Buying a vacation home you can enjoy as well as use to bring in income is a win-win. Having recently gone through the process of buying a vacation property to rent out, I realized how helpful it would have been to have a step-by-step guide. This is not an exhaustive list, but covers many of the details you'll need to be aware of as you buy your vacation property and start your new business renting it out.
1. Figure out where you'd like to buy.
For me, this wasn't just pure economics; I also wanted a place that was easy to drive to (ideally two hours or less) and that we could personally enjoy. Do some market research to see if rentals are viable in your desired area and to get a sense of how much they rent for on vacation rental sites like Airbnb and VRBO.
2. Window shop.
Once you have a sense of where you'd like to buy, look online for recent sales to gauge the price range for the size of house you want (and can afford). You'll want to simultaneously reach out to a local realtor.
3. Figure out your down payment.
Most banks or mortgage companies want 20% or more as a down payment for a second home, or even 25% or more down if it's a condo. This is, of course, inextricably linked to the previous point so you know how much cash you'll need.
4. Get preapproval.
Get preapproved by a bank or mortgage company for the loan. You could theoretically do this earlier in the process, but until you have a sense of how much you want to spend, it's hard to know what to ask for.
5. Make sure the type of home you choose will suit your vacation rental business needs.
By now you've probably already started looking more seriously at places. I was torn between a condo and a house. Condos have the appeal of requiring less maintenance (they usually take care of chores like snow removal and landscaping) but can have hefty homeowners association fees. It turned out that the real issue, however, was that a lot of condo associations don't allow rentals of less than a week. This was a nonstarter for me since I was planning on targeting weekend getaway people.
6. Line up insurance.
If you haven't already, line up an insurance policy for the home. All you're doing for now is explaining your plans to the insurance company — make sure you tell them you plan on renting, since not every insurance company will allow that, and give them the name of the mortgage company you'll be going with. The insurance company will coordinate with the mortgage company to set up a temporary proof of insurance. You'll also want to consider an umbrella insurance policy to protect your new property or add the home to your existing umbrella policy.
7. Get the paperwork in order.
Once your offer is accepted, get in touch with your mortgage company to let them know. You'll give them a copy of the signed purchase and sale agreement and whatever items are left on their to-do list to wrap up the loan. They'll be ordering an appraisal, as well, to make sure the home is worth enough to justify the mortgage they'll be giving you.
8. Hire your contractor well before closing.
Several weeks before closing, you'll want to begin reaching out to contractors to line up any needed remodeling work. You don't want to start talking to people after you buy just to have to wait another three or four weeks for the work to start. This approach worked out well for us; we closed on time, and the workers were in the next day.
9. Set up your business.
Form an LLC or trust to protect your personal assets from liability. Consult with your attorney on this.
10. Get the utilities running.
Before you close, call the electric company to let them know you'll be moving in so you're not in the dark when you arrive after closing. (Classic rookie mistake!) This is also a good time to schedule Wi-Fi and cable installation and figure out who services your heating system.
11. Follow these general tips.
• The decor is important. A fresh coat of paint goes a long way, as does new furniture. Even just a couple of small touches can give your property an edge over another. For example, you could hang a pair of vintage skis on the wall if your property is near a ski resort.
• You may want to consider investing in power-flush toilets — eliminating a bunch of calls about clogged toilets is well worth it.
• Designate an "owner's closet" — a locked closet where you can keep your personal items for when you're using the vacation home for yourself.
• Remember to install a lockbox on the outside of the house for renters, and make a few extra keys.
• Laminate two copies of your house rules: one for the fridge, and one for the coffee table.
• Find a local cleaner and a handyman who are willing to be on call for issues.
12. Do your research on tax requirements.
Some states require you to collect taxes, so make sure you register and get all that set up well in advance. Check with the state tax office. Also make sure you don't have to register with the local municipality where your property is located.
13. Advertise your property.
Once all repairs, renovations, painting and decorating are done, have photos taken for the rental listing, and get the listing posted.
I hope these steps help you start your rental property business with as few headaches as possible. Enjoy your new vacation home — and your new venture!
This article and material are written by Caleb Harty, Principal of Harty Financial, for informational purposes only. This is not a solicitation of any product or service. Any assumptions are hypothetical and for illustrative purposes only. Harty Financial nor its staff provide tax, legal or accounting advice. Please consult your own professional for those needs.
