I suppose the answer to this is complicated and really depends on one’s goals with the vacation rental, how much work one wants to put into the rental process and the cost / benefit analysis of purchase price and rental income.
I will use my vacation rental as an example. We own a vacation rental on the Big Island of Hawaii at the upscale Mauna Lani resort. We purchased it in 2014 when prices were still somewhat depressed from the great recession. We put down 30% and have a second home mortgage with rate less than 4% for the rest. We have large HOA (about 1400 per month)due to the fact that in Hawaii the HOA takes care of all exterior elements including landscaping, exterior paint, roofing, common areas such as fitness center, pool, beach club etc. But considering we are not on island for 10 months of the year, we are happy to pay someone to manage all of that for us.
We advertise our home on Vrbo and Airbnb. Those websites have changed a lot over the years and charge the renter more than they used to but people are still using them. I have seen a huge shift in the past few years away from Vrbo and much more to Airbnb. A general rule of thumb is that foreigners will use Airbnb as will younger (millennials and younger) Americans but baby boomers and some genX will use Vrbo. It has been fascinating to watch this evolution. We also do have quite a few return renters that will just contact me directly after their first year.
The big question that one has to answer which will directly affect if you lose money on the vacation rental itself or break even (assuming you have a mortgage), is how involved do you want to be with the management of your rental? First thing you need to look at is the IRS code – https://www.irs.gov/taxtopics/tc415 and then discuss with your accountant. You must take the rules of this very seriously. There are a few more issues to discuss with your accountant as enumerated here: https://www.marketwatch.com/story/own-a-vacation-home-heres-how-the-new-tax-law-affects-you-2018-12-03 How much you can write off on your taxes and the passive activity loss is directly affected by your activity.
So what that means is that for the best tax benefit, you need to actively manage your vacation rental – that means taking the bookings, communicating with guests, keeping maintenance log, and doing as much of the work yourself at least to get up to the 750 hours per year. If you have a booking agency deal with your guests, you are not actively managing your property and while you may have some tax advantage, it is no where near where it would be if you did it yourself.
Another large factor is just income vs expenses. Before purchasing a vacation rental, I would check occupancy rates pretty carefully. Can the home be rented all year long? Are there seasonal adjustments in rates and what are the rates? Does the number of nights rented per year times rate cover your expected expenses? What about the weather? We picked our location on the Big Island partly because of its very strong rental history and the consistent weather. It is always in demand as there is no rainy season, no mud season etc. We are also rarely affected by flight delays as there is no snow coming this way. As a result, we enjoy high rates of occupancy.
But to be in demand as a vacation rental, one has to maintain your home carefully. Things cannot be broken, everything should be sparkling clean, it should be well equipped. We regularly upgrade and repair elements in our home so it is pristine. As someone who manages her own rental, I watch the reviews carefully and strive for perfect reviews every time. The only way to achieve that is pay attention and make sure you visit your place. In my opinion, anyone who is self managing needs to visit once a quarter at least.
Let’s take money out of the equation though. What do you get for a vacation rental? For us, we are happy to meet up with our family members who live apart from us in a place that has years of happy memories. Even though we enjoy travelling to new places too, there is something special about everyone knowing we are going to favorite place that is stress free – knowing what to expect has a lot to do with the lack of stress.
In the end, everyone needs to take a look at the cost benefit analysis and weigh the work against financial impact versus your happiness that you get from enjoying your second home.
Check out this website https://buyvacationrentals.net/ for more vacation rental purchase information!
Today I am looking at pricing and real estate market trends in Big Sky Montana. This should serve to round out one’s perspective on real estate in southwest Montana – check my blogs on November 15 and 25th for more information on Belgrade and Bozeman. The four graphs below represent single family homes, condos and townhomes in 4 different price categories. In the first graph, we see sold prices of homes below $295K. You might think this looks like good news for buyers but if you factor in actually how many homes have actually sold and are on the market, you see that there are 2 single family homes listed and 9 condos.
In the next category seen below, we have homes from 295K to 512K. In this category, pricing looks pretty flat in 2019. But factor in that there are no single family homes and only 20 condos on the market currently.
In the next category seen below, we have home from 512K – 1.1M. Things get a little interesting here as we see median prices for single family at 947K and condos at 752K. Townhomes and Single family homes especially reflect pretty large increases this year which is, of course, a function of little supply and big demand. As we sit today, there are 3 single family homes on the market right now and no townhomes but there are 24 condos in this price category available.
In the last category, we see everything over 1.1M. And we see increasing prices this year in the single family and condo categories. There are currently 56 single family homes on the market and 58 condos. Clearly, this is where the developers and builders are concentrating and where they perceive the demand to be.
The Big Sky market is different than our other SW Montana housing markets as it is primarily made up of second homes. The second homes are owned by mostly outsiders or non Montanans. Their money has come from the booming economy and record stock market that we have seen in the past few years. I think that as long as that continues, all will be good in Big Sky as it is a beautiful place with many amenities. However, all economics are cyclical and at some point, we will have some kind of slow down in the US and world economy. At that point we will see this Big Sky market slow as well and like most second home markets, it will probably take a bigger hit than primary home markets and take longer to recover. All home buyers need to weigh the risk against their financial situation to evaluate whether a second home purchase in a place like Big Sky is a good decision.
These numbers reflect sold pricing. Remember that Montana is a non disclosure state so only licensed real estate professionals can access accurate data. If you would like to dive deeper into market trends, please reach out and let’s have a conversation! I hope you found this helpful – please pass it on!!