Rent Your House as a Vacation Home for Cash

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make your home a vacation rentalLori McRae, a resident of Olympia, Wash., owns two vacation homes in the Lake Cushman area of the Olympic Peninsula. She and her family use one just for themselves, but the other property they use mainly as a rental. Along the way, she said, she's learned one thing about life as a vacation rental landlord: "Watch out for yourself."

Roughly 25 percent of all homeowners that purchase vacation homes buy their property with plans to rent it out, according to the National Association of Realtors' 2010 Investment and Vacation Home Buyers Survey. If you're considering a vacation home purchase or renting out an existing vacation home property, consider the following advice.

Get it in writing

While McRae's A-frame rental cabin has been a good moneymaker, that doesn't mean McRae's life as a landlord is headache-free. To make sure renters use the property sensibly, she says, she requires an upfront $200 deposit and a signed contract spelling out agreements between her and her renters. For instance, she doesn't charge a cleaning fee, but she does ask renters to do a basic cleaning (bag dirty linens, sweep and vacuum, leave the kitchen clean) unless they want her to deduct $20 per cleaning hour from their deposit. She's changed the contract's wording over the years to address renters' behavior.

"During the first year someone rented it out for a party of six, and when we drove by, there were 20 people on the deck -- and that was just on the deck," McRae says. The "partying" renter led to a revision of the contract that subjects renters to eviction if a party size exceeds the agreed-upon number. "The house is on a septic system with one bathroom," she says. "That just won't do."

Tackle tax concerns: The "14 day rule"

Is your place a vacation home or investment property? Or a little bit of both? Many vacation homeowners use their property personally part of the year and rent it out during another part of the year. In the eyes of the IRS, however, your home is a vacation property if you rent it out up to 14 days a year (which you can do tax-free) and use it yourself the rest of the time, and it's an investment property if you rent it out and spend less than 14 days per year for personal use, notes Christine Hrib-Karpinski, a vacation homes expert with vacation rentals company HomeAway.com. You'll face different tax consequences depending on your choice.

Are you in it to make profit, or just a little extra cash?

Vacation home owners differ over whether they're more interested in making a profit off renting out a vacation home, or just occasionally subsidizing their ownership with rentals. If you plan to break even -- or even profit -- from renting out your vacation home, you'll likely need to rent it at least 17 weeks per year, Hrib-Karpinski says. And keep in mind that operating your home as a rental may lead to expenses from wear and tear, or fees to contractors (cleaners, landscapers, etc.). If you plan to rent your home frequently, you'll need to advertise it in regional media or through portals such as VRBO.com ($279/year), HomeAway.com ($329/year), or other vacation listings services.

Management company or solo management?

Some vacation property owners work with a professional management company to market, manage and handle rental activity. Typically, management companies charge anywhere from 30 percent to 50 percent of the rent to handle marketing, booking, collecting rental funds, and coordinating cleaning and maintenance, Hrib-Karpinski says. Some owners find outsourcing these details -- and the potential for higher occupancy -- worth the cost. Others handle these details themselves, often through a loose confederation of local contractors (the snowplow guy, the cleaning lady, etc.). When you use a management company, however, you can still get time for yourself in your home -- just ask to block out your dates of choice.

Ultimately, a vacation home should reward its owners -- both as a place to be passive and rest, and as a place poised to provide passive rental income.

"We bought our place six years ago and we're glad we did," says McRae. "It's only been open one day this summer."
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