A New Challenge To The Vacation-Home Market

by Michael Kling
on June 25, 2012 No Comments
Categories : E-Features

Although vacation homes are typically purchased for personal use and lifestyle reasons, recent research by the National Association of Realtors (NAR) reveals a consistent trend of more vacation-home owners renting out their properties. In 2006, only 13% of vacation-home buyers said they intended to rent out the second homes – by 2010, that figure had increased to 27%.

‘The elevated level in recent years may result from the difficulty in obtaining mortgages and a greater overall level of investor and cash purchasers,’ says Walt Molony, NAR's senior public affairs specialist.
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Vacation-home sales increased 7% to 502,000 in 2011 from 469,000 in 2010, while owner-occupied purchases fell 15.5%, according to NAR's 2012 Investment and Vacation Home Buyers Survey. As renting out vacation homes becomes more common, owners face increasing resistance from their states and local communities intent on regulating and even banning short-term rentals.

‘Vacation homes have been around for centuries, literally,’ says Doug Coates, association director for the Oregon Association of Vacation Rentals. ‘But a lot more people have been taking vacations at the homes and using them recently. Because of the economy and the fact that people need the income, they've been a lot more visible to local communities the last several years.’

Regulations may address zoning issues or the health and safety of guests. They may levy taxes, require business licenses, or completely ban short-term rentals in some neighborhoods.

‘One of the real problems is that you've got every little county and town and neighborhood trying to do their own regulatory approach,’ Coates says. ‘There's not a uniform regulatory approach that we're moving to. You end up with just an incredible mismatch from one town to the next.’
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Some rules are reasonable, Coates adds, while others are not. For example, sometimes communities implement regulations retroactively, which can force owners out of the rental business and require them to sell at a loss. But that does not mean the rules are chiseled in stone – Coates recalls that he and other vacation-home owners in Tillamook County, Ore., organized and successfully helped the county write a less restrictive property law after one proposal was viewed as too harsh.

‘It was not terribly obnoxious for us to live with,’ he says. ‘That's not often the case. People don't always organize and speak up for themselves.’

Jeffrey J. Koch, owner of Colorado Resort Lending in Vail Valley, Colo., says more vacation-home owners in the Colorado ski resort area are renting out their properties to help offset expenses, namely taxes and association fees. Rental income can't cover the mortgage, but most owners are happy to make a dent in expenses, he adds.

‘Management fees are so bloody high,’ Koch says.

However, selling – as well as refinancing without bringing cash to the table – is difficult because property values have dropped substantially – 30% to 35% over the last couple years.
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‘People can't sell, so at least with rent, they can offset some of the debt,’ Koch continues, noting that many wealthy people do not feel pressured to collect extra income. ‘As you go higher up the food chain, you see less of that.’

Owners may report rental income on their tax returns for better tax write-offs, but the revelation can create problems for mortgage refinance applications, Koch warns. Lenders might reject the refinance or require a lower loan-to-value ratio and give a higher interest rate if the home is reported as an investment property.

‘You'd think the income would be a plus if they had to take it back,’ Koch says.

Just over half of owners advertising their rentals on HomeAway.com pay for 75% or more of their mortgage with rental income, says Jon Gray, HomeAway vice president. People using the site book their properties for an average of 19 weeks and garner $28,000 of rental income a year.

A 2010 survey of HomeAway users showed that one in five owners new to renting their vacation homes cited economic conditions – including the need to generate additional income, a recent job loss, the inability to sell the home or the risk of foreclosure – as the reason behind their decision to lease their property. Many owners who had started renting out during hard times continued doing so after finding that renting was a great income source, even if they no longer needed the extra money, Gray says.

While HomeAway's position is to support ‘fair regulations,’ the company notifies owners of pending regulations and helps communities understand the rentals' positive economic impact and establish fair regulations, Gray says.
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‘We want to help galvanize local owners and help communities understand what vacation rentals do for their community,’ he explains.

Owners have different reasons for renting out their homes, Gray notes. Some inherited the house and need extra income to keep it in the family. Some buy it, planning to use it as their future retirement home. Others are investors with one or two homes. Wealthy out-of-towners owning multiple properties, a complaint of vacation-rental opponents, are not abundant.

However, Coates points out that the amount of rental income that owners collect also varies. For his part, Coates may net a few thousand dollars a year, but he acknowledges that he is more of an exception in this area.

‘You don't get very many people who are actually making a profit by renting out their home,’ he says.

Michael Kling is a former editor of Secondary Marketing Executive and a financial journalist based in Stratford, Conn.

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