How to Make Money by Renting a Vacation Home to Long-term Tenants

Last updated on December 9, 2016 by

Long-term Vacation RentalsIn the span of just one week, I received two completely different views on vacation rental homes.

One person told me they were selling their vacation rental home because they were losing money, and the other told me how much they love owning their vacation rental.

Why the discrepancy?

I spoke with a Florida developer, Troy White, who knows this business well after developing a luxury living community in St. Augustine called La Fontana, to help shed some light on the issue … and to find out how best to rent out a vacation home.

Surprisingly, he said the easiest way to have a stress free vacation rental property, is to rent it to long-term tenants.

Why a Vacation Home?

Vacation homes can be fantastic investments, if they are in the right location. They have a natural appeal as a rental because they typically are only used by their owners for a few weeks out of the year. It makes sense to make some extra money while it’s not in use.

It makes sense to make some extra money while it’s not in use.

If you’re looking for a guide on how to make money renting out a vacation home long-term, read on.

1. Approach This as Any Other Investment

One reason timeshare sales staff are so successful with such an inferior product is that they catch people when they are on a vacation high. Vacationers are so hyped up about the great time they were having they got caught up in a sort of vacation haze and couldn’t wait to signed on the dotted line.

That is the absolute wrong way to buy investment property. “Buyers need to approach the acquisition of the property as an investment first and a vacation home second,” says White.

Buyers need to approach the acquisition of the property as an investment first and a vacation home second.

Investing in a vacation home successfully requires you to determine “demand trends and long-term attractiveness of the property,” he says. In other words, just because you like going somewhere doesn’t mean there’s a deep market of renters available.

Probably the biggest mistake people make when buying a vacation home they intend to rent out is “overestimating a property’s demand/occupancy that can be reached,” says White. Determine what the demand is by analyzing how well nearby vacation homes do. Also, speak with a local real estate agent or a vacation rental company to find out.

2. Get Very Familiar with the Area

Before you invest in a long-term vacation rental property, you need to “really get to know it on a local level,” says White. He recommends connecting with real estate agents and locals who know the area well. Be sure to find out the state laws and regulations and local laws of that jurisdiction are, as well the amount of property taxes.

“A real estate agent should be able to warn you about future developments that could affect the property value of your potential home,” he says. Not to mention that new developments would be direct competition for you. That might be okay if the area is popular enough to support a new development, but you certainly don’t want to be blindsided.

A real estate agent should be able to warn you about future developments…

If the vacation home you’re considering is in a development with a homeowners association, find out whether you can rent it out. Some HOAs don’t allow rentals at all, others restrict the rentals to a certain percentage, and some might have no restrictions.

3. Rent for the Long Term

Most people, when considering renting out a vacation home, consider renting it for weeklong stretches. But you can also rent out a vacation home long-term to people who wish to stay a while.

It’s true that you won’t be able to charge as much when you rent long-term as opposed to renting by the week. But it’s much less time-consuming to rent for the long-term, and you could save a lot of money by managing it yourself with Cozy.

Most long-term rental leases are for six, nine, or 12 months. If you’re already a landlord, renting your vacation home to tenants for a long-term stay is more along the lines of what you’re used to: You would screen tenants just as you already do, and you would prepare a lease. Your tenants would put the utilities in their own name, and they would supply their own furnishings.

Plus, you wouldn’t need to fret about vacancies all the time, as could (and probably would) happen when you rent a vacation home by the week.

With long-term tenants, you’ll receive monthly income, just as you do with your regular rental properties. If you rent your vacation home for six or nine months, you still have time to enjoy it yourself during the year. If you rent it for 12 months at a time, your tenants are paying your mortgage (if you have one), so you can retire someday to your dream home.

4. Learn to Be a Long-distance Landlord

After you’ve found the perfect vacation home destination spot, you need to prepare yourself for being a long-distance landlord.

It’s crucial to find a trusted handyman, plumber, and electrician since you will probably manage repairs remotely. Your real estate agent might be able to recommend service providers. You can also ask local residents for recommendations.

It’s a good idea to meet the service providers while you’re in the area. Let them know that you just bought investment property and that you’d like to call them when something comes up.

5. Negotiate Personal Use in the Lease

If you want to enjoy your vacation home while also renting it out long-term, you can negotiate some vacation time into the lease. Many long-distance owners want to enjoy their vacation 1-2 weeks every year, and you can make it a requirement in the lease.

If it’s part of the contract, the tenant will have to simply go on vacation during the same time, or stay with a friend. Obviously, I don’t suggest charging rent to the tenant while they don’t have access to it.

6. Use a Manager for Short-Term Rentals

While long-term tenants provide more security, a short-term rental can be more profitable.

If your vacation home is in a popular vacation destination (such as beaches, ski resorts, Disney world, etc.), then you can make 2-3 times more money by renting it on a weekly basis.

However, weekly rentals more stress, more wear and tear, and very time-consuming. Unless you live near your vacation home, and don’t mind performing weekly check-in’s, I suggest you hire a local professional manager.

A professional manager will typically take 20-30% of your rental’s gross income to manage weekly rentals, but you may still end up making more renting it short-term than long-term.

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Bottom Line

Renting a vacation home as a long-term rental isn’t too different from the regular rental business. But since you probably will be a long-distance landlord, it’s best if this isn’t your first rental property. Plus, long-distance landlording is really only profitable if you are only renting to long-term tenants.

My two cents:

  • Long-term Leases: If you plan to rent your property with a year lease or longer, you can likely manager it yourself from anywhere. Just be sure to use the right tools, and build a network of contractors in that location.
  • Short-Term Leases: If you want to rent your property under short-term or weekly rentals, from afar, it would be best to hire a local property manager.

If the long-distance rental is your first investment property, please hire a professional to show you the ropes.

Once you have a bit of experience under your belt and understand the neighborhood you’re buying in, you should be one of the people who say they love owning a vacation rental.

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2 CommentsLeave a Comment

  • Samantha Weston

    I enjoyed this article and have been thinking about vacation rentals for a few months. What is like to know is how investors make decisions about where to own their vacation properties? Specifically, how to best narrow it down given all the options in the USA alone? Are there resources for this?

    • Laura Agadoni

      Hi Samantha,
      I’m glad you enjoyed the article! Many people start based on where they’d want to live someday and then do the research discussed in the article: see how popular the area is, speak with local real estate agents, and get to know the area well. It’s also a good idea to choose an area that you can drive to in 8 hours or fewer.

      MarketWatch published a list of the 10 most popular spots for vacation homes in 2013 (but you’d still need to determine whether the area might make a good investment). They were, starting from No. 1: Ocean City, NJ; North Wildwood, NJ; Kissimmee, FL; Ocean City, MD; Marco Island, FL; Big Bear, CA; Lake Arrowhead, CA; Panama City, FL; Gatlinburg, TN; and Cherry Grove Beach, SC.

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