Buying a vacation home

Question

My wife and I are thinking to buy a house in upstate NY. We live in Brooklyn, NY (US) and rent AirB&B houses for weekends year round for a few days there. Our thought is that we would like to buy a house and rent it out to AirB&B during the times we aren't there to help with the mortgage.

We currently only go up 2-3 times for a season, each rental costing us around $800 per trip as we need space to accommodate extended family and friends. Houses that would have enough space for us go for about $250K and should yield income that's slightly lower than we're paying.

A little about our finances: we can put 10% down payment and are making about 100k together after taxes. Our current rent is $2.8k monthly. Spending money on the downpayment + closing costs on a $250k house would leave us with $10k in savings.

Our calculation is that at $800 a week average cost to rent our new place (which is extremely conservative as $800 is what we would pay for a weekend now) would yield $3600 monthly. Paying tax on that money and charging extra for cleaning/maintenance fees we should be enough to cover the mortgage and most of the expenses.

What we're looking for is basically skim from the top - go when rentals aren't great or when there's enough money to cover the mortgage + all expenses already. So when the mortgage is repaid, we get a vacation house that's paid in full and are able to save on those rentals now.

What do you guys think of this? I am missing any critical parts that would alter the equation?

EDIT:
We do not own any property now and are intending for this to be our permanent home - at least as far as banks are concerned. My parents are also in - and they also do not own any property and we're considering all options including taking them buying it if there's any benefit.

Area where we're looking in has year-round attractions - ski, hiking, biking, festivals etc.

Answer 1

The plan is quite optimistic. You need more research to arrive at the numbers.

1. Occupancy: This can be quite low on average. See this article on Mash that gives out some number. It can be lower to about 30-40%. Research well to understand the occupancy that you are looking at.
2. Rental Income: You need to factor the commission being paid to AirBnB as well as state taxes. This will impact the numbers. Article on Investopedia.
3. Regulations: NY has regulations on properties for short term rental. One can't rent out property for less than 30 days if you are not staying there.
4. Maintenance: Apart from various property taxes, there are host of things that are needed to keep the property well. Cleaning, Plumbing, Wifi going down, electric fittings need replacing, white goods need fixing. All of these are difficult to fix remotely. Staying close to the property helps.
5. Personal Time: You should also factor that you will gets calls from Renters for various things and these could at times when you can't take a call [busy office schedule with meetings, travelling etc]. Not all experiences are smooth where its face less interactions.
6. Support System: Ideally it would help if you have someone close in the area who will step in if required. Some conflicts can be nasty.
7. Duration of Mortgage: AirBnB is a recent phenomenon. There is no guarantee it will remain like this for 30 years. In today's world thing change fast. You need to factor that you will be able to pay the mortgage without any AirBnB Income and treat whatever you get as bonus.

Another option you can look at is; buying a property close by and renting via AirBnB. This will address some of the points but not all.

Answer 2

I think your plan is optimistic. Some other things to consider:

• Your rental will not be rented every week. you might talk to other rental owners in that area and see what a reasonable occupancy rate is.
• You will need more than 10% down. It will be difficult to get a mortgage on a vacation home with only that much down

To me, there's not enough margin to adequately deal with downswings and unexpected expenses. There's too big of a chance that you will not be able to make mortgage payments, and either lose the rental and either need to declare bankruptcy or tap into other assets to cover the difference.

Many people do what you propose and come out OK. Many others, however, end up losing the rental and being worse off that before.

Why not save up what you would have spent on the rental mortgage for a year or two and see if you still want to pursue this when you can put more money down and have a bigger emergency fund (separate from your personal emergency fund) to fall back on.

Answer 3

Be very careful about buying with the intention to Air B&B. Don't mention that to the lender at all.

Make sure your desired property has a high probability of being rented at all. You know the location and appeal as a vacation spot through the whole year much better than any of us would. But a lot of people over estimate the rentability of their properties, especially considering they depend on a third party service to book them, which means your account can be closed without notice. Then what do you do?

Where I live, you could buy a dump and Air B&B it just for the month the gem and mineral show is in town and you'd make the payments for the whole year. Maybe you have something similar in NY and you're likely ok. Just have it planned out and factor a plan for the worst case scenarios. Nothing feel like slavery quite like working full time jobs just to barely make payments on something you don't use.

I have friends who have successfully built up impressive Air B&B portfolios but they are almost exclusively 1 bedrooms in large cities with major events as a regular appeal. I never asked why they don't buy more larger properties to accommodate families like yours because it seemed like they did their own math and stuck to what was working for them.

Don't let me dissuade you. Just speaking from observation. The other answers here cover the other things like remote cleaning, maintenance, and above all the loan from the bank's perspective when it is intended for rental use. They don't like those kind of loans unless you have a lot of property already or have a very healthy personal cushion.

Answer 4

I would call a mortgage broker and ask them if you can even qualify for a mortgage that high. That might be tough for a second home considering what you already pay in rent.

My understanding is rental income will not be considered in underwriting until it has been shown for at least 2 years. Maybe there are financial products which will take into account the home will be used for Airbnb? If not, I think you'd have to show your mortgage and current rent are less than ~35% of your income, but that may be gross income.

Definitely find out about rental vacancy rates, plumber rates and back up cleaners.

I do see the value in your idea, basically subsidize your vacations and have a consistent place to stay at. I think the underwriting, vacancy rates and regular landlord issues will be the biggest concerns.

Answer 5

I think you should consider, is that managing a house without presence is difficult and will cost you money.

There will be more then a cleaning service what you need, what happens if something goes brokes. Who gives out the keys to the appartment. Is there someone reachable when a emergency happens, water damage etc. Thats another service provider then a cleaning service.

You also mentioned, that you get a similiar sized house for that money but does it have an equally good location?

Also AirBnB is mostly for tourist, prices are often lower during the week. Appartments mostly for AirBnb, face legal matters in many citys and might get more regulated. ( see https://techcrunch.com/2018/07/18/new-law-forces-airbnb-open-its-books-to-new-york-authorities/?guccounter=1)

But yes you can make good money with AirBnb, but i expect it is easier to start close to your home.