So you read yesterday‘s post and still think you want to own a vacation rental home.
I Want To Buy a Vacation Rental Property
Now you just need to figure out whether or not you can afford it. How much money does it take to own a second home and how much money will you earn from it? I’ll walk you through the details of our second property to uncover the real cost of home ownership. Then you can decide if vacation rental ownership is right for you.
Owning a Vacation Rental Home
As I mentioned yesterday we purchased our rental home near the height of the housing market. We secured a 30 year fixed rate mortgage at 6% through a credit union that required 20% down. These days I highly doubt you could attain a mortgage on a second home without putting down at least 20%. The down payment came from a bunch of stocks and mutual funds that my husband and I had been holding onto for years. A large chunk came from company stock that would now be worthless.
Owning a Vacation Property in the Outer Banks
Most people think that you can earn enough money in rental income to cover the cost of the mortgage. While this might be the case in warmer vacation spots where you can rent year round, it is certainly not the norm in a place like the Outer Banks of North Carolina. Owning a rental property in the Outer Banks may be a worthy investment, but keep in mind the rental season is limited by seasonal temperatures.
In North Carolina the typical rental season is between ten and sixteen weeks, depending on how close to the ocean your home is located. The majority of rentals occur in June, July, August and September. Real estate agents may quote you all sorts of year round rental numbers, but most homes rent primarily during that time frame. Due to the short rental season most people cannot make enough money off of their home, (at least in the first few years), to cover the mortgage.
Search for Rental History
If you are interested in purchasing a vacation rental home definitely ask for the latest rental rates and history. This is the best indication of the how much rental income you might be able to earn. Rates on vacation homes vary widely. The homes in our area, of comparable size and age, rent between $2,000 and $3,500 per week during the peak season. The peak season in North Carolina is roughly eight weeks long, so we charge less before and after that time period.
Review Peak and Non-Peak Rates
A home that rents for $2,500 during the peak of the season may rent for as little as $800 during the off-season. While $800 a week sounds like a decent number, you must keep in mind that you will rarely rent your home during these non-summer months. If we incurred no other expenses and rented our property twelve peak and shoulder weeks our rental income would cover roughly six months of our mortgage. Of course, there are many other expenses that further reduce our income; a lot of savvy renters now negotiate for lower rents and discounted rentals, which further reduces our yearly income.
Outer Banks Property Management Fees
For example, if you do not live in the vacation area you will probably need the services of a rental agency, which will help you find renters, clean the home weekly and be available to listen to all customer calls and complaints. The commission rate is typically in the range of 16-30% in North Carolina.
At other vacation spots it can vary widely. At 30% the rental company is taking almost a third of your income. Outer Banks property management fees vary greatly between companies so make sure to check their fees before signing any contracts.
Vacation Rental by Owner Outer Banks
You can also list your rental on Home Away or Owner Direct Vacation Rentals. Outer banks vacation rentals by owner charge much fewer fees. Remember, vacation rental property management fees will cut into your profits more than anything else. Make certain to compare prices before choosing your management company.
In my opinion the commission of large rental companies is a huge rip-off. The rental agency is relatively good at getting renters into your home, but they aren’t much good for anything other than that. The agencies almost never hold tenants responsible for broken items, so if something is destroyed or stolen the owner almost always ends up paying for it. As an owner you may expect to pay between $50 – $150 a year to replace small appliances like toasters, coffee makers and blenders.
Consider the Cost of Services
If you own a pool and/or hot tub you will need to pay for a weekly pool cleaning service. We typically pay between $100 and $150 per week just for those services. It costs an additional $300 to $500 per year to open and close the pools in the off season. Of course, you can charge renters more for the use of your pool and hot tub, which does boost overall revenue.
If you live near your rental property you can save money by performing the pool cleaning yourself. A comprehensive list of pool cleaning tools can be found at Globo Surf. My husband and I don’t live anywhere near our rental home, so this isn’t an option for us. However, we do save money by opening and closing the pool. We set aside room in our schedule every April and October to visit our home and take care of these tasks.
As an owner you will also be responsible for paying any laundry related fees. For example, if a renter spills chocolate sauce all over the rugs in your home, the rental agency will send the carpets out for cleaning and then mail you bill. The same occurs for bedspreads, curtains and any other item that might need laundering.
You’ll also be on the hook for lawn care services.
Don’t Forget About Replacement Costs
If you want to keep renters happy you will also need to replace bedding, curtains and even art work every few years. No one wants to sleep on an ancient bedspread or look at stained and tattered drapes. We typically spend between $100 – $200 on items like this each year. I search Burlington Coat Factory and Marshall’s for inexpensive designer items and replace at least one bedspread and a handful of blankets each year.
You will also want to set aside a budget and/or time to clean your windows, repaint your home and perform other home maintenance projects. While you might allow paint chips or outdated bathrooms in your home, you should be aware that renters will not be fond of it. The costs for home maintenance can range from a couple of dollars for a can of paint to a few hundred dollars for bathroom remodeling.
Higher Utility Bills
Utility bills are always higher in vacation properties. Do you remember your dad telling you to shut the door when you were a kid? That doesn’t happen in a rental home. Because renters aren’t paying for the utility bill, they don’t care if the doors and windows are left open while the air conditioner runs on full blast.
A lot of guests purposefully turn the air conditioner to incredibly low settings. How do we know? We have a wireless thermostat and can peak at the temperatures while renters stay there. We never raise or lower the temperature for our guests, but we know when the air conditioner is kicking out sixty-degree air at the height of the summer.
Higher Insurance Costs
Your second home may require flood or wind insurance. If you think homeowner’s insurance is pricey, wait until you tack on the cost of this insurance. We pay over $3,000 for this extra insurance each year.
If you rent your home, you’ll also need an umbrella policy covering injuries and accidents that your guests may incur while staying on your property. If you rent through a rental management company, this insurance is required, but honestly, it’s wise to buy even if you rent directly.
Is Property in the Outer Banks a Good Investment
Lastly, if the money you get from renting your home does not cover the cost of renting it, you may be able to post a taxable loss on Schedule E. The tax laws for rental properties are extremely complex and since I’m not an accountant I’d highly suggest you speak with a CPA. There are also lots of good articles on the Internet that can explain the differences between passive and active income and between rental properties and personal residences. In each of these situations different tax laws will apply.
Outer Banks Rental Profit
At the end of the day our rental income doesn’t come close to covering our mortgage and expenses. If we purchased our property at a different point in time we might be closer to hitting the mark, but as it stands now we have a long way to go before our property becomes profitable.
Cost of Owning A Second Home
To learn more about the costs associated with owning a rental home click on any of the links below:
This is super interesting. I'd def like to hear more about your experiences.
We don't live near our vacation rental properties on Sanibel Island (but will soon!) so there is no choice but to have managers on island. That said, I get 90% of my rental guests through my own efforts and both the condo and house are rented 75% of the year. I work hard to get the rentals, but it's worth it to me for the ROI and the fact that when they are my bookings I only pay the agencies 10 percent instead of 25%. The agencies coordinate the bookings, cleanings and repairs, and they do a decent job of it. I would never rely on them to get all my rental guests, however, as I do a much better job than they ever could. It's my business, not theirs, and I put a lot of time into it!
samba — that's an interesting business model, a smaller commission rate if you bring in the rentals yourself. We actually have to pay the same commission rates whether or not they find the renter and like you we find the majority of renters, so it's a total rip off. In fact, not only do we find more renters, but we do things to make sure they return. Our rental company doesn't reward us for either of these activities.
This sounds like a lose/lose situation. Buying a vacation home that you can't use in peak season because you have to rent it out to earn income to cover the expenses, only the rental income you collect can't cover the expenses (thus a loss) and you have to hire contractors to do weekly updates plus annually replace items. Plus you bought the vacation home at the height of the housing market.
You people don't sound too bright.
Hope no body falls, trips or gets hurt on your 'vacation' nightmare 'cause when they do, you folks will be wiped out.
Idiots.
That seems unnecessarily harsh Anonymous. Simply because rental income might not cover the mortgage does not mean they are losing out on the property.
For one, her family can stay there anytime its vacant, leading to cherished family memories. For two, she could still be making a decent return on her investment if the rental income + appreciation is greater than the interest portion of the mortgage payments (combined with any fees, taxes or other expenses).
Cherished family memories? Are you for real? You can make 'cherished family memories' right in your own backyard. Give me a break!
What I detest most are bloggers (frugal) who give out financial advice and paint rosy pictures. The Other Banks are a hurricanes' nightmare!
She can use the place when it's vacant? Yeah! Like the off seasons. Brilliant. Happy memories shivering off your butts.
I'd like to see a profit & loss statement on this overpriced/bought rental property.
The only thing you got right are the losses you can claim off your tax returns but those are limited to only a few years. Plus now, rental income is on the chopping block to be heavily taxed. How much will be left for her?
Very bad, bad, bad business deal/investment whatever! If you like to spend time on the Outer Banks, R E N T and choose whatever weeks you want to.
Geeze.
What kind of family memories are you going to created when mommy & daddy start pulling their hair out of their heads when they get swamped with bills, bills, and more bills.
Have a happy vacation life.
What a joke!
Grumpy Anonymous Commenter – Let me try to address all of your issues.
First, I actually prefer not to stay in North Carolina during the peak weeks and months of summer. The best and most quiet time is September, so I'm not missing out on anything by allowing renters to stay during that time.
Second, my husband and I don't need the rental income to cover the mortgage. The WHOLE POINT of this article was to demonstrate that rental income won't cover the mortgage, so clearly we don't rely on that money to pay for it.
Third, it's not the worst idea to buy a house at the peak of the housing market. If you know anything about the economy you know that the peak of the housing market was also the peak for the stock market. We cashed out on stocks that are no where near their 2005 value. In fact, some of those stocks lost 90% of their value since that time.
Fourth, in order to rent a vacation home you must have liability insurance. We have a very large policy that would cover us if someone was injured while vacationing at our home.
Fifth, as I mentioned before the whole purpose of this article was to point out that owning a vacation rental property is not always profitable and that contrary to popular belief the rental income will not help you pay all the bills. The whole point was that owning a home is NOT the rosy picture some people make it out to be.
Sixth, again the OBX are most beautiful in September and October. The water is warmest, the crowds have all dissipated and the air temperature is often just right, not to hot and not yet cold.
Seventh, we do write a good portion of our expenses off of our taxes. No one can predict the future of tax law, but for the time being we take advantage of them.
Lastly, not everything in life has to make you money. After all, you aren't going to make money by renting a beach house for two weeks every summer, but it doesn't mean you aren't going to go on vacation.
I do not think of my vacation home as an investment. I think of it as a place I love to go. My husband and I are fortunate enough to be able to afford two homes without relying on the rental income of the second one. So I love my home for what it is… a place for my family and I to spend quality time together.
Anonymous-
Hope no body falls, trips or gets hurt on your 'vacation' nightmare 'cause when they do, you folks will be wiped out.
General liability and umbrella insurance policies are very affordable these days. I'm sure they carry multiple policies to address these items as anyone that owns a rental property would be concerned with such things.
What I detest most are bloggers (frugal) who give out financial advice and paint rosy pictures. The Other Banks are a hurricanes' nightmare!
You should check your facts before you making statements like that.
The last hurricane to make landfall was an 85mph storm on August 3, 2004. There have not been any other 75+ mph tropical systems that have made landfall in the past 6 years in the area. The last major storm (CAT3 or higher) that made landfall was Emily (September 1, 1993) with 100mph winds. I would not characterize 1 major landfall in 17 years as a "hurricane nightmare."
But if you want to rant and rail about the ills of home ownership on the Outer Banks I will gladly yield the floor to the village idiot.
PS – here's your data. It took about 2 minutes to retrieve from the tropical prediction center.
YEAR MONTH DAY STORM NAME WIND SPEED(KTS) PRESSURE(MB) CATEGORY
1 1991 8 19 BOB 95 957 H2
2 1992 9 25 DANIELLE 45 1004 TS
3 1992 9 25 DANIELLE 55 1001 TS
4 1992 9 25 DANIELLE 55 1007 TS
5 1993 8 31 EMILY 100 962 H3
6 1993 9 1 EMILY 100 960 H3
7 1995 6 6 ALLISON 40 995 E
8 1995 6 7 ALLISON 40 992 E
9 1996 6 20 ARTHUR 35 1005 TS
10 1996 6 20 ARTHUR 35 1005 TS
11 1996 10 8 JOSEPHINE 45 988 E
12 1996 10 8 JOSEPHINE 45 986 E
13 1997 7 24 DANNY 30 1004 TD
14 1997 7 24 DANNY 40 1000 TS
15 1998 8 27 BONNIE 60 980 TS
16 1998 8 28 BONNIE 65 983 H1
17 1998 8 28 BONNIE 75 985 H1
18 1998 9 4 EARL 50 998 E
19 1998 9 4 EARL 50 1000 E
20 1999 9 16 FLOYD 70 967 H1
21 2000 9 23 HELENE 35 1010 TS
22 2000 9 24 HELENE 40 1008 TS
23 2001 6 15 ALLISON 25 1009 SD
24 2001 6 16 ALLISON 25 1007 SD
25 2001 6 16 ALLISON 25 1007 SD
26 2001 6 16 ALLISON 25 1007 SD
27 2002 10 12 KYLE 30 1012 TD
28 2002 10 12 KYLE 40 1009 TS
29 2004 8 3 ALEX 85 974 H2
30 2004 8 3 ALEX 85 972 H2
31 2004 8 13 BONNIE 25 1008 TD
32 2004 8 13 BONNIE 25 1008 TD
33 2004 8 14 CHARLEY 60 1000 TS
34 2004 8 15 CHARLEY 40 1012 E
35 2006 6 14 ALBERTO 35 1002 E
36 2007 6 3 BARRY 40 994 E
37 2007 6 4 BARRY 40 992 E
38 2007 9 9 GABRIELLE 50 1004 TS
39 2007 9 9 GABRIELLE 45 1006 TS
40 2007 9 10 GABRIELLE 40 1007 TS
41 2007 9 10 GABRIELLE 30 1008 TD
We just spent 3 days at the Outer Banks. It was the first time for us "off-season." Wow what a difference! What a great difference! No traffic, no lines in the restraunts, did I mention no traffic. We left the beach and were home in just over 3 hours on a Sat. Un-heard of in the summer! I highly recommend it and hope to go back next spring break!
This was a helpful blog.
I'm looking at a vacation rental in the Finger Lakes Region of upstate New York. Our best season is July 4th through Labor Day.
What is your vacancy rate during the Summer season? Do you always have it fully rented in July and August?
How long did it take you to get to the high occupancy rate you currently enjoy in July and August?