Considering purchasing a vacation rental?
January 28, 2021
Last year's fast-paced real estate market changed our local vacation rental environment drastically. Many of our area's long-standing vacation rentals were sold and are no longer available to area guests leaving a void that's ready to be filled by new vacation rentals. Likewise, some seeking to escape the COVID-19 pandemic purchased properties to flee more populous areas, with plans to offer their properties as vacation rentals once the pandemic subsides.
According to Pew Research Center, 22% of American adults surveyed stated that they, or someone they know, changed their primary residence in 2020 due to the pandemic. A competitive real estate market coupled with a potential vacation rental business, led to complex decisions for buyers. Our office was flooded with calls from buyers looking for advice in an effort to make smart buying decisions that would extend beyond the pandemic. To help others in their decision-making process, we wanted to provide some key considerations when looking at potential vacation rental properties in our area.
Picking the right home
The first choice is an easy one. Choose a location and property where you yourself would want to stay. Chances are, if you love it, others will too. Aside from having an amazing home in a beautiful setting, it needs to be located close to amenities that appeal to guests.
Also, consider whether you want to use it year-round or seasonally. Remember that access can be difficult and costly to maintain during the winter months if you aren't close to main roads. I've had clients with beautiful homes on the Blackfoot River that stay completely booked during the summer months but their property isn't ideal for winter guests because they are too far from winter recreation opportunities.
Consider the future
Look at how the property may be used in the future. Perhaps it's an area where you may want to retire. A 2015 study by the National Association of Realtors found that:
• 37% of people plan to use their second home for family vacations,
• 16% plan to convert their vacation property into their retirement home, and
• 42% of buyers purchased their investment property in hopes of generating income through renting.
Be sure to look at area amenities and access to services such as medical care and shopping. If you have hobbies or participate in sports or outdoor activities, check to see if there are area clubs or community centers. Future growth is another important consideration. Plans for an outdoor mall may thwart your love of bird watching, but is great if you love to shop.
Rules and regulations
As vacation homes have become increasingly popular, so have regulations. Cities, towns, condominiums, subdivisions and homeowner's associations have adopted rules regarding vacation homes. Before considering the purchase of a potential vacation property, be sure to check with your real estate or property management professional to see if there are laws or regulations that would prevent you from renting the property. This is particularly true in the Seeley Lake area where many of our subdivisions strictly prohibit vacation rentals. I have had clients come to me regarding potential management opportunities only to be disappointed to find out that their home is in an area where vacation rentals are strictly prohibited.
Many local jurisdictions have licensing regulations that require a review process that can be time-consuming, as well as expensive. You should begin that process at least 3 to 6 months prior to the time you plan to begin accepting bookings. In our area, people begin booking their summer dates a year in advance. Currently, most of our summer rentals are already at least 50% booked. If you have a home you want to book for the summer of 2022, you want to begin the licensing process by the summer of 2021.
Once you've chosen the appropriate property, it's important to make sure you have the right insurance. A standard homeowner's policy does not provide you with the coverage you need. You will also need to decide if you're going to manage the property yourself or hire a property manager. If you decide to handle the management yourself, remember that any individual or company you contract with to provide services must have their own insurance. If they don't, and an accident occurs, you can be held liable. Ask all contractors, including housekeepers, to provide you with a copy of their certificate of insurance.
Professional or self-management?
Each property manager provides different levels of service so ask for their rates and scope of services such as maintenance and cleaning. In exchange, property managers are compensated by collecting a percentage of a commission in the form of a percentage of guest payments. In exchange, we provide a variety of services, collect and remit Lodging and Facilities Taxes to the Montana Department of Revenue, coordinate repairs and submit damage claims to insurance to save owners money, take care of cleaning, maintain the owner's calendar for their personal use. We also pay bills, check to make sure plowing, mowing or other contracted services are being performed. We are responsible for providing owners with monthly and annual accounting records for tax purposes.
Having a local property manager is especially important if you don't live in the area. The vast majority of guest issues are easily resolved when someone is available. Our most frequent calls are for guest lockouts, thrown breakers, and minor plumbing issues. Most of these can be resolved by staff without having to call a maintenance person, which saves our homeowners money. Average management costs are more than double that of long-term rentals due to the complexity of taxes, cleaning and other issues involved in their management.
Overall, purchasing a vacation rental can be a great way to build equity. You may be eligible for tax write-offs on a property where you would otherwise be spending money to vacation. It's a great way to spend time with family and friends in a place you love. Make the process as stress-free as possible by talking with your financial advisor, real estate professional and a property manager to make sure you are making the best possible decision.