The vacation home market is doing well. Now that COVID numbers have decreased significantly, people don't want to stay home. They want to travel and explore. Is now the time for you to be investing in a vacation rental home? Let's find out!
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Not only are more people traveling now more than before the pandemic started, many people are still working from home. This means vacation rentals have a potential for a good return on investment.
What are some questions you should be asking yourself and experts about if YOU should buy a vacation rental?
And is Cherokee Village Arkansas the place for you to buy one?
It's important to look at both sides of this, though I want to scream out YES! It is a great place to have a vacation home! Buying a vacation rental is a great opportunity for you to build wealth and equity in a home.
Just like any home you are considering buying, you want to evaluate if a vacation home will appreciate value. It's definitely possible you will save money by not spending on hotels year after year (as well as time planning), but I am referring to when you go to sell this house in 5, 10, 20 years--will you get your money back and hopefully make some? If you own a vacation home, you can possibly enjoy longer vacations, not worrying about the nightly rate. You will want to go more often since you're invested. This is a good return on your emotional health, having a chance to recharge and relax. A vacation rental can be used for you and your family, rent it out, or a little bit of both. If you decide to rent out your home, you want to be gaining income rather than breaking even with mortgage, taxes, insurance and maintenance.
Consider all your expenses when buying a vacation rental. You will have the normal home expenses: mortgage, taxes, insurance as well as maintenance when you are there or not. You'll also have to consider the seasons and whether you need to winterize the home or other measure to prevent mildew in the summer months.
When deciding to buy a vacation home, you will need to evaluate your finances: will this leave less for the kids' college fund or your retirement?
Will you still want to vacation in the same spot in 5 years? 10 years? Retire here in 20 years?
If you decide to rent the vacation home, you may worry about potential damage to the house. This is why a property manager is so important; someone who knows the area and keep a close eye on your home.
When buying a vacation rental, you will want to consider the housing market overall. Right now, prices are starting to come down from an all-time high and sellers are not getting offers in a few days nor multiple offers. If you have to get a loan to purchase a vacation rental, you will have to pay a higher down payment, more than likely. Depending on your credit, the property and the bank, a buyer could be required to pay 25, 35 even 50% down. The partial benefit is you will likely not have an appraisal since you have so much invested. Interest rates are also going up but expected to come back down slightly later this year.
Taxes are also a consideration when buying a vacation home. You can deduct mortgage interest and property taxes if you use it as a vacation home only. If you rent the home out, it will look different on your taxes. You will have to report the income, but it will be reduced by any expenses you have for maintenance and improvements. This may be a way for you to save money--make improvements that are tax deductible since it was a rental income producing property!
It is important to have realistic expectations on the rental income: will it be enough to pay the mortgage?
What if I don't get any renters?
Will I actual use the home for vacations?
It is important to work with a REALTOR® who know the vacation home market. Make sure you are looking for an investment in a popular vacation spot like Cherokee Village AR. Look at other homes that are for rent in the area--what are they renting for?
Are the owners happy with their return?
What are the occupancy rates--how often are the homes rented?
Are there too many vacation rentals available already/is the market saturated?
I believe that is one reason the market is NOT saturated--we have very few actual hotel/motels in the area, so vacation rentals have been a great option for people wanting to enjoy the area.
Buying a vacation rental can be quite different from other investments. If you've owned long term rentals, you have an idea of what it is like, but not exactly. It's more like a hospitality business, where you are the host and housing guests. You are advertising constantly rather than once a year for a new tenant. You -are cleaning the property weekly or more than weekly depending on check out and check in, where a long-term rental shouldn't require any cleaning if they honor their security deposit. This is often times why researching property management companies/agents is essential to a smooth-running vacation rental-high occupancy and great reviews is a mutual goal!
Property management companies generally charge more for vacation home rentals than on long term rentals. They have more invested time managing multiple check in and check outs during a month, as well as organizing cleanings. Our property management also includes incidentals like toilet paper, paper towels, soap, shampoo, etc.
When researching, ask property managers what the most desired features are in a home: hot tub?
waterfront-does it matter which lake or river?
near the beach?
number of bedrooms?
Find out if homes currently used as a nightly rental are listed for sale--these will have a record of their performance and often come furnished.
Seasonality is another issue to contemplate. Cherokee Village does have all 4 seasons, so we do have some times of the year with little to no tourists. Our busiest season is from May through August with a few reservations in April and September, sometimes holiday reservations. Some of our clients will have snowbirds rent for the winter which helps keep rents consistent and still get the best return in the summer. When evaluating, plan on the worst months' rent to break even on your expenses. On the best months, set some excess income aside to get you through the worst months. The best time for you to close on a house is in Spring, so you can build up those cash reserves to get you through the winter.
After deliberating all these details for buying a vacation rental, you may decide it's not right for you. It may be better for you to buy 2 or 3 less expensive, long- term rentals with the same money. These homes will likely have less appreciation than a vacation home but will also be less risky for a monthly income. A single-family home in a good neighborhood is much safer for an investment than a high-end home needing to be rented out most weekends of the year.
Is buying a vacation rental right for you? If you can answer many of the questions above and still feel good about moving forward, then yes, it is. Most people say real estate is about location (which obviously a vacation home needs to be desirable) but it's also about timing. Right now, there is a low inventory of houses but since vacation homes are in a higher price range, there is less competition. This gives buyers an edge to negotiate with sellers. Also remember, no more than 10% of your net worth should be in one asset--it's important to diversify.
If you are ready to look more into buying, check out this video, Where is the best place to retire in AR?