The Economics of Owning a Seasonal Rental

Financial issues for a second home can be tricky. Consider: Taxes. Mortgage interest and property taxes are deductible, says John W. Roth at tax information publisher CCH. In general, if a place is rented fewer than 15 days a year, rental income is not reported to the Internal Revenue Service. After the 15-day limit, tax treatment depends on the mix of rental and personal use. The rules are complicated. Consult IRS Publication No. 527, available at www.irs.gov, or see a tax adviser. Rental income. Don't plan to recoup anything close to the full cost of a vacation home by renting it out, experts say. Julie Mealo of Wells Fargo Home Mortgage says vacation property on the New Jersey shore generally returns about 7% of property value each year. Example: A $1 million house can generate $70,000 in annual rent.

If you have been to the Desert on vacation more than once, the thought of buying your own property has probably crossed your mind. There are many reasons for buying your own unit in the Desert: come down when you want, investment potential or future retirement.

Any, and all, of these reasons have been used and are valid. The question is does it make sense financially? That is what we are going to tell you about. Personal reasons provide the impetus to buy in the first place. Finance determine whether you can afford the dream or not.

The bottom line for owners is what will the property net. Net income is affected by three variables:

1. Rental price

2. Time rented

3. Management fees

Rental price is a function of the marketplace, thus, there is little or no control over it. The price can be set high with a corresponding decrease in the amount of time rented, and vice-versa.

Rental Price

Rental price is determined by size, location and condition of the property.

Time Rented

The amount of time a property is rented is a function of the price, the amount of time the owners wish to use the property and the expertise of the management team in renting the property. Most property managers can rent the units for about four months during high season: mid-December through April. Good property managers can tack another month onto that. Great property managers can even rent units for part of the summer.

Management Fees

Management fees range from 20% to 40% of the property’s rental price. In the Desert, most rental managers charge between 20% to 30%.

Below is a worksheet showing the expenses and revenue from owning an average two bedroom, two bathroom unit in a country club. We have also provided this worksheet in Excel formats for download so you can run your own assumptions.

One thing we haven’t added into the worksheet is the effect on your taxes from owning a rental property. As real estate agents, we are not qualified to discuss the tax ramifications of rental property. Please talk to your attorney or accountant.

Call for costs and rental rates for other country clubs and complexes.

To download this Excel worksheet and use your own assumptions, click here.

You can find other Real Estate Reports below:

Scottsdale/Phoenix
http://SouthwestRealEstate.com

Newport Beach/Orange County
http://OrangeCoastRealEstate.com

Las Vegas
http://Vegas-Report.com

San Diego County
http://SanDiegoCoastProperty.com

Marin County
http://www.well.com/user/jaxson/

   Hawaii
http://HawaiianRealEstate.com

Silicon Valley
http://SanJoseProperty.com

Santa Cruz County
http://SantaCruzRealEstate.biz