Renting Your Retirement/Vacation Home
With all the amazing deals on properties in Central America, it’s hard to not get in on the action. But what if you’re still several years away from retiring and unable to live in your new paradise full time? This is where renting can help out. Not only is renting a nice source of extra income, but you’ll feel more at ease knowing that your home is being inhabited, and not sitting empty – a possible target for break-ins.
The key to renting your property is ensuring you have all your ducks in a row. Here, we’ll share with you key tips on how to make the most of your property’s potential.
Taxes – tax liabilities on rental income vary depending on what part of Latin America you’re in, anywhere from 0% to 30%. Speak with your attorney about deductions that may apply to you to help offset some of these taxes. It’s also possible that other taxes such as luxury tax, wealth tax or school tax will apply. In addition, it’s important to do your due diligence in your home country. Discuss the rental income with your accountant and if there’s any way you can possibly reduce these costs as well.
Pricing – determining your rental yield is the first step to formulating how much to charge for your home. Gross yield is the annual rent divided by the property price – add in the running costs such as utilities, management fees and cleaning and you get your net yield. Basically, the less you pay, the higher the yield. Hence why it’s worth looking for fire sales and distressed properties as your original investment will be lower then your neighbors, but you’ll be able to charge the same rental prices.
It’s also important to consider what type of renter you wish to accommodate. Short-term? Long-term? If you’re leaning towards short-term, consider that you will need to furnish and equip the home. Other costs include utilities, running costs and management fees. Alternatively, a long-term rental is not always necessarily furnished, and typically the renter covers most utilities and running costs.
Whether you’re looking to offer short-term rental or long-term rental, the income should be fixed to some extent based on your property type and where it is. Certain areas have higher demand for short and long-term rentals. Generally, the lower your purchase price, the more overall bang for your buck.
Location – Investigate, research and do your homework when purchasing a foreign property – that’s a given, right? However, if your primary purpose for purchasing a vacation home is to rent it out, this is even more important. Different areas of a country will have different renter demands. A small town, near the beach is likely an ideal short-term rental area, while a metropolitan condo in a main city has a higher chance of being a long-term rental. Chat with real estate agents and management companies, or check out the classifieds and online ads to provide an idea of rental rates in your area.
Property Management – The majority of individuals renting their retirement or vacation home do not live within a few hours drive of their property. This is where a property manager comes into play, and is pretty much a necessity. Find a reputable, bilingual, local property manager and interview them. What are their rates? Do they find the tenants and deal with check-ins and check-outs? Do they pay utilities? What about a middle-of-the-night emergency with the home? These are all very important questions to ask when looking for a property manager.
Marketing and advertising of your property is key in ensuring quality and full occupancy of your home. Some property managers are better at this then others… ask for references from their other clients, investigate their track record and confirm the history of their occupancy rates and incomes.
It’s also extremely important that the management company is on the legal up-and-up. Ask your attorney to go over the rental contract they use for both tenants and you as the homeowner.
Your Rental Ability – As there are some countries that put restrictions on short-term rentals, ask for your attorney’s assistance in confirming whether you can actually rent your home. In addition, if you’re looking to rent a condo or home in a private community, there may be bylaws you need to know about.
Occupancy Levels – to come up with a somewhat accurate number of what occupancy levels are like in the country you own your home in; you can’t simply rely on tourist numbers. Instead, look to hotels and resorts to gauge occupancy, as these are the same individuals that would possibly consider renting a home over a hotel room.
Competition – if you’re purchasing a home specifically for rental income purposes, researching the area you’re considering buying in can make all the difference. If your goal is short-term rentals, you’ll want to ensure you aren’t in an area already saturated with hotel rooms and short-term condo rentals. If long-term rental is your goal, finding a residential area with limited rental homes is your best bet. Basically, the less direct competition, the more lucrative your rental property will be for you.
Investigate the area’s long-term goals for hotel rooms and condo projects. Although it may seem like a good area when you buy, check to see if there are any large developments or hotels slated to be built in the coming years. This can significantly affect your rental yield down the road.
Demographic – expanding your pool of possible renters helps ensure you receive maximum rental yield and maintain occupancy. If you concentrate on a specific demographic of renters, your occupancy may end up suffering if that group decreases their travel.
If you’re purchasing an International home specifically to rent, your best bet is to find an area with a diverse demographic. Areas that are busy with tourists, businesses bringing in executives for extended periods and annual snowbirds from North America are all good markets to capitalize your rental.
Renting your retirement or vacation home can be a good way to ensure your future home is taken care of and lived in, while bringing in a bit of an income, just as purchasing a home for purely investment purposes can be worthwhile and lucrative.
We hope we’ve been able to bring to light some key areas to consider before jumping into the International rental world. If you ensure your attorney has gone over all contracts and agreements, you have secured a reputable and trustworthy property manager and have done your research about the best area to purchase to ensure maximum rental yield, then you’re well on your way to helping fund your own International dreams.