It’s Time to Buy the Next Vacation Rental Home

time_to_buy_the_next_vacation_rental_homeOver the past 12 years I’ve owned seven vacation homes – at one time we had five on the go – but mostly we have bought and sold as the market has evolved. Currently, I’m managing two – Osprey Cottage (bought in 2005) and Kingfisher Cottage (bought in 2012).

The process of selection has always been the same with new learning applied to every purchase, so with a new project on the go (researching a property in the Bahamas), it’s time to revisit it and to evaluate what has worked, what hasn’t and whether the ‘rinse and repeat’ system is still appropriate.

 

tweetIs it time to buy your first or next #vacationrental property? @Cottageguru shares her thoughts for her next one

The goal

The goal in the past has always been to invest with resale in mind so this has driven our selection criteria. In our region, homes that sit on the market for a long time because they are in a less popular area can often work well as vacation rentals because the guest demographic really doesn’t care whether it’s on a popular boating lake, or near a moderately sized town. In the long-term though, selling the property could be an issue, so picking up a bargain because it will rent well is not always the best route. The caveat of that, of course, is if you plan to operate the property as a business, then you can sell it as a business.

So far, I’ve never bought a place I would actually want to live in for any length of time. They have all been too rural, located way down country lanes, or have the odd quirk that completely bypasses a guest on a short vacation, but may be irritating for long-term living.

This time around we are looking for a place that we’ll eventually spend half our year in – maybe longer, so the criteria have changed enormously. The goal now is to find the home in the sun that will rent really well for the next ten years and then become a residence for our fun years.

 

Starting Again

For me and the properties I bought it was always relatively easy. The numbers were there clear as day on my accountant's reports. I knew exactly what the set-up costs would be, how long it would take to build a solid client base, what the seasons were and the potential rental income would be. And, it was invariably accurate.

In Ontario, Canada, our high season is July and August and a well-presented property has little issue with rental through the summer. Yielding spring and fall bookings has always been harder but knowing what sells in the out-of-season (and indeed winter) periods has helped. We needed:

To be pet-friendly – because the majority of guests in fall and spring have pets. They tend to be more mature groups whose children have flown the nests that are now occupied by furry friends.

To be winter warming – meaning a visible form of heat is essential. A wood or propane stove or an open fireplace creates the ambiance that hikers, skiers, and other outdoorsy people are looking for.

To offer high – end facilities – because no-one wants to ‘rough it’ in winter. After all, why leave the comforts of home when the weather doesn’t play nice if there isn’t something better or comparable to go to. To this end all our cottages have had:

  • Hot tub
  • WiFi
  • Large flat screen TV with satellite service
  • Wonderfully comfortable beds with high-end linens

So that was all relatively easy.

Rinse and Repeat (plus a little learning along the way)

Now we are in uncharted territory and have to start from scratch.

 

Setting Criteria

We now have different criteria. Our ‘retirement’ place must have oceanfront with clear water for swimming; it will have privacy; gardens (something that never bothered me much before); the layout must be such that our grandchildren get their own ‘wing’ – meaning bedrooms distanced from the master suite.

Those are the must-haves.

Now to check what else is out there matching those criteria that is renting.

 

Research the Competition

The best place to start is with those who are already renting in the location you want to be. Just take a look at Home Away or Flipkey – check out how many properties there are, what their average rental rate is and what their availability looks like.

Be wary of the calendars though – most just show available and non-available dates so it’s hard to tell what are actual bookings and what may be owner/family blocked time. In general though, if you are comparing them, it should be fairly easy to tell when the busy times are and what months have less activity.

 

Crunch the Numbers

Now comes the time to get the calculator out.

What are similar properties renting for?

What is the potential occupancy?

When do you want to use it and can you manage a couple of high season weeks?

The Bahamas is a year-round destination and although there are times when occupancy is almost guaranteed – December through April – I was surprised to see that popular properties were also full through the summer months and it was only October/November that tended to show a slackening in bookings.

 

Engaging an Expert

To learn more it was time to find a realtor.

I learned from experience early on in my buying-in Ontario days that some realtors know about rentals but most don’t.

They know all about vacation homes and the people who buy them for use as a second home, but once confronted on the rental aspect, it was surprising the few that were able to offer any educated advice on seasonality/rates/regulations etc.

The first realtor I interviewed in the Bahamas blustered about what she knew, which was very little. Not knowing what Home Away was seemed a dead giveaway.

The second, we found because they were offering vacation rentals on their website and were doing some agency operations. Not only did they have the knowledge we were after, they had a good insight into all the peripheral aspects of owning a vacation rental, such as where to hire a property manager, and whether licensing was required.

 

Don’t Forget the Set-Up Costs

I’ve always had a budget for setting up a property from scratch that has been remarkably accurate. We prepared a spreadsheet that had every bit of furniture, appliance, kitchen equipment, linen supplies etc. I could travel out from the UK, spend a weekend shopping, and leave on Sunday night with the house all ready for my property manager to take over and set-up.

With the Bahamas, all these things need to be imported and the duty is horrific. After all, there is no income tax or inheritance tax in the islands so the government makes its money from import duties. So, I have taken my spreadsheet and added 40% to cover shipping and duty.

 

Taxes, Regulations, and Legislation

Buying out of your comfort zone i.e. in a location you are not familiar with, can bring a lot of headaches, surprises and off-the-wall moments. A lot of these can come from regulations and legislation and additional taxes that may be imposed on an income generating property.

Trust me – if you are making money off this thing, someone is going to want their share whether it be local government, tourism authorities or your own tax man.

Yes, there is plenty to think about, and we’ll be traveling to Great Exuma again in February to look again, talk to the realtor and really get serious about crunching numbers.

I would love to hear from you if you’ve bought a property in another country. What other tips can you give to me, or others contemplating the same type of purchase? Are their pitfalls we need to think of that you unwittingly fell into?

Lance

Thanks for the article Mike! First, I just want to say thanks to you and Heather for bringing valuable content and insights to the VR industry. I am always anxiously waiting for the next Podcast to come out.

My story is similar in the way that we purchased our vacation rental (www.magicalclubhouse.com) in Orlando FL, yet we live in Dubai. The whole process was conducted via email, Skype, and Youtube. Yes, a little risky but the price was right and time was of the essence so we weighed the risks and then went through with the purchase. We did not run in to administrative problems with a U.S. home purchase since the process is pretty transparent, unlike destinations in developing countries where problems are part of the experience.

The biggest challenge is finding the right Property management team to partner with. Obviously, I would have preferred to “interview” the final 3 companies on my list in person since they would be taking care of my guests and property but time and distance wouldn’t allow it. When I was finally able to see my property and conduct a completely new makeover, I sighed with relief.

In summary:

1. Research, Research, Research. Analyze, compare and cross reference potential properties. You will see trends. I look for win-win properties which means I first look for a great price (long-term capital gains), as well as potential income revenue (shorter term).

2. Treat the choice of your property management Co. very seriously. It really needs to be viewed as a partnership, and not just a business deal. You must be satisfied with their business model and verify they have SOP’s (Standard Operating Procedures), have an employee training program, and share the same philosophy towards your property.

3. Find qualified experts in the region, vet them, then actually take heed to what they are saying. It may cost a little more up front, but will be less headaches down the road.

Keep on doing what your doing!

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