Vacation is in the air for many schools this week in the New Jersey area. For those planning a getaway, depending on one’s budget, family size and preferences, renting a vacation home over a hotel room has become increasingly popular over the past few years. Services and Apps such as AirBNB, HomeAway, and VRBO have made it exceedingly convenient and affordable to rent full homes and condos, instead of the traditional hotel stay option.
For those considering to be on the flip side of the equation – as an owner of a protentional vacation rental home, there are certainly many advantages as well as risks that one should keep in mind. If you frequently travel to the same area and want the convenience of having a set place of your own – to come and go as you please, this may serve to be the best of both worlds. On the one hand, if used often enough, the costs associated with paying for something else may be recouped fairly quickly. On the other hand, the reality however is, it is often not as easy as it looks and seems, to successfully and financially make sense.
An acquaintance recently called me to discuss an opportunity to purchase such a home, and wanted to pick my brains on the viabilities and mechanics. The advantages are a lot easier to identify, and people usually do a good job convincing themselves of all of the endless benefits – so I mostly focused on the risks. We discussed the carrying costs of maintaining such a property all year round, and tried to determine how often such a home could practically be rented. I reminded him of the need to keep a reserve for increased expenses such as unexpected vacancy, repair, maintenance and any common association charges that are incurred.
He was shocked to learn that I can actually finance homes that are being used as short-term rentals. Everyone is familiar with typical second home mortgages, and investment property financing, but it is highly uncommon to be able to get reasonable financing on short-term rental homes. The risks and unknows have kept traditional banks away from lending in this space. The banks that do entertain such financing are usually very rigid in their requirements to make it worthwhile.
In addition, some factors of consideration for buyers, renters and potential lenders include:
- Evidence that this short-term rental is legal and permissible in the subject property’s jurisdiction.
- Proof of the necessary registrations, licenses, permits and business certificates to rent out the property, if applicable.
- Confirmation that the owner registered and paid any transient occupancy taxes, or the like.
- Proper commercial liability insurance for the necessary use and occupancy of such homes.
All in all, there are a lot of unknowns and risks when venturing into such a ‘business’. One of the biggest drivers in considering these types of home purchases are the thought that the house will vastly appreciate in value, and make it all well worthwhile. This is certainly not a guarantee. In fact, it wasn’t too long ago when many vacation homes flooded the market, and the price on these homes declined. Owners could not sell these homes for anywhere near what they paid for it. The general rule of thumb for these types of ownership is, the longer you hold onto a vacation home, the better chance you have of making money on the property-, but buying a vacation home to immediate flip for profit is not a surefire money maker.
Owning a vacation rental home is a good investment if you do your homework and use conservative numbers to calculate it all. Very often, these homes are purchased “all cash” making the return on investment very unappealing. Knowing that you could get long term financing and reasonable rates can help make that decision a little more viable, but it is still something that you need to carefully evaluate with a knowledgeable advisor before jumping into the pool, and into the purchase! Shout-out and mazal tov to the Nachtigal and Barishansky families!
By Shmuel Shayowitz
Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience including licenses and certifications as certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at [email protected].