Vacation Homes are Fun! But Is One Right for You?
Buying a second home is a major decision. Sometimes, if the area is desirable enough, a second home can generate enough income to pay for itself. But before you consider investing in a vacation property, and definitely before you become a short-term rental landlord, there are some issues you need to think through.
1. Consider the needs of others.
When you’re buying a vacation home just for your family, you can outfit it to fit your specific needs. When you’re buying a vacation home that you plan to rent out, you may want to include extra sleeping spaces or kid-friendly amenities that your family doesn’t actually need. For example, you may think hot tubs are pointless, but a hot tub could lead to a significantly higher number of vacation rentals. And you may hate kayaking, but if you’re near a lake or river, a free-to-use kayak may be a big selling point.
2. Know your local laws and taxes.
If you’re managing short-term rentals, you’ll need to collect and pay occupancy tax, just as a hotel would. Call your state and city sales tax division and ask about the process for your particular location. (It’s better to do this up front. If you’re audited later, you may be hit with a hefty bill.)
You’ll also be required to pay income tax on rental income, although some home-ownership expenses may also qualify as tax deductions.
If you’re doing short-term rentals, you may be required to apply for a license with your city or county. If your property is in the Denver area, this site will help you keep things legitimate.
3. Have a business plan.
Does your location have “on” and “off” seasons? You may want to charge different daily rates based on the season, numbers of guests, or length of stay. If you’re not near enough to manage the property yourself, you’ll need to pay someone to clean between rentals and be available to handle emergencies. Finally, calculate your return-on-investment before purchasing to make sure your second home makes solid financial sense.
4. Choose the location carefully.
If your primary reason for buying a vacation home is to rent it out, it’s probably best to choose an area that has year-round attractions, such as skiing in the winter and hiking in the summer. But if your own family wants to be able to use your vacation spot for weekend getaways, you probably want it to be within a few hours drive from your primary residence. And if it’s important that your second home increase in value, you’ll need to research the area’s property trends. Is the local economy/population growing? Is the real estate market healthy?
5. Estimate your potential rental income conservatively.
It’s much better to be pleasantly surprised than disappointed and over-stretched.
Calculate your return-on-investment before purchasing, to make sure your second home makes solid financial sense.
6. Be realistic about the additional expense you’re taking on.
You’ll need to budget for homeowners insurance and potential repairs (to the tune of about 1.5% of the home’s total value per year).
7. Have a vacancy plan.
If your vacation home will be vacant for longer than a few days, put timers on your lights and halt mail services. And maybe ask a neighbor to occasionally park in your driveway, since houses that appear empty are low-hanging fruit for thieves.
Need to talk to a licensed agent about a homeowner’s policy for your new vacation house? Contact a Colorado Farm Bureau Insurance agent near you.