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Should I buy a vacation home?
A lot of people have asked me that question so I have put together this article that covers in detail all the points you’ll need to consider before you purchase a vacation home as an investment. Most of the following information your realtor will never tell you and if you ask them about any of this they will greatly downplay it or conveniently ignore the question. After reading this you’ll have much more information than your realtor wants you to have. So here goes.
Many people, including us when we purchased our first home, think that if they owned their own vacation home that they could rent it out to other vacationers, and would at least cover the cost of the investment as well as most of the cost for their own vacation time. And that’s what many realtors will try to sell you on when you walk in to their office. What they don’t tell you is what it will cost you to rent your vacation home.
Here is a brief list of regular expenses you will incur for your vacation
home:
1. Mortgage (principle & interest)
2. Mortgage insurance
3. Property tax
4. Home owner’s insurance
5. Phone
6. Water
7. Sewer
8. Electric & Gas (if you have gas)
9. Management fee
10. Lawn service
11. Pool service
12. Pest or termite service
13. Cable TV or Satellite service
14. Home owner’s association fees
15. Other
In order to determine your costs, and what you should rent your home for, you will need to follow a formula. Here is an example for comparison. The figures are average for the Central Florida area.
Let’s say you purchase a 4 bedroom, 2 bath home with private pool near Disney with a purchase price of $300,000. Let’s also say that it is already furnished so you are ready to rent it out as soon as possible. You put $100,000 down which leaves you with a mortgage of $200,000 (you would actually have closing costs on top of the $300K to also consider but for the purpose of this example we will keep it simple.) You won’t have mortgage insurance because you put down more that 20%. You have a 30 year fixed rate of 6% with a monthly payment of $1,200 for principle and interest. Your annual property tax is $2,000 and your annual home owner’s insurance is $1,000. In order to determine what your “break even” point is we do the following math:
1. Multiply your monthly mortgage payment by 12 to get your annual mortgage
payment amount ($1,200 x 12 = $14,400)
2. Add your annual mortgage amount, your annual property tax and your annual
home owner’s insurance together ($14,400 + $2,000 + $1,000 = $17,400)
3. Divide this amount by 12 ($17,400 / 12 = $1,450)
4. Add to this your monthly management fees, lawn service, pool service, phone
service, cable TV, utilities (water, electric, gas, sewer, etc.), pest and
termite protection, home owner’s association fee, and any other monthly
recurring fees or annual fees that can be divided by 12. Below are typical
monthly fees:
4.1. Management - $125
4.2. Lawn - $ 70
4.3. Pool - $ 75
4.4. Phone - $ 40
4.5. Water/Sewer - $ 45
4.6. Electric - $200
4.7. Cable TV - $ 45
4.8. Termite Protection - $ 30 (Initial cost is typically $1,500, renewal averages
$30 per month)
4.9. HOA - $ 30
5. So based on the above numbers you’ll have a monthly expense total
of $2,110.
6. Multiply this amount by 12 ($2,110 x 12 = $25,320 per year in expenses)
7. Divide the annual expense by 30 (the target number of weekly rentals) ($25,3420
/ 30 = $844).
8. Add to this amount the cost of cleaning after departures and resort taxes
that you will have to pay. Cleaning fees average $70 per clean. Taxes should
be calculated at 11% ($844 x .11 = $92.85). So $844 + $70 + 92.85 = $1,006.85
9. Based on the above numbers you will need to rent your home for at least
30 weeks per year at an average of $1,006.85 per week to get to your break
even point.
Now you ask why did I pick 30 weeks? Because 30 weeks is an average number of weeks that an aggressive owner can rent his vacation home for............
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