4 Things You Need to Know Before Buying a Vacation Rental
Investing in real estate is an excellent way to increase your wealth. With a carefully curated portfolio and a few well-timed acquisitions, you can substantially increase your monthly income. Vacation properties are one way to enter the real estate market, and they come with the added benefits of owning your own getaway. But before you make the decision to buy a cabin, condo, or apartment, there are a few things you absolutely must know so that you don’t wind up with an empty house and even emptier pockets.
What you can afford
Unless you have several hundred thousand dollars sitting in the bank just waiting to be spent, you will most likely need to apply for a second mortgage. According to Zacks, you’ll probably also have to come up with a down payment of 20 percent or more. This means on a $200,000 property, you are looking at around $40,000 – and that does not include closing costs, furniture, initial utility turn on, or other associated expenses. Some lenders may even require a down payment of 25 percent since your second home will actually be considered an investment property and not a secondary residence.
Your credit score and debt-to-income (DTI) ratio are also important to the buying process. Nerd Wallet notes the sweet spot for DTI is 36 percent, which takes into account your first and second mortgages along with any other outstanding debt, such as car payments or open lines of credit.
You can expect your interest rate to be between .5 percent and one percent higher than on a primary residence. When calculating your potential monthly payment, you must also factor in insurance, property taxes, ongoing marketing, and maintenance expenses.
What the home is worth
The real estate market is aggressive, and especially so in high-demand areas. For this reason, homes are often listed for much higher than what they are actually worth. Before you get excited and schedule a viewing, check the potential value online with a home value tool, which can give you a pretty good indication of whether the list price is in line with comparable properties.
Next, and perhaps most importantly, as you get more serious about buying a vacation rental, partner with an experienced real estate agent that knows the area. Your agent will be a valuable resource in helping you both locate other potential properties and negotiating when you’re ready.
The home’s marketability
A vacation rental is only as good as the attractions that it’s near. Take stock of things to do in the few miles surrounding where you wish to purchase. Knowing what’s available will put you on track to determine the potential number of tourists you can expect each season. You can also visit vacation sites for comparable rentals to see how far in advance they book, and for how much.
Know your limitations
Many people don’t realize the work that goes in with maintaining and renting out a vacation home. From bookings to cleaning between guests to being available 24/7, not every vacation home investor is up to this task. If you know going in that your schedule will make it hard to tend to rental home upkeep, turn to a management agency to handle the details. The right company will have a plan to help your home earn more revenue and will be able to keep your property consistently rented and maintained.
These are just a few things to consider before you diversify your investment portfolio to include a vacation rental property. But, they are critical and can’t be ignored. Buying a vacation rental is a big deal, and likely to be almost as much of an investment as your primary home. Fortunately, if you are smart about your choice, take your time, and work with a real estate agent that understands your goals and budget, you can turn a profit that can help pay for your next rental property.
Brittany Fisheer has spent more than 20 years as a CPA. She runs her own site, financiallywell.info where she shares knowledge about taxes, personal finance and general financial literacy hoping to help anyone who may benefit from it. Image via Pexels