-round nature, with our own land (dream in NYC). But than there was an attempt by oil companies to frack in the region. Luckily, New York City has some weight in Albany (as almost half of the states revenue come from one city) and it was able to stop it - they took on that fight because NYC's water supply comes from there. But even though they won, regular people now afraid to buy second homes in the area, because if there is ever fracking, the values will drop through the floor. Even perceived remote possibility of it depresses the market.

[doingitallwrong]

Taxes can be higher than heck on a second home, as you won't get the mortgage exemption like you would on a primary residence, so check that out so you don't get surprised.

You can deduct mortgage interest (and real estate taxes) on a second home, if you itemize. (You can only deduct one second home, however.) If you rent the home part of the time, and use it for personal use the longer of 14 days or 10% of the rented days, then you allocate the taxes and interest between personal use and business use.

If you're operating it as a business rental the mortgage can be deducted, as can anything you put in for repairs, etc; however, the deduction is never going to be greater than the amount you spend in interest on a mortgage.

I'm not sure I'm understanding that correctly. As a business rental, you can deduct mortgage interest, real estate taxes, management fees, insurance premiums, utilities, repairs, maintenance, advertising, travel (not related to personal use), cleaning, etc. as a dollar-for-dollar offset of your rental income. Clearly this deduction will be greater than the mortgage interest alone, often substantially so. (If you have no personal use, and have a net loss on the rental, you may be able to use the loss to offset your other income, as well, depending on other factors. Again, if you have personal use, you would deduct a prorated amount of the expenses, and you cannot take a loss, though losses do carry forward to future years.)