Vacation Properties - Beware the Details


There have been some recent news stories about the vacation homes markets coming back into favor. Generally, these markets can get slower during times of uncertainty. The buyers who can afford to spend significant money on a property they use for just a few weeks are balancing the purchase with other investments and their view of the economy. They have the money, but often they choose not to spend it.

If you are considering buying a vacation property or ski or beach condominium, be careful to fully understand the details. Often you're buying in areas far from home, and the markets in resort areas do not respond to economic factors like areas with buyers moving in or out for employment reasons.

There is one thing that experienced real estate brokers understand but their buyers often do not. It is about the old saying that "we buy on emotion and justify it with logic." You're vacationing most years in your favorite winter ski destination, and you're paying a fortune to rent that ski condo for a week or two. You decide that if you're going to be there every year anyway, you may want to buy one.

You justify the emotion of the purchase with the logic of being able to rent the unit out when you're not using it. You like the idea of others paying those big rental fees to you when you're back home living your normal life. You also read about the income tax advantages you can gain with a "rental property." Whether your real estate agent offers or not, you want to be very careful with your due diligence.

The first thing you'll run into is limitations on your own use if you want to take full advantage of tax breaks. From the IRS website:

If you rent a dwelling unit to others that you also use as a personal residence, limitations may apply to the rental expenses you can deduct. You are considered to use a dwelling unit as a personal residence if you use it for personal purposes during the tax year for more than the greater of:

14 days, or 10% of the total days you rent it to others at a fair rental price.

You don't lose all of your breaks, but there will be adjustments, and the calculations for what is allowed and what is not are a pain and you should have them done by a good accountant.

Then there is the "entrenched management" situation. An example of an actual vacation/resort market helps to illustrate this. It's a small town with a popular winter ski area. If you want to buy a condo, you have the major decision of whether you want to buy one in the town or a ski in/out condo in the ski valley. In town, most condo projects do not have management staffing an office, nor do they have on-staff maintenance people.

It's the opposite for the condo projects on or around the slopes. There is a fully-staffed office and full-time maintenance people. Those salaries mount up. In this example, many of these projects charge a 35% to 45% fee of every dollar received in rental income. There will also be much higher monthly or quarterly owner dues that are charged whether the unit is rented out or not. You do have those in the town, but they're lower.

If you do want to rent out your in-town unit in this market, you'll still pay that 35%-45% fee out of rental income or some lower fee with added cleaning costs that vary based on condition after people leave.

To make a long story short, few ski area condos even come close to breaking, even after all factors are considered. Those that do so are usually making the cut because of the high income of the owner getting some offset from deductions. Just remember that the devil is in the details.