Six Surprising Facts About Affording a Vacation Rental in Central Florida


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Six Surprising Facts About Affording a Vacation Rental in Central Florida

Facts About Vacation Rental Ownership

You may be thinking, "I have enough to worry about with one mortgage - why would I want another one?" or, "I rent an apartment - how could I buy a vacation rental property near Disney World?" The answers may surprise you.

While there is no guarantee that you will get rich renting out a vacation home in a desirable location, there is an excellent chance that you can generate enough vacation rental income to offset your monthly expenses. Some owners of vacation rentals want to go further.

It is not unreasonable to set your sights on recouping the purchase price and break even on the upkeep of the unit. It depends on your goals, expectations, and how you approach a purchase. 

The key is to do your homework, purchase wisely, and hire a reliable, full-service property management firm. 


#1 The Pros & Cons of Buying Vacation Rental Property May Balance Out

Owning a vacation rental home is not for everyone, but you may be one of the folks who get a lot of enjoyment - and financial benefit - from owning a "home away from home".  This is a major life decision, and you should go into it with your eyes wide open.

The Pros
  1. Vacation for free and cover monthly expenses through the year! 
  2. You will build equity in the home while collecting rental income, instead of paying rent to build someone else's equity
  3. Paying cash gives you higher cash flow and net profit each year. Consider your goals before going this route.
  4. Federal and state tax laws may allow deductions on mortgage interest and property taxes.
  5. Usually, you can take a tax write-off for some or all of your rental expenses. 
  6. You can furnish the home the way you like it and keep personal belongings there to reduce luggage when you visit.
  7. It could become your primary residence when you retire.
The Cons
  1. It is usually expensive to buy a home in a popular vacation spot - get ready for a little sticker shock
  2. If you already own your primary residence, you will likely double the property taxes, utilities, insurance, and maintenance you pay
  3. Getting a mortgage loan for a vacation home is more challenging than a loan for a primary residence because down payment requirements and interest rates are usually higher
  4. You may find that buying the property with a higher down payment is the better option. Higher out of pocket expense.
  5. You will need to be nearby to take care of maintenance issues or hire a vacation rental property manager
  6. Once your money goes into the purchase of the home, it is not a quick and easy proposition to turn it back into cash.
  7. Not a get rich quick scheme. Like most real estate the returns take time. It’s a long term investment requiring patience.


#2 You May Want to Pay Cash for Your Kissimmee, or Cocoa Beach Vacation Rental

Should you pay cash or try to find financing for your new Florida rental? The cash vs. financing debate has some twists and turns that may surprise you.

Lenders are more conservative about loaning money for a second property because they know - if times get tough - a borrower will default on a vacation house loan before they will give up their primary residence. For this reason, it is harder to qualify for a mortgage loan on a vacation property. 

Even if you can get financing, the interest rates, down payment, and closing costs are likely higher than for a primary residence. You should carefully consider saving cash to buy the vacation rental home outright.


#3 Ads, Bookings, & Property Management are a Top Priority

Do not let the challenges of keeping your vacation rental occupied and maintained deter you from making the purchase. Do your research to identify the best full-service property management company. 

Even if your primary residence is only a short drive away, it is almost impossible to do everything that must be done to keep your property maintained and your bookings solid. Think in terms of a guest locking themselves out of the house - is it reasonable for them to wait for you to get there, or more practical to have someone onsite or nearby to respond immediately?

In the big picture, it is not maintenance, or lockouts, or cleaning between guests that will make or break the success of your vacation rental endeavor. It is the ability to put paying guests in your rental home every day that you aren't using it.

You are probably smart enough to learn how to list, advertise, book, and collect payments, but how much time do you have? An onsite vacation rental property management firm should have years of experience and a solid track record of consistently high occupancy rates - in the off-season as well as the peak season. Consistent cash flow is key in this industry. Especially, if you have a monthly payment you have to cover. Having your home sit empty can cost more over the course of the year.

The return on the investment in hiring a reputable, full-service property manager is typically great - especially if you compare that monthly cost to the missed opportunity costs of letting your home sit idle. Be sure to factor this into your budget, and do careful research before you hire.


#4 The Purchase and Setup Can be Affordable

You may be well-advised to look at lenders in the local area where you are planning to buy. They will have local knowledge and the ability to get meaningful appraisals. If you’re paying cash for a vacation rental. You have more purchasing power and can close quickly.

Shop out the interest rate you will pay for the loan. Do your research, read reviews, and choose a lender that meets your individual needs. Also, include the cost of a home inspection report in your budget, as that will be needed during the escrow period and before the closing.

When you close on the house, you will need to bring money to the table. Typically the settlement of the escrow account means you will be paying the down payment, the first monthly mortgage payment, lender fees, and some or all of the closing costs depending on your arrangement with the seller.

In your budget, don't forget to include the cost of buying or shipping any new  furniture, kitchen equipment, linens, and the other things a fully furnished home should offer. Also, allow for any licenses or permits that may be needed before you can rent out your unit.


#5 You May Quickly Break Even on Monthly Expenses for Your Vacation Rental Home in Kissimmee

Your monthly mortgage payment is what it is, once you have closed escrow on the house. There will be other monthly expenses that may include HOA fees, property management fees, and utilities. This is why controlling your initial fixed costs upfront before the purchase is so critical. Shop insurance providers and control monthly mortgage payments. Interviewing management companies and finding out all possible costs associated with them. This will help keep more money in your pocket and not theirs! Find someone who does not nickel and dime you for every little thing. 

The rental income you collect should cover your monthly expenses at a minimum. Just remember that part of the gross amount collected from a guest must be passed on to pay local taxes and cleaning. Also, you should keep in mind that a percentage of your "profit" should be set aside for future repairs (see #6 below).


#6 Unexpected Additional Expenses Just Need a Plan

It is hard to budget for the unexpected, but - honestly - some surprises are more surprising than others. If you are a homeowner, you know that a maintenance issue comes up every so often and it's just a part of owning a vacation rental.

With a short-term rental property, some experts suggest that you have an emergency fund that is equal to 5% of the annual cost of the home, some tout the "50% rule", and others give you complicated number-crunching to arrive at the amount of cash you should have on hand for emergencies. 

It is good to listen to experts - and remember that your property management firm was chosen because they are experienced in the industry and the location of your vacation home, and surrounding areas. Ask your property manager about the emergency funds they require you to provide them (usually a few hundred dollars) and get their advice on the total amount of cash you should have available on short notice for larger repairs.


How Do You Know If You're Ready?

When you have finished your research and calculated a realistic monthly payment amount for your rental property, start putting that amount into a separate savings account. If you can do this for several months without dipping into it, you are ready to move forward with the purchase and you will have a good bit of money saved up for the down payment.

If you are seriously thinking about buying a vacation home in the Orlando/Cocoa Beach area, it is not too early to start interviewing property management companies. At Vacation Central Florida, we are happy to help educate you about the fine details so you know what to expect when you buy.