Occasionally, an inspired entrepreneur comes to me looking to buy a vacation home in Florida, or some other popular vacation spot. While they may use it, the main focus is to rent it out.
What can you do to prepare for a vacation rental purchase?
1) Prepare for sticker shock. Many times you fixate on what a house cost where you are from, but a vacation rental is automatically going to cost more for its size because of the location and the earnings potential. Prepare mentally and financially for that ahead of time.
2) prepare for a bigger downpayment. A lot of people are shocked to hear of needing more than usual. While you can call it a second home, and maybe get closer to a normal downpayment, the reality is that there is probably no $0 down program. A true rental property is 15-25% down, and that gets a higher rate than your home as well. So it costs more all the way around than your home.
3) Don’t forget prep costs. There are towels, decorations, furniture, etc. That you need for a vacation rental. It is basically a furnished home is the expectation of your renters so dishes, utensils, appliances, etc. Have to be up to the level of the rental. If you are charging top dollar, they may not appreciate plastic silverware for example. All of this adds up significantly.
4) prepare for ongoing maintenance costs. From mowing the lawn to cleaning after each guest leaves, you have to have someone to monitor things and provide those services. This is often forgotten or at least under budgeted in the equation of how
much you could make from a rental property.
5) Prepare for higher property taxes and insurance as a rental property. This can affect the payment if escrowed and if not, should be budgeted as the yearly cost could easily add up to several months’ gross rents! So whether the lender or you budgets for it, it still must be paid. The insurance is higher for a temporary rental as the guests are generally not that concerned about their temporary home and it sits empty at times as well.
If you count all the costs, and budget for them, it will help you see what the minimum rent should be set for as well as what it will take to truly make a profit…