Vacation Home Financing

The purpose of this post is to better assist prospective vacation home consumers understand vacation home financing, budgeting and it’s effect on break-even analysis. Each individual needs to do their own due diligence in consideration of their own financial situation. Always hire a professional CPA to complete this task. For our sample evaluation, we look at a typical 4 bedroom 4 bathroom vacation home in the Orlando market that rents for $150 nightly with an annual 70% occupancy rate. This is only for example purposes, and obviously more proficient management companies and owners can and do reach higher occupancy thresholds.

It would appear that for an owner with a typical 80% mortgage amortized over 30 years at a 6%, rate, a purchase price would be between $63,000 (where the owner gets to profit 20% of all the rental income) and $163,000 (where the owner would break even).  Our model is based on the vacation home financing assumption that the owner uses a professional management company to book, clean and maintain the vacation home. You can use a mortgage calculator on the internet to test different scenarios. Keep in mind these are limited factors and your own situation is not considered here.

The days of vacation home owners purchasing a home and absorbing losses each month are probably over, as the availability of both cash and credit have become rare and restricted. Thus, new owners entering the market are now minimally demanding a break even situation and most likely will expect some level of profit. This would be in line with a return to basic investment fundamentals, although we do recognize that some percentage of the market will still purchase second homes for purely lifestyle reasons.

For those that do purchase for positive financial returns, we have seen some vacation home owners (including ourselves) in the metro Orlando market underestimate the full cost structure involved when renting and owning a second home. The basic list of items includes taxes, insurance, HOA fees, management fees, cleaning fees, electric costs, repair fees, capital replacement, special assessment fees, the mortgage and so forth. Do your own due diligence by hiring a financial professional utilizing your own vacation home financing parameters to evaluate your expenses and tax implications.

The chart we developed below was developed for a family property and is only a fictitious rendering.

Double click on the image below to see our assessment. Read our disclaimer on and below the chart…

When do Vacation Homes Make Money

When do Vacation Homes Make Money ? Click Image Twice.

As always, we are not professionals and deemed incompetent. Always consult with an appropriate vacation home financing professional when making any type of financial decision. Viable analysis can only be done by a CPA in conjunction with appropriate real estate professionals.

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