Owning a vacation home is one way to make extra money without going to work every day. If you have the money to invest and do so wisely, vacation rentals can provide passive income. But too many people don’t fully understand all the costs involved with owning a vacation home, leaving them with unpleasant and costly surprises. And since the last thing you want to do when investing in a new business is lose money, knowing every cost can help you make the most of your investment.
A vacation property is an investment just as your primary home is. You won’t want to skip the initial inspection. It helps you avoid unwanted surprises that could require a lot of money to fix.
It’s also a good idea to have home inspections performed periodically. You’ll want to ensure your property is up to local and state codes, especially since you rent it to guests.
Closing costs accompany all property purchases, including vacation rentals, so don’t forget to include these in your budget for purchasing a vacation rental. Closing costs might include title transfer fees, escrow fees, and processing fees. You may also face other fees in addition to your down payment and mortgage.
You can expect to pay between 2% and 5% of your loan amount in closing costs. So, if your loan is for $200,000, anticipate closing costs between $4,000 and $10,000.
Vacation rentals come with the same utility bills you have at your primary residence. And since you rent for short intervals of time, the responsibility of paying them will likely fall to you.
You’ll encounter basic utilities such as electricity, water and sewer, and heat, but your guests won’t be thinking about keeping the costs down the way you would in your own home, so those bills may surprise you. Most guests will expect free wifi and might also expect a landline telephone. And you will still need to pay these bills when the vacation home is empty.
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You will need to pay property taxes on your vacation rental; How much depends on various factors such as the location and assessed value. Since you’ll need to invest in a rental where people want to vacation, you’ll have fewer options for choosing a low-tax state. The good news is that property taxes are fairly low in states like Hawaii and California; the bad news is that home prices in these states are not.
You may also need to pay tax on your rental income. To avoid unnecessary tax burdens, you’ll want to keep detailed records of all your expenses related to the property. Hiring an experienced accountant can help protect you from making mistakes that cost you more money, or from missing out on significant deductions.
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Property maintenance and repairs
There are all the usual expenses like lawn care, pest control, and battery and filter replacements. But things can break down and wear out in vacation rentals as in any other home. These problems will need addressing before they result in larger issues.
You will need to maintain the property, like new, to keep it attractive as a rental: curb appeal is important. You also have to maintain the property when it’s not in use. If it’s a seasonal rental, there may be extra expenses in closing and re-opening the property between seasons.
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In order to successfully rent the property, you will probably need to advertise it, and, of course, advertising costs money. There are many types of advertising available, including paid ads. Many property owners choose to list on popular vacation rental platforms, such as Airbnb, which takes a percentage of your earnings.
You may need to experiment with marketing to see which types provide the best results. This could get expensive very quickly, especially if the strategy is not effective.
A vacation rental needs to be fully furnished. Cheaper furniture is more likely to become damaged or broken and may not appeal to high-paying guests.
But expensive furniture is costly to replace and, often, more difficult to clean and maintain. Guests will not want to rent the vacation home if the sofa is full of stains or the mattresses are lumpy.
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Household and personal items
In addition to furniture, you may need to purchase household furnishings and items for your guests to use during their stay. You can purchase some infrequently, such as curtains, blankets, and kitchen utensils. But others will need to be replenished regularly, such as bathroom supplies such as toilet paper, basic cleaning supplies, and toiletries, and kitchen staples such as coffee, tea, salt, pepper, sugar, etc. If you provide sheets and towels, there will also be laundry to do when guests leave.
Depending on the location, you may want to provide other conveniences at the rental, such as firewood or a beach umbrella, or even puzzles and board games.
You should also factor in replacement costs for theft and/or breakage; you could find towels or other items missing once a guest leaves. And there’s the cost of cleaning and re-stocking between visits. If you don’t live close to the vacation home or don’t want to do it yourself, you’ll need to pay someone to manage the property between guests.
Homeowners Association (HOA) fees
If your vacation rental is a community that requires HOA fees, those fees will be an added cost. HOA fees can be costly, at as much as thousands of dollars per month. However, you can expect lower fees in many areas. And, if the HOA also offers attractive amenities, such as a community pool or golf course, that could increase your rental income and be well worth the fees.
To ensure the vacation home is affordable and a good investment, determine how much the HOA fees are before you buy, and remember that you will need to pay them whether or not the property is occupied.
Owning a vacation rental may sound great, and it can be, but the actual costs can be a big surprise. You can minimize expenses by comparing lenders, considering vacation rental locations, and gathering all of the necessary information before deciding on a purchase. It pays to make smart money moves when you invest your hard-earned money.
Owning and renting out a vacation property can be lucrative, but be sure to consider all the costs, including the work that may fall to you to clean, maintain, and prepare the property for the next guest. The last thing you want is for any unexpected costs to eat into your profits, or for your “passive” income to become a full-time job.