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Monday, January 16, 2012

Buying a golf vacation home to rent it out

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        It sounds so simple:  Buy a warm weather vacation home in a golf resort community, use it for family vacations a few weeks each year and then rent it out the rest of the time.  That extra income will help defray mortgage payments or, if no mortgage, will supply a bit of spending money to put toward the annual vacation.

        Although few people ever “pay” for their vacation homes with rental income, the arrangement can work well for those who do approach the idea with a lot of patience and no great expectations.  Patience will be a special virtue if, as some economists and realtors in the southeast suggest, we are seeing the bottom of the market for planned development home prices, many of which are at their lowest ever.  The real investment payoff could come in price appreciation in the coming years, more so than rental income.

        If you are contemplating the purchase of a vacation home you plan to rent out, here are a few things to consider:

 

Community First

        As with any real estate purchase, success is likely to be governed by the three principles of location, location, location.  Target a resort community that attracts a consistent flow of vacationers, year-round if possible.  Look at a place like Myrtle Beach, for example, where the beaches attract summer crowds and golf attracts the package players the rest of the year (summer is actually non-peak for golf in Myrtle Beach because of the heat).  A year-round resort gives you the best opportunity for a higher annual income from rentals.  For those who like to ski and golf and are not into sun tan lotion and sand, some of New England’s ski resorts transform into golf resorts a couple of months after the snow melts.  We have visited and liked Owl’s Nest in New Hampshire and Stowe and Killington in Vermont.

 

 

Don’t Apply Standards of Your Primary Home

        Few of us would want to live permanently in a vacation home we purchase to generate income.  Communities that lure vacationers –- i.e. transients –- are, by definition, not especially private.  Even full-time residents of these communities have to share many of the amenities with “strangers” which sometimes makes for strange bedfellows.  In short, do not expect to feel especially “at home” in a place where every week or two, the cast of characters changes substantially and you furnish your home to withstand temporary-bachelor foursomes on a weeklong or weekend lark. You cannot choose your rental guests –- the management company you hire to rent your place does that (see below) –- and most, but not all, visitors will treat your furnishings with respect.  But why take the chance?  If you have rented one of these units yourself, you know that, after a while, the faux wicker and canvas seating wears on the body and the eyes.  But it sure stands up better than mahogany, and is more easily replaced.

 

Shop for the Management Fee

        Managing a property yourself, long distance, could be life-altering, and not for the better.  What if a pipe bursts or the toilet leaks?  Are you going to hop on the next plane to go rescue your paying customers?  The vast

Management fees vary widely, from 25% to more than 40% of your rental income.

majority of vacation home owners who rent out their places hire a local or on-site management company to market the unit, clean up after guests leave, check them in and out, provide replacement for any broken fixtures or accessories and generally act in all your best interests.  This service, of course, comes at a cost, sometimes a substantial one.  I have seen fees up to 45% in some resort communities, but also as low as 25%, for example at Wachesaw Plantation, a private golf community in Murrells Inlet, SC.  Wachesaw is one of the Myrtle Beach area’s few members-only clubs, but owners of the handful of cottages set among the live oaks can pass along temporary membership to those who rent the cottages.  The Tom Fazio designed golf course is excellent.

        In short, and no matter what management fee you pay, you need to consider that a $1,000 per week rental rate could mean as little as $600 net to you.

 

The Economy, The Weather, and The IRS

        Vacation preferences change all the time, sometimes for unpredictable reasons.  Do not purchase a vacation home unless you can afford to pay for it in the lean years.  Should we re-enter a recession, for example, you could rue the day you had the crazy idea to buy a vacation home.  This is an argument for one other criterion in your search for a vacation home:  Identify a place that you would be happy to use multiple weeks each year because if rents are slow, you may be doing just that.

        Understand, however, that your personal use of your rental property is governed by IRS rules.  Generally speaking, if you claim expenses on the home, you are permitted personal use of it for 14 days annually or 10% of the days it is rented out at fair market value (in other words, not to friends and family at below market rates).  You will find a concise explanation of the IRS rules governing vacation rental property by clicking here.

 

Buy a U.S. Vacation Home; See the World

        We have owned our vacation condo in Pawleys Island, SC, for more than 12 years.  We made the decision from the gitgo not to rent it out, choosing instead the option to furnish it to our liking (not “vacation proof” it) and to ensure it was available if we decided at the last minute to fly or drive down from Connecticut.  We keep enough clothes and other provisions there that we don’t have to worry about packing bags.  Was it a sound economic decision?  Absolutely not.  But from a lifestyle standpoint, we don’t regret it.

        Six years ago, we found another terrific use for the unit:  We swapped it for a two-week stay in Crail, Scotland, less than a mile from two outstanding seaside golf courses and just nine miles from St. Andrews.  Owners of the Crail cottage, Glasgow residents George and Dorothy, stayed at our Pawleys Plantation condo in April that year, and my son Tim and I stayed at the Crail cottage in June.  We had a great time and it sure beat staying in a sterile hotel.  George and Dorothy joined us for round of golf at Balcomie Golf Links, their course in Crail, and at Scottscraig, the seventh oldest course in the world, 15 minutes north of St. Andrews.

        George and I facilitated the swap through a group called HomeLink International, and six years later we remain the best of pen pals.  I daresay that without our vacation home as “bait,” we could not have generated any interest in a swap for our suburban Connecticut home; although the golf in the Hartford, CT, area is pretty good, it is definitely not Myrtle Beach or Scotland.

 

Coming Soon: Suggestions for a few golf community vacation homes you can rent out.
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Larry Gavrich

This blog was conceived and is published by me, Larry Gavrich, a former corporate communications executive who founded HomeOnTheCourse, LLC, in 2005.  Our firm advises baby boomers and others seeking a lifestyle in which golf is a major component.  My wife Connie and I own a home in Connecticut (not on a golf course) and a condo at Pawleys Plantation in Pawleys Island, SC, on a Jack Nicklaus layout.  We began our search for our home on the course more than 15 years ago, and the challenges of the search inspired me to research golf communities and write objective reviews of them.

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