Before You Buy – Tips for Making a Profitable Vacation Rental Purchase

Who doesn’t go on vacation and dream of buying a property in that location?  Walk along any street in a tourist destination and there are huddles on people looking at the pictures in the realtors office windows.  And if those people are renting a vacation home they will be calculating potential rental figures based on what they have just paid.  The savvy ones – those who are already VR home owners - will factor in the known costs of property management, maintenance, operational costs and marketing as it relates to their own property and come to a bottom line figure that may convince them one way or another, but many make knee-jerk decisions they come to regret.

Before getting to the point of no return and putting money down, signing paperwork and committing to a lengthy period of expense, it’s important to do thorough research to ensure the buying decision is sound and makes economic sense. These steps to take before you buy could rescue you from a poor choice based on emotional factors and a fun-in-the-sun attitude.

Goals and motivation
Is a purchase primarily for investment and return based on rental value, or is there a longer-term goal such as retirement involved?  Buying a vacation home so there is more personal time spent there rather than rental time, will put a different slant on a purchase decision, and bring in more of an emotional consideration.  Looking at longer term goals should include an exit strategy too including estate planning.

Get to know the country
Tourist areas tend to be microcosms and don’t reflect the economic structure of the country as a whole.  Don’t just look at the small picture and marvel at the cleanliness of the region and friendliness of the people.  Explore outside the boundaries of the popular tourist spots as being a home owner will mean you need to widen your perspective.  What may be great to enjoy for two weeks of laid-back vacation could be very different when the responsibilities of ownership are involved. 

Property laws
Every country has different laws on property. It’s no problem if you find your dream house in your own country even it is a long distance, however let’s say you want to buy in Costa Rica, Belize or Panama – it may not be as easy as you first think. Find out what the laws are relating to buying a property if you are a non-resident.  In the Bahamas for instance, the government encourages foreign investment and purchasing either vacant land or an established property is a fairly straightforward process.

How will you be taxed?
As with property laws, you will wide variations in taxation that covers rental income, property tax and most importantly, capital gains.  In the Bahamas for instance, there is no income tax or fees payable when you sell a property but there are high import duties, whereas buying in Canada for instance will bring you a wealth of regulations governing withholding tax, purchase tax and provincial taxation. 
Talking to accountants in your home country as well as your purchase country will give you the detail you need to make an informed decision.

Figuring out financing
A hefty down-payment will usually be required for financing a second property but if interest rates are low and you are able to get a loan, this may be a good route to go.  Go and discuss with your financial manager or bank before making decisions to get your pre-approval in place.  It’s always a worthwhile idea to create a good business plan to support any loan request, and even more so if there is likely to be more risk for the lender.

Get to know the rental market
Popularity of destinations comes and goes so it’s a good idea to do a study on the prospective growth and density of the rental market. How many properties are listed for rental?  Do a detailed competitive study of properties in the area noting their rental rates and checking availability calendars for occupancy figures.  This needs to be done over time which is a good leveler as it’s impossible to make a snap decision on a purchase while the study is underway.  It may mean missing a potential property that comes on the market, but the sacrifice will be worth it if the research points in the direction that doesn’t make it a solid investment.

More costs to consider
Create a spreadsheet that lays out your annual costs, both fixed and variable.  There will be mortgage (or loan repayments), property taxes, insurance and regular maintenance as well as the costs that will be liable each time you rent out – cleaning etc.  Take into account all marketing and administration costs for rental as these can add up too. 

Your own use
Think carefully about how you plan to use the property. If you’ve vacationed in the location and love it in the best season of the year, this is the time most guests want to visit too, so taking up valuable rental periods may not be the best idea.  If using it yourself if a prime reason for buying, go back to your goals and motivation and really establish if buying is your best choice.  Weigh up the pros and cons of purchase against just renting someone else’s property each year.
Buying any property is a major decision but one that is often done on a whim with too much emotional involvement.  Taking the time to research thoroughly and do the due diligence can save a lot of time and stress.