BEVERLY HILLS, Calif. (TheStreet) -- As investors speculate whether the real estate market is about to make a turnaround, some are considering offering second homes as vacation rentals, which can supplement operating expenses incurred when the property isn't in use. But before you sign closing documents expecting it's as simple as creating an account with the popular vacation-rentals-by-owner site, VRBO.com, here are a few tips to make sure you know what to expect and are investing in a home people really want to rent.
There's plenty to think about before you can start renting a second home for income, especially if you haven't bought the second home yet.
Do your homework
You've likely watched endless episodes of
in which buyers swoop in for 24 hours in St. John and buy one $1 million property from among three homes. That's not how it works in the real world. If you're planning to buy a second home for use as a vacation rental, do yourself a favor and plan multiple trips to your intended destination, researching and walking several neighborhoods to get the feel and mood of each. Keep in mind that you're not buying only a house; you're buying a neighborhood. Potential vacation renters look first at what neighborhood they want to be in, then what houses are available. Most importantly, whether you're buying or already own a potential rental, check with the city to see what type of permits are required (or even if short-term rentals are allowed), and with the holder of your homeowners insurance to make sure you're covered and for how much.
The bigger the better
While you may think there's no big difference between the three-bedroom/two-bathroom house and the one with four bedrooms and four bathrooms, in the rental world it can mean a difference of 30% to 50% in potential rental income. Try to find the maximum amount of bedrooms and baths possible so the home appeals to larger families and groups with more than one or two couples sharing the home. Most potential buyers simply do the math of dividing the room rate by the number of bedrooms to give the cost equivalent of staying in a hotel. Also, look at local hotel rates through the year for fluctuation between high and low seasons to foresee the ebbs and flows of your potential rental income.
Photos are key
Whether selling or renting your house, professional photographs (likely costing anywhere from $200 to $500) are just about the best investment you can make. Cheap, DIY photography can make an average house rental look terrible. Keep in mind that typically the more photos you post on sites such as VRBO, the more it costs, but also the higher your listing is placed in your geographic target market. Try for no less than 10 photos, with the best exterior feature of your property as the first or top listing image, followed by wide-angle lens interior shots and a few of the property at night.
Get the right management
You may think all you need is a lockbox and good email to coordinate guest stays. In reality, unless you intend to manage the property yourself, you'll sooner or later need a house manager or management company. Find a company or person to walk guests in as well as check them out to ensure the house is kept in order and a deposit can be refunded in full. The house manager will also be the point of contact for guests should the plumbing need repair or a pool not get properly hot, which, by the way, it never does. Expect to pay a management company 20% to 30% of the total rental income, or a local manager anywhere from 10% or a negotiated monthly or hourly fee.
Friends and family or renters?
Sure you wanted to spend New Years in St. Barts or loan your Laguna Beach property to friends for the Fourth of July, but those are your peak rental periods. They generate more income and are more likely to encourage repeat business. Should you give in to whim or sentiment?
Look at it this way: You can either have a second home or a vacation rental. You need to decide on a priority. Should a friend ask to borrow the house during key rental times, try simply referring them to your VRBO listing with a discount (if you like them) or a polite note that says, "We really use the house as an income property, but would love for you to give it a try." They'll get the message, and you won't lose the income or, hopefully, the friend.
The kingdom of VRBO
You've bought the house, decorated it and are ready for your VRBO debut. Since you're not using a local manager, it's up to you to make sure your house is really ready for guests. Do you have two sets of sheets per bed, two towels per person, a fully equipped kitchen and someone or something to walk guests through electronic gadgetry to turn on the television or pool heater? Be sure to go though each step and think about such things as the amount of your deposit, how you will process rental payments and whether your house lives up to its lofty descriptions. Renters can and will post feedback online that affects your income, so don't misrepresent.
Why isn't my house renting?
You've got the glossy photos and editorial perfected on your online listing, but for some season you can't get it rented. Your first problem may be the price. Make sure your rental rate is in line with area competition. Next, take a look at the availability of other properties in your area to see who's got a full rental calendar -- then try to emulate their formula for success. If you've managed to get inquiries but just can't seal the deal, make sure you're responding to your potential renters in no more than a two-hour period, and try not to be too aggressive or too quick to close the deal.
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Michael Martin is the managing editor of JetSetReport.com, a luxury travel and lifestyle guide based in Los Angeles and London. His work has appeared in InStyle, Blackbook, Elle, U.K.'s Red magazine and on ITV and the BBC.