Host, Christine Karpinski: I'm Christine Karpinski thank you for listening to the How to Rent Vacation Properties by Owner podcast.

Guest, Larry Seyer: Christine why should I buy a vacation rental home?

Christine: Well, it's not a matter of buying a vacation rental property. It's just a matter of buying a vacation home. Sometimes you just want to own a second home. That you can use, you know, for your family-- for your gatherings for your family, maybe for holidays or just on weekends. So, I guess that's probably the main motivation for purchasing a second home.

Then usually, the rental aspect becomes a fallback strategy, or an affordability factor. And by fallback strategy, I mean that you are using it to rent it out when you're not using it. So the majority of vacation homes, we know from a survey from the National Association of Realtors. The majority of vacation homes are only used two weeks a year.

So that, means they are sitting empty. They are sitting totally vacant for 50 weeks a year. Now if you can take that property, and have somebody rent it, for maybe only 10 or 15 or 20 of those weeks, then you're using that money as a fallback strategy.

Larry:  So, if you use it 10 to 20 weeks out of the year then, you are telling me that it would be worth it for it to sit empty the rest of the time, because it would pay for itself? Is that what you are trying to say?

Christine: Well no, it's not worth I for it to sit empty because it's actually better to rent it because insurance companies hate properties that are unoccupied. They would much rather see a property that is occupied more often, which is contrary to belief. Most people think, well if I'm hoping to turn my vacation home into a vacation rental home, then the insurance ramifications are going to be much greater.

Well, that's not necessarily true. Yes, you will have to take out some extra liability, but really, your property is going to be occupied, which the insurance companies like to see more so.

Larry:  Well tell me, how am I going to be able to afford a home like this? A vacation home, because vacation homes are typically in some very expensive areas.

Christine: It's true. Vacation homes are typically in the most coveted areas. They are either on the beach, at the base of a mountain, or maybe right on the lake. Waterfront property and mountain property is much more expensive because it's a matter of supply and demand. There is only so much beachfront to be had.

So yes, it is going to be more expensive, but if you can rent your property out when you are not using it, the rental revenue will help offset the cost of ownership. What I do is I tell people that the best thing to do is to determine your affordability factor. Figure out how much you can spend out of your pocket each month for this second home.

If you have a disposable income of $2,000 a month that you can afford to spend on a second home, you can either buy a property that is $200, 000 and use that disposable income of $2000 dollars a month and pay for a vacation home or you may be able to afford a $4,000 a month property, which would maybe be around 400,000 if you factor in the rental revenue, because the rental revenue will help offset the costs.

Larry:  Are there any areas right now that you recommend buying property in?

Christine: Well, pretty much anywhere thought the United States is a really good place to buy. I know it sounds kind of silly. Sort of evading the question. But, what we have found from HomeAway research-- HomeAway.com is a website that lists vacation homes, over 130, 000 properties-- is that there is vacation homes available for rent within a two hour drive of pretty much any metropolitan area.

So that means, that if you live in Atlanta, you could go to the North Georgia Mountains. You can go to Tennessee, maybe even Florida. If you live in New York City, you can go to Cape Cod. You can go to the Poconos. You can go to upstate New York. If you live in California, say in LA you can go to Big Bear, or maybe even Palm Dessert.

Now let's take an area like Chicago. People say in Chicago, “I know I have got the lakes but, is there anywhere south of the lakes?” Believe it or not, there are vacation homes for rent in the more remote locations of Illinois, maybe even Indiana. People have cabins in those areas.

A lot of owners say, “Well, who would want to rent it?” Well, you bought it. I mean you bought it, you enjoy it. It is a refuge from the city. So don't automatically assume that somebody is not going to want to rent it.

Larry: You said earlier that property should not cost another dime after your down payment. How is that realistic?

Christine:  OK, here is how it works. I have a really simple formula for determining whether or not the property is going to pay for itself. It's very simple-- it's not a high level accountant explanation with depreciating costs and all of that. I just want to know how many greenbacks it is going to cost me out of my pocket each month.

And I came up with a formula, it is: If your mortgage payment is less than or equal to one peak week that you can rent your property for, and you can rent that property for 17 weeks a year, then that property will break even.

And let me explain that because I can see that you are going, “Hmm, wait a minute, I don't know if I understand.” OK, let's take a property that the mortgage payment is $2000 a month. OK, if you can rent that property for $2000 a week, and rent it for 12 weeks, which by the way regardless of where you own, where you own on the beach, in the mountains, on a lake, or in the middle of a prairie, there's typically 12 peak weeks. And most properties are rented fully those 12 peak weeks. So if you can rent those 12 weeks, you'll have enough money to pay your 12 mortgage payments. And then the extra costs associated with ownership would be like phone bills, or maybe the insurance, cable, phone, power, all of those things ‑ can usually be paid for by five extra weeks rental. So if you rent it for 17 weeks it has paid for itself. I know, it sounds very easy, doesn't it?

Larry:  Makes me wish I would have done it.

Christine:  Well, you still can, that's the thing. That is where a lot of people today are going, “Oh well if I would have bought a place five or ten years ago.”  We all look back at those “woulda, coulda, shouldas. Believe me. I've got them, too. When I bought my first place I wish I would have bought ten of them because they have appreciated so well. And they rent so well and now the cost to buy in that area is very expensive. But if you can still break even on that property when you buy it, it doesn't really much matter.

Real estate is what's known as today's blue‑chip stocks. Very sound investments. They are more long‑term investments than they are short‑term. We don't have to worry about some higher up in a company like Enron or WorldCom that is going to all of the sudden make our stocks a worthless piece of paper. I mean, real estate is always a very tangible, long term, good investment.

Larry:  If I were to decide to purchase some rental property, is there a company that will handle everything for me-- all the rentals, so basically I just sign on the dotted line and somebody takes care of it for me?

Christine:  Yup, you can do that. That is called a property management company. And there are property management companies pretty much anywhere that you can turn to that will literally do everything. You don't even have to step foot in there. They'll take care of all the rentals, they will file your state sales tax, they will do all the housekeeping, they will do all the maintenance, and they'll just give you a check each month.

The problem is the cost for property management services. When you look at property management for in-town long term investments, those property managers take around 10% of the rental revenue. In vacation markets, the percentage is more like 20‑50%. So the average is around 30‑40%. So if you are giving away 30‑40% of your rental income that's going to obviously cut in really deep into the amount of money that you are going to make from that property.

So you would have to do one of two things to make the same amount as somebody who would be renting without a property manager. You would either have to rent it a lot more often or you would just have to say, “I am OK with it not making as much money. I am OK about paying money out of my pocket to own this property. I really don't want any of the hassles.”

But, the thing that stops people from renting by owner is really the lack of knowledge. They are sort of fearful of it, they think, “Oh my gosh, it's going to be so much work.” It really isn't as much work as you think it is. I'll admit it; the first year is always going to be much more difficult than your subsequent years, because the first year is when you are learning how to oil your machine. Once you get it very well oiled, it will just work very easily, and it';ll just be like doing it rote. I don't even have to think about renting my vacation home. It's really not a problem. It just flies off and everything is wonderful.