Figuring out your break-even point will provide a goal for rentals.

One of the goals is to achieve a break-even cash flow (on a year-to-year basis), coupled with a maximum tax shelter on other earned income. My definition of the break-even point is when all of the income (rent) from your vacation rental property is enough to pay all of the bills associated with ownership of the property. In other words, your vacation home should not cost you another dime after your down payment.

If your property falls inside this simple formula then you should be able to achieve positive cash flow. Note this formula only works if you rent by owner.

If your monthly mortgage payment is equal to or less than one peak week rental rate, and if you rent for 17 weeks then you should be able to achieve positive cash flow.

Here's how: Take a property that rents for $1000 per week during the peak season with a monthly mortgage payment of $1000. There are 12 peak weeks most or all of which are generally occupied. Then 12 weeks rented = 1 year's mortgage payments. Then you'll need to rent 5 other weeks to pay for incidentals such as power, phone, association dues, minor maintenance etc. Rent by owner and have 17 (33% occupancy) weeks booked and you have break-even cash flow. Rent more and you have positive cash flow.

So what if your property does not fit into this formula?

Say your mortgage payment is $2000/month and your property only rents for $1200/week.

Take your monthly mortgage payment (including principal, interest, taxes and insurance) and multiply it by 12 (months) to determine your annual mortgage cost. Then divide that by your rental amount per week.

So in this scenario, you would need to rent 20 weeks just to pay the mortgage payment ($24,000/ $1200).

Then figure the other costs of ownership, such as home owner association dues, power, gas, phone, etc. and divide that by your typical off-season rate.

It's always best to have goals to strive toward when renting your second home.

How are you addressing the biggest challenge you face to reaching your break-even point?

Using Self-Directed IRAs to Buy Vacation Properties Did you know that you can buy real estate, including vacation properties, with your IRA?   Don't Lower Your Rates, Raise Your Standards Increased competition in your area? Don't panic and slash your rates. Instead add value.   Creating a Top-Notch Marketing Plan for Your Vacation Rental Pointers for attracting more travelers, getting your financials in order, and determining your personal keys to success.   Creative Ways to Keep a Large Home Booked in the Slower Season Pointers for keeping your large vacation rental home full during the off season.

© Christine Karpinski, 2006, u.081203.af