15 Questions to Ask Before Buying a Vacation Property to Rent Out
15 Questions to Ask Before Buying a Vacation Property to Rent Out
There's more to buying a vacation rental than you may think
Buying a vacation rental property may seem like a great idea. You can use the house to enjoy your own trips while also renting it out to cover your costs and perhaps turn a profit.
But before you dive into making an offer, there are a few key things you'll need to consider to make sure the decision to buy this type of real estate is the right one for you.
In particular, here are 15 questions you should ask yourself to decide whether you should proceed with your purchase.
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1. How often will you use the property?
If you're buying a vacation rental property, you'll want to consider whether your primary goal is to rent it out and make money or use it often.
If you'll be at the property during most of the prime times for renting it, then you probably won't make much money at all. You'll want to know that up front so that you can make sure you're able to afford the costs without rental income coming in.
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2. Can the property legally be rented?
The rules for rental properties vary based on location. Neighborhood homeowners association (HOA) rules can also affect whether you're allowed to rent the space.
In most cases, long-term rentals are permitted in the majority of circumstances. But if you're hoping to do short-term rentals -- which is popular for vacation properties -- you're likely to run into more restrictions.
You don't want to purchase a property only to discover you can't rent it as planned. So be sure to research the rules before you act.
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3. Will you need a management company?
There's a lot involved in renting a property, from finding tenants to making repairs as needed to cleaning up the property once each renter leaves.
You may not want to manage all these issues yourself -- especially if your vacation property isn't reasonably close to your primary home. Management companies can be hired to handle these tasks for you, but paying their fees will eat into potential profits.
ALSO READ: Managing a Rental? 6 Reasons a Property Management Company Is the Way to Go
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4. How will you market the property?
You'll need to have a plan for marketing your property if you want to be successful at renting it.
Management companies can sometimes handle this for you, but ultimately, you're the person most invested in the success of your rental operations, so you'll need to think about ways to make your space stand out from the crowd.
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5. How much can you rent the property out for?
It's helpful to have some idea of how much rent you can expect to collect. This enables you to do the math on whether your investment will make you money, cost you money, or enable you to break even on annual expenses.
You can typically look at comparable properties in the area to get an idea of what you can expect to earn. Of course, if you anticipate using the property yourself on a regular basis, then you'll bring in less income.
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6. Is there high demand for rental properties in the area?
Ideally, if you're buying a vacation property to rent out, you'll purchase a place where there are lots of tourists and substantial demand. The more people looking for a rental in the area, the more likely your investment will be profitable.
Of course, if you'll be using the space yourself sometimes, you'll also want to make sure you find a location you enjoy being in.
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7. How much competition is there?
Often, touristy areas have a lot of rental properties on the market. The more competition there is, the more aggressive you'll need to be in your effort to attract tenants.
A high level of competition could lead to more times that your property is empty, potentially reducing expected profits.
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8. Will you qualify for a mortgage loan?
If you can't pay for the vacation rental property outright, you'll need to make sure you can qualify for a home loan to buy it.
Lenders tend to have stricter requirements with approving a mortgage for a home that's not your primary residence, so be prepared to jump through more financial hoops.
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9. How much will your mortgage costs be?
You'll want to get a good idea of what your monthly mortgage payment will be before you commit to buying a vacation rental. This is especially important as mortgage rates have risen this year, driving up monthly payments.
Knowing your payment up front will help you determine whether the rent you're likely to collect can cover it and, in turn, whether purchasing is a sound investment.
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10. What are the other costs of ownership?
Your mortgage is just the start of the costs you'll incur. You'll also have property taxes, insurance, home and yard maintenance, and up-front closing costs to pay.
If the property doesn't come furnished, that is another expense. And repairs will fall on your shoulders as well.
You should be able to estimate total annual costs and compare those to the rental income you're likely to earn.
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11. How will your insurance costs be affected by renting out the property?
Insuring a rental property is different from insuring a primary home or even a secondary home.
You'll need to make sure you know the rules for home insurance and get the right types of coverage to protect against loss if problems with tenants arise.
Your premiums may also be more expensive when renting out the property, so be sure to take that into account when determining whether your investment is likely to be profitable.
ALSO READ: What Airbnb Hosts Need to Know About Renters & Homeowners Insurance
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12. How will renting the property affect your taxes?
Income from a rental property is subject to federal tax. There may also be state and local taxes charged on the rent collected. Of course, you should also be able to claim certain deductions for the rental property to offset some of this income.
If you sell the house, though, different -- and less favorable -- capital gains tax rules will typically apply if the home is not your primary residence or was used for business purposes. Be sure to understand what tax rate you'll owe if you're lucky enough to make money selling the home in the future.
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13. How long do you intend to own the property?
There are upfront fees associated with both the purchase of a vacation rental property and the sale. These can total thousands of dollars.
If you do not intend to keep the vacation rental for the long term, it's very possible you could end up incurring such high costs with a short-term sale that you can't make enough money off the sale of the property to pay them and your mortgage loan.
ALSO READ: Will Your Home Purchase Help You Build Wealth -- or Is It a Big Mistake?
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14. How will you handle problem tenants?
When renting out your property, you always run the risk of tenants causing issues. These problems could be anything from damaging your furniture to throwing large parties that get you into trouble with your HOA.
You'll need a plan for dealing with these types of issues if you're going to entrust your space to others.
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15. Are you comfortable renting out your space?
Finally, think about whether you're OK with having a vacation home that you use but also rent out.
If you want to leave your stuff undisturbed at the vacation home or visit on a whim, you may decide that you don't want renters there after all. Likewise, you may simply decide you feel uncomfortable with others on your property -- but it's best to know that before committing to the rental lifestyle.
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Be sure renting out a vacation property is really right for you
As you can see, there's a lot to think about when deciding whether buying a vacation rental property is right for you.
You don't want to regret your choice -- it's hard to get out of a real estate investment once you've made your purchase. So do your due diligence before you jump in to make sure your vacation rental experience is likely to be a positive one in the long term.
The Motley Fool has a disclosure policy.
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