Before you enter the world of owning a vacation rental, you’ll need to ask yourself the following very important question. Why? That's right, ask yourself even before your property search begins, why do I want to do this? Here’s the thing, if you're looking to make a business out of your vacation rental and generate passive income, you need to be careful not to let your emotions get in the way of making a sound business decision about the house you ultimately buy. The decisions you make with a business mindset may be very different than if you are just buying a vacation home solely for personal use with your family.
Is buying your vacation home an emotional decision or a business decision?
Here’s what I mean by that. What may seem like the perfect getaway house and location for your family may not make sense from a rental business perspective. If you make an emotional decision to buy a home that you fall in love with, but where there really is no vacation rental market, you'll be sunk from the beginning. However, if you're okay with having just a few guests book each year to help offset some of the carrying cost, maybe buying that lovely mountaintop retreat in the woods in the middle of nowhere will work. Again, why are you looking to do this?
On the other hand, If you plan to buy a vacation home intending to generate passive income and cash flow, you absolutely have to think of this as a business from the get go. You'll need to pick a location where other people will actually want to vacation, too. The house you buy also needs to be conducive to your target rental demographic. Is it easy to find and easy to access? The last thing you want is to deal with cranky guests calling you because they're lost and can't find your place. Are the roads well maintained? If you buy in an area that gets ice and snow, your guests will appreciate not getting snowed in. Is the property itself relatively safe and in a safe area? Are people drawn to the area? These are just a few of the questions you'll need to consider in order to make a wise business decision.
The decision hierarchy is simple.
We're operating a small hospitality business and help people to plan and enjoy their vacations in the Blue Ridge Mountains of North Carolina. But, at the end of the day we want to make money, as do all business owners. And we want to make it passively with as little input as possible. But we also want to enjoy using the homes we purchase. I mean really enjoy them! We made the decision early on to pick a location and a property that would rent, most importantly.
When we were looking at property to buy, our decision hierarchy worked something like this. First, we chose a location that would draw vacationers but wasn’t over saturated with rental competition. I'll expand upon this in future posts and talk about research tools you can use to aid your own search. Second, we viewed only properties that would serve as good vacation rentals- they needed to be family-friendly, safe, attractive with good curb appeal, easy to access, etc. Third, they needed to offer some sort of amenity to help them stand out to potential guests. Finally, and only after the first three business criteria were satisfied, would we allow our personal bias and emotion to enter the decision-making process.
It's not all about you.
Have you ever sold a home? My guess is your real estate agent told you to box up all your pictures and personal things and put them away before showing the house. The reason is so that potential buyers can picture themselves living in the home and not focus on your family while touring it. The same principle holds true for vacation rentals. You'll want your guests to make their own memories in your vacation home and not focus on your memories. Will you be able to enjoy your vacation home without a bunch of family pictures and personal stuff everywhere? This is another decision you should be comfortable with before entering the vacation rental hospitality business.
I may not know you, but here’s what I do know about you. You have the cutest kids and most beautiful family, and you have the coolest Labrador Retriever who loves hiking and is super photogenic- ironically, so do I! You had an amazing time on your first whitewater rafting trip- we did too! Listen, I get it. Those were amazing moments and you want to remember them forever. However, you'll want to keep your vacation photos in your primary residence- I promise you that your renters don’t want to see them. Again, they want to create their own memories, not relive yours. It’s a very harsh reality but ever so true.
Here's another reality check for you. Are you going to be comfortable with random people sleeping in your bed? Lounging on your couch? Using your kitchen and your pots and pans? What about bathing in your tub? If you can't get past the thought of these things happening in your vacation home, you may want to rethink things. When Kristen and I started looking at buying our first vacation home, we had to convince ourselves of one very important thing. This house, first and foremost, was merely the asset upon which our hospitality business would be based. The first time, it was a little hard to stomach when it came time to pull the trigger on the purchase. I will say that the second go-around was much easier.
You can have your cake and eat it, too!
In our minds, owning the two vacation homes is really no different than vacationing in large luxury hotel cottages. We check-in and check-out just like our guests and pay for a cleaning after we leave. We do have owners' closets at each house where we keep our personal things secured so that's a plus. But you won't find pictures of our family and you really can't tell that we're the owners. However, the fact that someone else pays for the luxury cottages that we get to regularly enjoy makes it all worth while. Try thinking about it this way- the vacation house itself doesn't make the memories. Rather, the memories are made at the house and doing all the fun things while you're there on vacation. Just because you remove the emotion and personalization from the house itself, doesn't mean you can't still enjoy it.
Again, depending on your goals, you can certainly have your cake and eat it, too. Our goal is to have vacation properties that we enjoy using and that not only pay for themselves, but also generate positive cash-flow. That means the annual revenue (cash) coming in exceeds the annual operating expenses (cash) going out. Now, for all of you without a finance or accounting background, there is a valuable difference between a rental property being cash-flow positive and being "profitable." Despite being cash-positive every year, we have (legally) never paid a dime in federal income tax on the revenue generated from our properties. That's because in any business, income tax is only paid on profit. Thanks in part to the guidance from our fantastic CPA, our properties have yet to generate any "profit" While there are many tax advantages to owning and investing in real estate, the most powerful is definitely the phantom income created through depreciation. This and other legal financial tricks and maneuvers will be discussed in later posts.
Our vacation rental business has provided additional cash to pay for things like travel sports, private sports lessons, and private education for all three of our kids- things that weren't in the budget. It's also allowed me to take a step back from my "career" of making money for other people. While I still have a traditional "job", I'm not trading as much time for money these days. I've found an attractive work-life balance where I rarely miss a baseball practice or lesson. A few weeks ago, my daughter tried out and was invited to join a travel volleyball team that cost about $2,500 for the season. Just a few days ago she was also asked to join a travel softball team that costs about $1,000 for the season. And that's just one of the three kids! Some people think we're nuts, and that's cool- I really don't care. It was easy for me to rationalize the cost because it will be paid for with about a week's rental revenue from one of our houses.
Don't be a straddler.
So, what happens if you let your emotions get in the way of making sound decisions and operating your vacation rental business? What happens if you try to go about it having one foot in the business lane and one foot in the emotional lane. That’s what I call straddling and it can be dangerous. You'll need to decide- is this going to be a business or not. It's as simple as that. If you get too emotionally attached to your vacation house or the things inside it, you're setting yourself up for emotional distress when someone does something one day to mess it up. Before you even get started, put your business goggles on when choosing the right property to buy. Then keep them on whenever you are faced with making important decisions.
Thank you for reading. As always, I welcome your comments and questions.
Comments