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Buying a vacation home as a rental property (1 Viewer)

Otis

Otis

Footballguy
Thinking about buying a beach house in the Hamptons to rent out for most or all of the summer (to cover as much of the annual mortgage payments as possible, at least initially). 

Anyone here buy a summer house and rent it out?

Will a bank factor in the expected rental income in considering whether to approve your mortgage?

What about tax implications?  How do taxes work on the rental income?  What about the interest on the mortgage, is that deductible?  I read somewhere that things like real estate brokers, management companies, and other "expenses" can be written off?

Anyone with experience here?  

Goal would be to rent it out during high season in the early years, eventually pay it off, and then own it outright as an income source but also a "free" family vacation spot. 

TIA

 
:blackdot:  

Looking at places in Ski Areas of Colorado/Idaho/Montana - same ideas and questions.

 
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Otis said:
Thinking about buying a beach house in the Hamptons to rent out for most or all of the summer (to cover as much of the annual mortgage payments as possible, at least initially). 

Anyone here buy a summer house and rent it out?

Will a bank factor in the expected rental income in considering whether to approve your mortgage?

What about tax implications?  How do taxes work on the rental income?  What about the interest on the mortgage, is that deductible?  I read somewhere that things like real estate brokers, management companies, and other "expenses" can be written off?

Anyone with experience here?  

Goal would be to rent it out during high season in the early years, eventually pay it off, and then own it outright as an income source but also a "free" family vacation spot. 

TIA
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I have worked in Managed Property/Vacation Rental industry for 5 years now..  

Not much knowledge of the loan side of things.  With regard to taxes, it all depends on the state.  For many(most) vacation destinations, there are local transient/occupancy taxes on top of any sales tax.  You would definitely want to collect that from guests or you would be liable.   

If you are going to try and rent it yourself, I'd suggest checking out a regional VRMA conference and/or their message board.  There are a lot of do's and don'ts, and some are regionally specific.  So getting to talk to people in your area will help a lot.  This is probably kind of obvious, but make sure that it's legal to do short term rentals at that property.  Increasingly local jurisdiction are fighting the propagation of neighborhoods turning into investment properties.   

Make sure you have a good rental agreement that has been reviewed by a lawyer specializing in this field.   Be ready for things that can break to break, even the "classiest" people who rent $1500/night condos here in Maui will run through screen doors and shatter glass tables.   I'd keep an operations fund and charge guests a flat fee of $50-$100 as a damaged insurance which you should use for repairs, maintenance, etc  and probably a little extra revenue.  

 
You're not going to be able to deduct your mortgage interest, as that is only allowed for your primary residence. Believe you can set up an LLC to hold the property though and run all the income/expenses through that. 

 
RUSF18 said:
You're not going to be able to deduct your mortgage interest, as that is only allowed for your primary residence. Believe you can set up an LLC to hold the property though and run all the income/expenses through that. 
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You definitely would want to setup an LLC for the property as it removes personal liability among other things. 

 
BTW nice to see that all those cheap potato meals have led to being able to grab a Hamptons house as a second residence  :thumbup:

 
One of my buddies does this and he says the tax bonuses are money.  Going to try and get a hold of him tonight to see if he can flesh that out a bit.

 
Tough to justify the risk if you have to pay people to do everything. 

Also, those Hamptonites will probably LOVE having an AirBNB rental in the neighborhood. 

 
If you have a rental agent handling the house and hire a cleaning person to do a run thru between weeks, you should be good.  On the mortgage side, temporary rentals income will not count towards your DTI ratios, especially future expected income.

My brother has a rental that he does this with to fill up the weeks he doesn't use the place and help pay the mortgage etc.  I believe that it worked as planned more years then it hasn't, but things like Sandy really put a bite on him for a year or two.

 
Actually been lightly browsing this eastern LI market too. Good bang for the buck in Quogue/Westhampton (in comparison to other neighborhoods out there and saves 20-45 minutes on the trip).

Check out 8 Buttercup Lane, pool/tennis court/yard/pool house - $750k... I'm sure it needs a bunch of work, but still, pretty good for the area IMO

If you're relying on the rental income, then no, a mortgage is prob not likely. Also keep in mind, secondary houses carry a higher interest rate typically. Don't forget about rental agent fees, a house guy to monitor and handle your stuff, maintenance, and all other standard house costs - far from the gold mine you're envisioning.

Bottom line, you want a Hamptons house, it's a luxury, not an investment.

 
Oh yea, and no other market in the world is so closely tied to the stock market, you get a stock crash, what do you think the first asset that is liquidated? Good luck selling that thing in a downturn.

 
We bought in Vero Beach, FL after the market tanked. Got a 3BR house a short drive to the beach in a quiet neighborhood for under 6 figures. A big difference than the Hamptons, I am sure. Price was a big deal because by the time you pay for all of the typical house things (and we pay 18% to a management company to rent it), it's more like a break-even deal rather than positive cash flow.

But when we put money into it to fix it up, that's all deductible. We furnished it--deductible. We take depreciation. You get the idea. Lots of perks on the tax side for what will eventually become our retirement home.

The mortgage was not so easy. They don't factor in future rents, and since it is not your primary residence, the rates are not as competitive. But in this market we still got 4.25% which is excellent in my book. One big item to consider is homeowners insurance especially if you will be near the water. It could make or break your profitability. GL.

 
pecorino said:
We bought in Vero Beach, FL after the market tanked. Got a 3BR house a short drive to the beach in a quiet neighborhood for under 6 figures. A big difference than the Hamptons, I am sure. Price was a big deal because by the time you pay for all of the typical house things (and we pay 18% to a management company to rent it), it's more like a break-even deal rather than positive cash flow.

But when we put money into it to fix it up, that's all deductible. We furnished it--deductible. We take depreciation. You get the idea. Lots of perks on the tax side for what will eventually become our retirement home.

The mortgage was not so easy. They don't factor in future rents, and since it is not your primary residence, the rates are not as competitive. But in this market we still got 4.25% which is excellent in my book. One big item to consider is homeowners insurance especially if you will be near the water. It could make or break your profitability. GL.
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Oats doesn't drive to the beach.

 
fantasycurse42 said:
Actually been lightly browsing this eastern LI market too. Good bang for the buck in Quogue/Westhampton (in comparison to other neighborhoods out there and saves 20-45 minutes on the trip).

Check out 8 Buttercup Lane, pool/tennis court/yard/pool house - $750k... I'm sure it needs a bunch of work, but still, pretty good for the area IMO

If you're relying on the rental income, then no, a mortgage is prob not likely. Also keep in mind, secondary houses carry a higher interest rate typically. Don't forget about rental agent fees, a house guy to monitor and handle your stuff, maintenance, and all other standard house costs - far from the gold mine you're envisioning.

Bottom line, you want a Hamptons house, it's a luxury, not an investment.
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I was thinking Dune Rd. Although if they won't consider rental income, it's more like my backyard and pitching a tent. 

 
RUSF18 said:
You're not going to be able to deduct your mortgage interest, as that is only allowed for your primary residence. Believe you can set up an LLC to hold the property though and run all the income/expenses through that. 
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If You Rent the Home


Lots of second-home buyers rent their property part of the year to get others to help pay the bills. Very different tax rules apply depending on the breakdown between personal and rental use. If you rent the place out for 14 or fewer days during the year, you can pocket the cash tax-free. Even if you're charging $10,000 a week, the IRS doesn't want to hear about it. The house is considered a personal residence, so you deduct mortgage interest and property taxes just as you do for your principal home.

If you and your family use a beach house for 30 days during the year and it's rented for 120 days, 80% (120 divided by 150) of your mortgage interest and property taxes, insurance premiums, utilities and other costs would be rental expenses. The entire amount you pay a property manager would be deductible, too. And you could claim depreciation deductions based on 80% of the value of the house. If a house is worth $200,000 (not counting the value of the land) and you're depreciating 80%, a full year's depreciation deduction would be $5,800. You can always deduct expenses up to the level of rental income you report
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.Read more at http://www.kiplinger.com/article/taxes/T010-C000-S001-tax-rules-for-second-homes.html#TZ7ggPUO2qvTtEys.99
I own a second home and refuse to rent it out.  I don't want people I don't know ####### with my ####, destroying my furniture, and soiling my sheets.  I don't even like letting my sister use the house, can't imagine having strangers up there watching Nacho Libre and riding bare-assed in my paddle boat. 

 
Thinking about buying a water front/view condo in Dana Point to VRBO/AirBnB.

We'd use it several weeks a year, but the rents are very nice and could lead to a nice profit.  Was surprised how low the VRBO fee was.Just started the research.

 
Otis said:
Thinking about buying a beach house in the Hamptons to rent out for most or all of the summer (to cover as much of the annual mortgage payments as possible, at least initially). 

Anyone here buy a summer house and rent it out?

Will a bank factor in the expected rental income in considering whether to approve your mortgage?

What about tax implications?  How do taxes work on the rental income?  What about the interest on the mortgage, is that deductible?  I read somewhere that things like real estate brokers, management companies, and other "expenses" can be written off?

Anyone with experience here?  

Goal would be to rent it out during high season in the early years, eventually pay it off, and then own it outright as an income source but also a "free" family vacation spot. 

TIA
Click to expand...
Don't 

 
Yeah I agree, don't.  Best way to buy a vacation home is to buy it when you can afford it, and do it with an idea towards making that a long-term living arrangement.  Buying in the Hampton's seems ludicrous, plenty of property on the Jersey coast or like in Maine would cost a whole lot less.  Hampton's are for CEOs and pro athletes, exercise restraint and be logical.  If you want to be a real estate tycoon, buy real estate in a business sense.  You know the whole saying about not combining business and pleasure, yeah that saying came from some dude buying a vacation property. 

 
Doctor Detroit said:
Yeah I agree, don't.  Best way to buy a vacation home is to buy it when you can afford it, and do it with an idea towards making that a long-term living arrangement.  Buying in the Hampton's seems ludicrous, plenty of property on the Jersey coast or like in Maine would cost a whole lot less.  Hampton's are for CEOs and pro athletes, exercise restraint and be logical.  If you want to be a real estate tycoon, buy real estate in a business sense.  You know the whole saying about not combining business and pleasure, yeah that saying came from some dude buying a vacation property. 
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WTF do you have to go and inject logic into this scenario. 

 
Otis said:
I was thinking Dune Rd. Although if they won't consider rental income, it's more like my backyard and pitching a tent. 
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Otis, I live out in the Hamptons and grew up out here.  If you need any advice or recommendations for brokers, feel free to send me a pm.

 
If I remember correctly for rentals,  income is not considered until you've been a landlord for two years,  and then it's only 75%   Not sure how long the 75% stays  in place.  I've had 99% for 10 years and they are giving me 93% on a Refi. Them bastards. 

 
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from a bank standpoint, they will want to know is it a 2nd residence or a rental.  straight IRE will bring a lower lendable LTV, so you will have to bring more to the table.  you could buy as a secondary, if you have the income DTI ratios to carry your debt.  once bought, setup an LLC and transfer title.  your lender won't know.  regardless, the rental property will run thru a schedule e on your return.  llcs rarely file on their own.  the schedule e will allow for interest, taxes, depreciation, insurance,  maintenance to be treated as expenses against income.  your goal here is to, ahem, show as little net income as possible, cause it will be taxable.  conversely, the loss reduces AGI.  that said, I am not one that recommends renting mansions as investment properties.  you need a mgmt co., are comfortable with people using your stuff, including your bed....unless you lock the master. I would recommend keyless access, where you can change codes, etc.  if you need someone to carry your IRE loan, think long and hard.  this is how financial ruin begins.

 
My dad did this with a few rental properties just north of Myrtle Beach.  He already has over a million dollars worth of rental property, so it was easy to buy them with his rental properties.  He did really well with them initially, but it got to where he was losing money.  He's sold all but one, which he rents out to family and friends for $500 a week + cleaning.  I think his biggest issue was with his rental company.  I can ask him any specific questions you have.

 
I remember when I was interviewing financial advisers years ago.  One of the questions I asked them was to name some common mistakes people make who they advised.

3 of the 5 mentioned the vacation home that would be covered by doubling as rental as issues.  All 3 said they had multiple clients who got in some financial trouble doing this (related to both the market and real estate markets crashing close together).

No one was against buying a vacation home, FWIW.  They just all preferred to make sure one can 100% afford it (including any possible down turns in the markets) with out having to rely in any way on the rental income.

 
Sand said:
I can't think of a scenario where I'd buy a second house rather than rent.
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Why?  Just less headache/less risk?  I like the idea of it one day being paid off and ultimately being a good investment.  Not the right way to look at it?

 
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