Before You Buy a Vacation Rental Home

BEVERLY HILLS, Calif. ( MainStreet) -- Record low interest rates and deteriorating home prices have brought a growing number of second-home buyers to the market -- in many cases, all-cash buyers looking to get a better return on their money through a vacation rental business than they can on traditional CDs or stock investments.

But operating a vacation rental business with your second home is not as easy as it sounds -- and the biggest mistakes you will make are likely to come long before you even buy.
A property may look good for use as a vacation rental, but there are many pitfalls to avoid even before purchase.

Here are some key tips to help you avoid second-homebuyers' remorse:

Find destinations with a long season
Try to invest in a market with the longest high season, which will extend the calendar time you are able to rent your second home at a premium. Destinations such as Lake Tahoe or Mammoth Lakes in California are likely a good sell during winter ski season but could be tough to rent during slower spring and summer months. Ditto for Palm Springs, which goes from 115-degree summers to chilly 40-degree nights in winter with a tight four-month high season. Unfortunately, few destinations are like Hawaii or Aspen in terms of their year-round appeal.

Consider locations abroad
One of our biggest investment regrets has been missing the boom of Uruguay's Jose Ignacio; homes selling in the $100,000 range a little less than a decade ago go for upward of $800,000 now. The idea of paying all cash for a house abroad and never fully understanding local real estate laws made us hesitate, but risk-takers can also reap rewards. With high-season rental rates that average around $1,000 a night and up for two-bedroom houses, Jose Ignacio is but one example of how a simple capital investment in up-and-coming vacation hot spots can yield impressive long-term returns in addition to capital appreciation.

The currency play
If you're one of those people who have always dreamed of a villa in Tuscany or farmhouse in France, consider that the European debt crisis and depressed real estate market makes that dream more affordable now than it has been in years. Using currency as a means to access key real estate deals is one of the best incentives for entering a foreign market that may be unfamiliar or previously out of budget. A posh English castle may just be in your real estate future.

Location is everything
When you finally get to the point of renting out your second home, one of the most important rental factors for prospective guests will be its location. Since most rental sites are location based, if your house is in Quogue, N.Y., it likely won't come up with competing rentals in East Hampton or Water Mill queries on rental sites such as VRBO. While this may seem trivial at first, the rental rate most people are willing to pay for your house will ultimately be based on what's around, regardless of how fabulous your lot, swimming pool or waterfront location happens to be.

Maximize bathrooms
Bigger houses get higher rental rates, but most people think "big" equates to actual square footage. To the contrary, most rental sites usually list the number of bedroom and baths before the actual square footage of the home -- at least in the headlines. Go for the maximum number of bedrooms for your rental home and try, if possible, to have as many bathrooms as bedrooms, considering renters are often looking to share the house with other couples and families and likely won't want to fight over the loo.

Decorate for the masses
Many second homes, especially abroad, are sold fully furnished. Unless you're planning on redecorating at your own expense, make sure the decorating isn't so personalized or specific that it may repulse potential renters and guests. Try to avoid garish decorating elements that could include textured carpeting, floral pattern furnishings, expressive ceiling fans or lighting fixtures, as well as ill-chosen bathroom fittings that may come with a hefty cost to replace.

Costs of insurance
Many second homeowners are surprised to find out that many insurance companies require separate policies when a home is used as a vacation rental. Don't try to slide under your agent's radar by being vague about your business, as ultimately you don't want to find out you're not fully covered if something happens. Be upfront with your insurance company and stipulate the use of the second home property as a vacation rental to avoid being canceled by the agency or even worse -- not covered in the result of a claim.

Short-term rentals laws
Many resort communities such as California's posh Laguna Beach require that short-term vacation rentals, meaning anything rented for less than a 30 days, require a special permit that has to be approved by the city. In the case of Laguna Beach, it also requires the permission of your neighbors, which is rarely easy to get. Before escrow closes or you make an offer, check with the local city clerk to see what's required by way or permits or licenses.

Managed or rent-it-yourself
Take into consideration who will be actively managing your rental property. If you're the do-it-yourself type, look into how long it will take you to commute to the property to receive guests and process their departure. Even if you're managing it yourself, try to find a network of local service professionals to help if a situation arises -- plumbing stoppages or leaky faucets, for instance -- that you're unable to handle. Lastly, look into management companies that maybe able to help in renting out the property down the road should your lifestyle or general interest keep you away from doing the work.

Rent before you buy
This is the best tip. Before you plunk down your hard-earned cash in an ailing real estate market in an uncertain economy, take the last of step of renting a house for a few nights in your intended neighborhood to spot any unforeseen pitfalls or red flags you may not have considered. Drive time to supermarkets, traffic noise or messy neighbors are likely something you won't notice until you're actually a part of the neighborhood and experiencing the very thing it is you're looking to sell to vacationers looking for a great getaway.

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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.