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Are You Ready to Buy a Vacation Home? 6 Questions to Ask First

December 4, 2019

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Whether it’s a bungalow by the beach or a cabin in the woods, owning a vacation home is a dream for many. After all, you’d always have a place to stay in a favorite travel destination, and could rent out the place when you’re not using it. What’s not to love?

Yet all too often, people venture into a vacation home purchase with “rose-colored glasses on,” says Denise Supplee, real estate investment educator and co-founder of property management software SparkRental.

Vacation homes can be a worthy investment, but owners don’t always fully realize the time and financial commitment involved.

As Supplee describes it, “Here is a typical scenario: New to property investing. Looks at the romanticism of a home by the ocean or one tucked away in the mountains. Assumes they’ll make a fortune.”

In reality, “there is substantial risk,” she says. “That’s especially true when a vacation home is used as a short-term rental, which can bring extra costs.”

Dealing with vacancies and attracting bookings can be time-consuming, too.

All of this begs the question: Are you truly ready to buy a vacation home?

For answers, look no further than our Guide to Buying a Vacation Home, a new weekly series. For this first installment, we pinpointed the key questions you should ask yourself to gauge just how prepared you are to take the plunge. By talking with experts and people who own (and rent out) their vacation homes, you’ll learn what’s involved in this endeavor, and the risks. That way, you can enter this adventure with your eyes wide open and, yes, maybe even make a profit!

1. Why do you really want a vacation home?

So before looking for a vacation home to purchase, first consider your reasons and goals for wanting one. How much do you plan to use it personally, and what will you do with the home the rest of the time?

According to Steve Schwab, founder and CEO of Casago, a vacation rental and property management platform, common reasons people purchase vacation homes include the following:

  • They have a place to stay in a favorite travel spot.
  • They have an eventual retirement home.
  • They establish a way to make money by renting the home out.
  • They have the home as an investment that they can rent out now to cover the mortgage and property taxes, and later sell for a profit.

Just keep in mind that some of these goals might clash and be hard to juggle.

Avery Carl, a real estate agent and owner of five vacation rental properties in Tennessee, cautions against getting too emotionally attached when purchasing a vacation home as an investment.

“If there are any personal emotions tied to an investment property, the owner will never maximize its cash flow potential, and owners will end up getting upset over minor issues like makeup on towels,” says Carl, who works with investors to acquire their own vacation rentals.

“My advice is not to rent it out if it’s a personal vacation home that you have an attachment to, and if it’s an investment, keep your emotions separate—it’s a business.”

2. Do you have time to manage a vacation home?

Many homeowners underestimate the time and work involved in owning a vacation home, Supplee says. The time commitment includes marketing the home, setting up listings on travel booking sites, keeping up maintenance, dealing with guests checking in and out, and handling guest requests.

“Some people buy a vacation home and find that they didn’t buy a vacation, they bought a job,” Schwab says.

Schwab says VRBO estimates that homeowners spend about seven hours a week managing a vacation home. However, it could be less: Carl, who manages five properties, says she spends about an hour and a half per week on each.

Additionally, self-managing a property means being on call 24/7 in case renters have any questions or problems from broken air conditioning to nonworking Wi-Fi.

3. Will you self-manage the rental, or hire help?

Some vacation home owners may enjoy handling the management process themselves. For others, especially if they live some distance away, hiring a property manager can be well worth the expense.

Schwab suggests owners tally up how many hours a week they spend managing their vacation home and divide the hours by a property manager’s fee. That can help homeowners determine whether a management service is worth the cost.

Even if you don’t plan to rent out the home to vacationers, hiring a property manager to keep an eye on the home when you’re not there is a good idea, especially if you live far away. This will ensure that the home stays clean and in good repair.

4. Do you want short- or long-term renters?

While renting out your place on Airbnb or VRBO might be the most lucrative option, it does have its downsides, including higher cleaning fees, more wear and tear on the home, and more frequent vacancies as renters come and go and bail during the offseason.

If you don’t want to deal with short-term vacationers, you can also try to rent to a long-term tenant. But finding longer-term renters can also be tricky, especially if the home is located in a popular seasonal travel destination, Supplee says.

“Long-term renters in these areas are far and few between,” she explains. “My area, the Pocono mountains, does not fetch high rents in the long term.”

For example, in Pocono Summit, PA, long-term rents would be in the $900 range for a three-bedroom chalet. But Supplee says the same home may rent for more than that per night during a high-season weekend.

Long-term renters also take away some of the flexibility that vacation home owners often enjoy, Schwab says. It would limit how often you could enjoy the home yourself if a tenant signs a six-month or one-year lease.

So how do you decide? If you want your rental to remain profitable, as a general rule it should earn at least 1% of its purchase price per month, Carl says. For instance, a $100,000 home should rent for $1,000 a month for a good return.

For short-term rentals, Carl suggests that your net operating income should be around 20% higher than your carrying costs (more on what those are next).

5. How much will this vacation home cost to maintain?

Vacation homes come with mortgages, taxes, and insurance, just like any other home. But, there will likely be additional costs such as maintenance, repairs, utilities, and other locality-specific charges. Turning the vacation home into a short-term rental brings even more expenses, including the following:

  • Cleaning fees could be $90 to $150 per session, according to Home Advisor.
  • Home maintenance is typically 1% to 4% of a home’s price.
  • Insurance premiums could be as much as 15% to 20% higher.
  • Property management typically costs 10% to 40% of the gross annual income.
  • Homeowners association fees vary drastically, ranging from $150 to $700 per month.

“It is important to understand that vacation rentals have a higher operating cost than traditional rentals,” Schwab says. “The normal wear and tear to vacation rentals is disproportionately higher than long-term rentals due to the high turnover of people constantly moving in and out.”

Supplee urges vacation home owners to factor additional costs into what they plan to charge to rent out the home.

6. What are the tax implications of renting out a vacation home?

The taxes associated with vacation homes can be complex, and vary based on how the property is used and how much time it is used personally versus being rented out. It’s always best to talk to a tax professional about your unique financial situation, but here’s an overview of what to expect.

In general, the amount of personal use dictates whether the home is truly classified as a rental property.

“If you have a vacation home that is rented [out] for more than 14 days during the year and your personal use does not exceed the greater of 14 days or 10% of the rental days, the home is then classified as a rental property—or, a business for tax purposes,” Supplee says.

When the home is considered rental property, rents received are reported as income. But you can deduct many of the expenses of renting out the property, including maintenance, insurance, taxes, and interest, according to the IRS. New tax rules also offer some benefits for rental property owners. Here are some of the tax benefits of owning a rental.

The post Are You Ready to Buy a Vacation Home? 6 Questions to Ask First appeared first on Real Estate News & Insights | realtor.com®.

Should You Sell Your Home—or Rent It Out? 4 Times to Hang On Tight

July 1, 2019

KentWeakley/iStock; realtor.com

While many homeowners reach a point where they decide to sell their place, here’s an alternative I’m considering for my own home: Rather than sell, I may rent it out instead.

When I bought my condo three years ago, I knew it was only a starter home. My one-bedroom, two-bath condo was the perfect space for me at the time, but I knew that as I got older, got married, and started a family, I’d need to move up, and out.

For a long time, I assumed I would just sell my current house, but it has since come to my attention that it could be smarter to hang on to this property instead. Here are four times renting out your house might make more sense than selling it—take a look to figure out whether it might make sense for you, too.

rental
My first home—and perhaps my first rental property

Jillian Pretzel

1. You don’t need to sell your house to buy your next one

“The first thing you need to ask yourself is ‘Do I need to sell this house because I need the money for something else?’” says Emily White, a real estate agent with Keller Williams Realty.

Many homeowners sell their current house to finance their next home, but this isn’t the case for everyone. Maybe you paid off your old house long ago, and you have the funds upfront to get a new mortgage. Or, maybe you’re planning on renting your next place and you don’t need a lump sum from your home sale for a down payment.

If you don’t need to sell your house to get into your next one, you might consider renting it out for a while so you can enjoy some passive income—then sell later when the time feels right.

2. You’re able to qualify for a second mortgage

Even if you don’t need to sell your current home to buy your next, the question remains: Can you qualify for a second mortgage?

After all, when you apply, lenders will consider any standing mortgages in your application, and if your debt-to-income ratio is pushing the limits, you might have no choice but to sell before you buy your next place.

Not sure where you stand? One way to gauge that is to seek mortgage pre-approval, where you meet with a lender who then crunches the numbers on your finances to see how much you can afford to borrow.

3. It’s a bad time to sell your house in terms of the market

Another bonus to renting rather than selling? It can give you the opportunity to be strategic with the timing of your sale, which is important because if you list your house at the wrong time, you could be risking big money.

If you haven’t been in the house very long (so the investment hasn’t had time to appreciate) or if the market isn’t good when you decide to sell, you might not be making the profit you could be getting if you wait for a better time.

To find out if you’ll make money off the sale if you list your house now, check out the value estimate of your home and find out what comparable houses in your area have been selling for. Of course, home estimates and comp prices are no guarantee of what your house is worth, but they will help you get an idea of what ballpark figure you’re looking at.

Then, calculate how much it will cost to sell the house—you’ll want to factor in repair fees, lawyer fees, plus the fee for a real estate agent—and see how much of a profit you’ll actually make on the house. If you won’t be making much, or if you come out at a loss, you might consider renting it out for a while instead.

“The good thing about renting out your place is that, in some regard, you can time the market to see when the best time to sell would be,” says White.

Renting it out for a year and taking a look at the market and your home value later could make this waiting game pay off.

4. Your house is in a good renter’s area, and renter-ready

If you’re in a big city where lots of people rent, or near a university where plenty of students are looking for off-campus housing, you could make a good amount of money renting out your place. So much of real estate is about supply and demand, so if there’s a big market, your home could be a great cash cow for years to come.

Next, ask yourself if your home would be attractive to renters. Some features could make your home especially valuable as a rental property, while those interested in buying may have different needs.

For example: While a buyer may want some good outdoor space and won’t mind mowing a lawn, renters might prefer a condo with a simple patio so they don’t have to worry about upkeep. While buyers might be OK with doing some updates and personalizations (after all, they’re probably planning on being there for a while), renters prefer a turnkey home.

Even furniture could be a big factor. While buyers are likely going to come in with their own stuff, some renters might pay extra for a fully or partly furnished home.

The post Should You Sell Your Home—or Rent It Out? 4 Times to Hang On Tight appeared first on Real Estate News & Insights | realtor.com®.

How to Hire a Property Manager: Tips to Find the Right Pro

August 3, 2018

How to Hire a Property Manager

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If you’re wondering how to hire a property manager, you have no doubt heard how this professional can be a boon to landlords who want to outsource the nitty-gritty details of running a rental property. But finding a good property manager can be challenging, since the quality level and services they provide really do run the gamut.

The key to hiring the right property manager for you is to draft a detailed job description and ask the right questions during the interview process. Here’s how to do that, so you can find the perfect pro who will save you headaches rather than create new ones.

What does a property manager do?

First things first: Do you really need or want a property manager’s services?

In an ideal world, “if you choose the right manager, it should make your life more peaceful and more profitable,” says Kimberly Smith, author of “Making Money With Rental Properties,” which is part of the Idiot’s Guides series.

Some property managers will have connections that will help fill your vacant properties with good tenants who pay on time and never cause a ruckus. Furthermore, a skilled property manager can do everything from marketing to rental collection to handling day-to-day maintenance issues.

“The right property manager will be able to deliver more efficient management and, in some cases, less expensive services,” Smith notes. In other words, paying a good property manager can actually save you money.

“For example, if they are managing 10 properties in one area, they can contract to have all HVAC systems serviced seasonally and get a volume discount,” she explains.

How to hire a property manager: Ask for recommendations and references

Most employers check employee references before extending an offer, and hiring a property manager should entail the same steps.

When Brady Hanna, president of Mill Creek Home Buyers in Kansas City, KS, first got into real estate investment, he was busy, exhausted, and overwhelmed. He went with the first property management company he found, and it was a huge mistake. Hanna learned the hard way what happens when you don’t ask around.

“They ended up filling my vacant unit, but as I scaled up and added several more properties, their communication was terrible,” Hanna says. “It was like pulling teeth to get information out of them. Sometimes I couldn’t reach a live person when I called, and several months in a row my rental income was paid significantly late and there were always excuses from the management company as to why.”

Hanna fired the company and then asked other local real estate investors for recommendations. That’s how he found the company he uses and trusts today.

“I would estimate that only roughly 20% of all property managers are great, so you want to find that out ahead of time instead of learning the hard way like I did,” Hanna says.

How much do property managers make?

Property managers are paid in a variety of ways, so you need to come to an agreement with your manager based on your individual needs.

Hanna provides this guide for reference: “When filling vacant units, they will typically charge half to one full month’s rent for marketing and filling your unit. Then on the ongoing management, the fee is usually anywhere between 7% to 10% of the rent collected. Some property managers will also charge an up-charge on maintenance items as well.”

Check the property manager’s qualifications

“A property manager that is acting on your behalf to lease and manage your property must assume fiduciary responsibility and needs to be a licensed real estate agent,” Smith says.

Other requirements vary from state to state, but you can call the nonprofit National Property Management Association to find out what the rules are for your area. For example, some states require HOA management licenses or property management licenses.

Lay out clear expectations

Generally, a property manager’s job is to manage the rental process from start to finish. That means “if the property is vacant, they will hire contractors to get it rent-ready at the owner’s expense, take pictures of the property, market it for rent, screen applicants, handle the showings of the property, fill it with a tenant, collect rent, and handle all maintenance requests as well,” Hanna says.

If tenants aren’t paying, it’s typically a property manager’s job to file for evictions and work with attorneys to collect back rent.

But there is no standard property management job description, which means it’s up to you to outline exactly what you are looking for from the get-go, Smith says. Do you want the start-to-finish management? Or are you looking to split the duties? This needs to be spelled out from Day 1.

Questions to ask a property manager

Not sure how to ascertain whether or not a manager can do the job you need? Hanna suggests asking the following questions:

  • What is your process for screening applicants?
  • How long does it typically take you to fill vacant units?
  • How many units are you currently managing?
  • How big is your staff?
  • What is your process for maintenance requests?
  • What is your process when a tenant doesn’t pay rent on time?
  • Have you filed evictions before? If so, how do you do that?

 

A good property manager should readily have answers to these questions—and if not, that’s a red flag. Remember, the whole point is for the pro to make your landlord duties easier, and part of that is simply establishing clear communication and a comfortable rapport.

Patricia-Anne Tom contributed to this report .

The post How to Hire a Property Manager: Tips to Find the Right Pro appeared first on Real Estate News & Insights | realtor.com®.