Owning a vacation rental has been a love-hate emotion for me. We bought a lakefront condo 10 years ago near lakes and an area known for entertainment venues, for what I thought at the time were great reasons.
Why we bought.
Diversify our investment holdings.
We only own one home, no land, no rentals. Much of our portfolio was invested in stocks, bonds and mutual funds. It seemed reasonable to devote a greater portion to real estate, in order to further diversify our portfolio.
Generate an income stream.
We planned to rent out the property and thought it would rent quite a few days of the year.
Property value appreciation.
We planned our purchase in the heady days just prior to the recession of 2008/2009. Property values had risen considerably in our married lifetime and we thought they would continue to do so.
Gather the family.
Wouldn’t it be fun to have a place where our sons, their wives and our grandchildren could come together to play, visit and bond?
All of the above reasons were valid, and actually continue to be valid.
My differing perspectives on vacation rental finances.
Depending if I am loving or hating the vacation rental ownership I view the financial desirability of owning it from different perspectives.
We paid around $200,000 in 2007 for the property with an extra amount for furnishings and a slip in a yet-to-be-built boat dock.
When I’m hating the ownership, my perspective tells me the following.
If we had put that quarter of a million dollars into a tax exempt bond fund at the time, it would have earned around 4% in yearly income, or around $8000 – every year for the past 10 years. That’s $80,000 folks. That $80K would have come without additional time spent or additional expenses.
If we hadn’t sold stocks and mutual funds to come up with the money to close the sale (cash on the table), we wouldn’t have generated a huge capital gain in 2007. If we hadn’t generated that gain, our taxes would have been lower. If our taxes had been lower, it would not have equaled or exceeded my spouse’s entire gross income and he would not have decided to retire. We might have had a couple more years of his earning power.
Operating costs of keeping the condo rented have been higher than expected. Net profits per year before depreciation averaged around $2500 per year for the past 6 years.
Time involved with self-rental-management has been extensive.
I don’t track time spent closely, but it is significant. Gathering supplies, deep cleaning, locating companies to clean between rentals, posting information on advertisement sites, responding to queries, billing clients, and many more tasks eat time.
Our accountant charges a lot to do our taxes.
Tax rules for vacation rentals in the US are quite complex. It is not a do-it-yourself type of tax return. Prior to having the rental property we always did our own taxes.
When I am loving the ownership, my perspective shifts to the following.
We paid $25k up front for a boat slip that never sold, had to sue to get the money back and ended up getting $9000 more than we paid out for the slip and the legal fees.
My Grandkids have grown up visiting the lake condo and love it. We have done a Money Camp each week during high season when they are off school. If I had done that week without owning the condo and had rented one at the lake, I would have paid out around $2000 each year for the rental for that week. We went there 5 years for camp so I would have spent $10,000 in rent.
After I started self-rental-management, we have been able to deduct some of the condo expenses from our personal taxes each year, resulting in some good tax savings.
We remain diversified in our portfolio and the property has regained it’s value from the ‘great recession’ downturn.
Our family has gathered multiple times across the years to enjoy the condo and the area. We used it as a home base to explore many activities and attractions within a days drive.
We haven’t had to pull money out of pocket to pay annual expenses on the condo and in fact, pulled $10K out of the llc that holds the condo from some of the annual earnings.
As you can no doubt see, putting the money spent on the condo into a tax free bond fund earning 4% interest a year would have yielded a lot more return on our dollar, but I think our return on life was at least equivalent.
If you own a vacation rental property, how do you gauge success or failure?