Good investment?

Is a vacation property a good investment. The answer to this question depends a lot on your situation and what you are hoping to get out of the investment. Buying an investment property can be a great investment. This is especially true if you can buy it in an up and coming area. An area that just started to attract tourists. A vacation rental can however also be a huge money pit that cost you more money than you make from it. It is very important that you do your research and know what to expect before you chose to invest in a vacation property.

Return on investment

There are two main ways you can make money from a vacation property. Renting them out and increased value. Below we are going to look at little closer on these two alternatives.

Rental income

italyIt is very easy to get carried away while thinking about how much money you could earn renting out your house. You paid USD 100 a night while you were renting a house. If you can rent the house out 50% of the time then you can earn about 18 000 a year. That is more then enough to pay the mortgage and leave you with some profit.

Not so fast. There are a lot of things wrong with that calculation. First of all. Very few vacation rentals are rented 50% of the year. In most cases the house will be empty during low season. Most destinations mainly attract visitors during a certain part of the year. The high season can be anything from 3 -6 months depending on where you live. You can not expect to have the house rented the entire high season. There will be gaps between guests even you property if popular. If it less popular you might only get one or two renters a year.

I do not think you should budget for more than 15-20% occupancy. I personally prefer to use 10%. That way the property is more likely to go better then expected then it is to do worse then expected.

The money you earn from renting the house out will not be all profit that you can use to pay the mortgage. There will be a number of expenses associated with owning and renting a house. You will need to pay property tax, water and electricity, garbage, heating and/or cooling, TV and internet and so on.

If you want to rent the house you will most likely need to hire a rental agent. (Unless you live in the area) They will charge you 10 -20% of your revenue to manage the house for you.

You will also need to pay for someone that clean the house (So that it looks good when guest arrives) and a gardener that tends to the garden. This all adds up even if they only come in once a week.

On top of this you will need to maintain the house and make sure that it stays in good condition.

All of this cost money. Owning a vacation property will cost you atleast USD 2 000 -3 000 a year. Most likely more if you choose to rent it out.

Most people who rent out their vacation properties does not earn enough to pay house related cost and the mortgage. All to many of them does not even earn enough to pay for the house related cost making the day to day operation of the house a losing affair.

It is very important to do extensive research and to chose the right property if you want to be able to get a high rental income. The right property that can rent for most of the year can be extremely profitable.

Selling for a profit

The odds that you will be able to make a decent return on the house when you sell it is lot higher then the odds that you will make money on the rental. Property values tend to go up over time. The risk associated with buying a property in the hope of selling it later for a profit is however rather high in Italy since there is a housing bubble and a large price correction is likely to come when interest rates go up. It can take a long time for the market to recover from that. You should get you money back and make a profit if you can hold on to the property long enough but it might be better to wait and buy a property after the price correction.

The only investment I feel I can recommend now is premium properties in super premium locations. These are likely to keep their value even if there is a market correction.

Hands on investment

curb appealIt is very important to keep in mind that vacation properties are hands on investments. You can not simply buy them and ignore them until you sell them. The property need to be cared for. If you do not care for it then the house will quickly deteriorate and lose in value.

If you want to be able to earn rental income you will need to be even more hands on managing bookings and making sure there is someone there to prepare for and receive renters.

You can hire people for all of this but this only solve part of the problem. There is still a risk for unexpected problems and expenses when something breaks or when a renter creates problem.

All of this is manageable but it is important to keep in mind when considering what to invest in. Owning a vacation property will occupy some of your time. You will therefore have to make a higher return on your investment when you buy a property then you need to earn if you buy a completely passive investment.

Your own usage

Whether or not you plan to use the house yourself or if you are strictly looking for an investment will affect whether a property is a good investment or not. Below we are going to look at the two most common situations.

Using for vacations

Do you plan to use the house to vacation in yourself. If that is true than this might provide you with some extra value since you do not have to pay for a hotels. This value is however often a lot smaller then you think.

vacationThe first thing you need to consider is that the house can not be rented out while you are living here. This means that you are reducing your income potential by using it yourself. This is especially true if you visit the house during high season. Something you are very likely to do. You will not only occupy the house during the time you stay there but you will also make it harder to fit in other reservation around it. I recommend that you assume that the house will be empty one week before you come and one week after you leave when you calculate how much income you will lose from staying in the house.

Staying in your own house is not as relaxing as you might think. When you live in some one elses house then you can relax. When you live in your house then you will see and think about all the things that needs to be done. This can make it hard to relax and you might end up spending the entire vacation working instead of relaxing.

Another drawback of having your own vacation property is that is very easy to feel forced to go there on vacation every year. It reduces your freedom to go wherever you want on vacation.

Retiring in your house

If you are planing to retire in the house then purchasing a vacation property can be a lot better option. In this case it is not just a financial investment but rather an investment into your future. Any rental income you get will help you pay of the mortgage and hopefully you will have paid your house by the time you retire. This gives you a lot calmer retirement and allow you to live on a lot less money since you do not have to pay rent or a mortgage.

Buying the house can be a good investment since it allows you to lock down your dream house.