I had a call from a guest staying at a property this morning; as many of us do, he has been caught up in the magic of his location and started to fantasize about vacation home ownership, and renting it out. It’s a rainy day so he’s been on the internet searching for homes for sale and has decided they are affordable and now wanted advice on what the next step would be.
While I can get drawn into excitement about this – after all that’s how I bought my first property in Canada while we were still living in UK – it is now tempered with practicality and experience. After we’d visited Ontario for a wedding, we decided this cottage rental idea could work, we came back again a few months later to search for a property. Unfortunately the first deal we found fell through because we hadn’t researched properly, established criteria or fully understood the nature of the rental market in this part of the world. Seven purchases later, I feel savvy enough to advise my guest client on how best to approach his idea and to avoid many of the mistakes I made at the outset. Here’s my five key points to consider before signing on the dotted line for vacation home ownership.
1. Emotional versus practical investment
Most people are in a different space when they are on vacation than in their daily lives. It’s generally a happier time and there’s a risk of the emotion of the moment overriding the practicality of generating an income. It’s better to shelve any decision making that may involve deposits or commitment until the vacation is over and the warm glow of vacation time has faded to pleasant memories.
2. Price point versus return
Look at the price of a property and give serious thought to the return on investment. A property may only rent for a proportion of the year and remain empty for a significant proportion of the time. Be realistic about the potential for rental over different seasons. A property in a Colorado ski resort may not deliver the occupancy in spring/summer/fall that a Florida villa might.
3. Year round rental potential
Following the previous point, this is an important consideration. The guest I spoke to hadn’t given much thought to the fact that the property he was staying in was not accessible in winter and early spring with snow and thaw making roads impassable, taking out a chunk of potential income out of the mix.
4. Traveling time for primary demographic
I traveled to a vacation rental in the Bahamas this year and will be doing so again next winter. Canadians from the eastern provinces are a target demographic for owners in Florida and the Caribbean because of the relatively short travelling distance (3 hours by air). On the other hand, when I have bought properties in Ontario I consider that my primary demographic resides in Toronto and I want to rent weekends to them in winter, so a property must be within a 2 – 2.5 hour drive. This is a key consideration before making a purchase decision or a new owner could be stuck with a great property nobody wants to visit in the low season because it’s too far.
5. Costs beyond purchase price
For any owner who has gone down this path, they will know the cost of purchasing the property is only the start, so setting a budget too high for the vacation home can leave a shortfall for furnishing, set-up, marketing and ongoing costs. These can be significant so it’s important to factor in fixed as well as variable costs of setting up a vacation rental.
My call with the guest finished with me suggesting he take some time to consider all that was involved in vacation home ownership, and he agreed the excitement of being on vacation and thinking “I can do this” was overriding practical factors. He’s going to go home, do some research and think again before setting off on the path toward vacation home ownership.