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Continued:
What do I mean by “aggressive”? I mean that you have your villa listed on lots of villa listing web sites and you have your own professional web site with lots of information about your villa and the surrounding area. And your web site is listed high on the search engines for several key words. It also means that you print, or have printed, your own brochures to hand out to people and leave in the home. It means that you spend time creating partnerships with other web sites, other owners, and businesses that your guests will find useful. To achieve this level you will probably spend in the area of $3,000 per year in web advertising. You’ll need to factor that into your monthly expenses and modify your break even point.
If you’re not that aggressive you can expect to rent your home about half that number of weeks per year. Renting your home for less weeks per year doesn’t mean that you can raise your weekly rate to make up the difference. You still have competition (other owners) whose rates ultimately determine the upper limits of your weekly rental rate.
But you say that you only want to offset your vacation expenses by having your own place to stay, etc. and won’t it still be a good long term real estate investment?
If you go by the above numbers and say that you only rent your home for 20 weeks per year at an average of the $1,006.85 per week you will need to multiply the $1,006.85 by the difference between the number of weeks you actually rented and the target number of weeks for “break even” (30-20 = 10, 10 x $1,006.85 = $10,068.50). That’s the amount your vacation cost you. If you want to look at the long term investment side of it you need to look into the future at the amount your home might be worth when you go to sell it. Here is the secondary formula:
You purchased your home for $300,000. You have an annual loss of $10,000 because you only rent for 20 weeks a year at your break even week rate. You keep your home for 10 years and sell the home for $450,000. Now take the $10,000 year loss and multiply it by 10 – the number of years you lost money ( $10,000 x 10 = $100,000). Subtract $100,000 from $450,000 ($450,000 - $100,000 = $350,000). So based on the above numbers you made $50,000 for your long term real estate investment. But wait, you forgot to add-in the amount of annual repairs, and the closing costs for the realtor. Was your investment worth it?
There is one more factor to consider. Investment properties can still be worth it if you factor in the “Tax Advantages”. Repairs and expenses are deductible and can make for a small win fall at tax time, but this applies only to American owners. This may not be the case for foreign investors. Another part of this factor is what your long term strategy is. If you plan to use your vacation home as a “Retirement” property at some time in the future then you can benefit from owning the vacation home by not having to pay capital gains tax because you’re not selling it for your retirement cash. Sell your primary dwelling and move into your vacation home (the one that you’ve been renting and claiming as investment). You’ll be able to keep up to $500,000 (under the current tax law) from the sale of your primary dwelling, without paying tax on it. This is one time opportunity. So you’ve claimed the vacation property as an investment property, collected rent for it, watched appreciate in value, claimed tax deductions for it and now you get to really enjoy it. It’s sort of like having your cake and eating it too!
The above strategy isn’t for everyone and I would suggest thinking long and hard about it before investing in a vacation home for the above reasons. We all know that taxes can change and what sounds like a good idea today can be a bad idea tomorrow. Investing solely for the “Tax Benefits” is always a bad idea. I wouldn’t invest in a vacation home unless I was serious about not just breaking even but actually making a few bucks above the break even point. Don’t forget that the IRS is watching too, and if you can’t show you’re intentions ARE to make a profit you’ll be paying the government some serious money.
There’s a lot more to owning and renting a vacation home than you thought and even more than I’ve included here. The above examples and formulas are only a start to get you thinking about this very large investment. The bottom line is that it’s NOT EASY and anyone who tells you otherwise is jerking your chain. Changes in the market, the area, the economy and a host of other factors can have either a positive or negative affect on your investment. One thing you can be sure of is this kind of investment will require a much more “hands on” approach than other investments.
You CAN make money owning your own vacation home and renting it out but this kind of investment is not for the “faint of heart”. It can be both rewarding and heart breaking. Hopefully after reading this you are a wiser investor.
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