The article “What to Consider Before You Buy a Vacation Home” recently appeared in The Wall Street Journal. In it, writer Jeff Brown, writer in Livingston, MT highlighted both the pluses and minuses of owning a vacation/rental home. Here is his article, edited to be most relevant to owning a home in Windcliff with personal comments inserted by Rich Chiappe of Windcliff Homes.
Chiappe first rented a Windcliff vacation rental home with his family and another in 2007, became enamored with Windcliff, purchased a 3-bedroom condo exclusively for vacation rental (investment) in 2011, sold it in 2014, purchased a lot in 2014 and completed a 4-bedroom custom home in 2015. Chiappe is now owner of Windcliff Vacation Rentals in Estes Park, Colorado.
Brown: It’s that time of year, when legions of vacationers decide they want to take the plunge and buy a second home. And this year, perhaps, it may be especially true: The economy is firming up, interest rates are still relatively low and investment accounts are brimming.
So consider this a reality check. Whether people are looking for a spot to enjoy themselves, rent to others or resell for a big profit, there are many mistakes that could bring them big headaches or cost them a lot of money.
Experts and homeowners warn newbies, for instance, that they may end up putting in a lot more work than they expect—and taking on a lot of frustration—to keep renters happy. They can easily run afoul of rules laid down by local governments or homeowners’ association, or find themselves facing unexpected costs. And there’s no guarantee the rental or resale market will stay strong enough to justify the expense.
Chiappe: Brown makes keen observations here. Windcliff owners still have to work to keep their homes maintained and renter-friendly, but in many ways, the Windcliff staff does most of the heavy lifting alleviating much of the frustration. But Brown’s last sentence is worth restating: “there’s no guarantee the rental or resale market will stay strong enough to justify the expense.”
Brown: “Costs of owning and renting a vacation home can be very high,” cautions longtime real-estate investor Todd Huettner, owner of Huettner Capital, a Denver real estate lender.
“The hassles and costs of short-term vacation rentals are higher than most people expect….People are way too optimistic about rent rates, vacancies, management fees, maintenance costs and home-value increases.” Owners who live far away can also be surprised by climate-related issues like damaging snow loads in the mountains or corrosion from salt air at the beach, he says.
Chiappe: Absolutely true on all points (my family also owns a beach home on the Texas coast). It is often very bewhildering when Windcliff charges an owner account for snow plowing when a) there were no renters in or scheduled to be in the home during or after the snow, and b) it’s 72º and sunny at home in Texas. Believe me, I get it. But there are very specific, good reasons why a drive must get plowed in Windcliff whether or not a guest or owner stay is involved.
Brown: Caveats aside, many people have already sealed a deal. After slumping in the years after the financial crisis, prices of vacation properties are back where they were in 2006, a National Association of Realtors survey found. The median sales price of a vacation home rose by 4.2% in 2016 to $200,000, following a 28% gain as the housing recovery gathered steam in 2015.
Chiappe: I’m not sure where the vacation homes referenced are located, but they certainly aren’t representative of Windcliff (or Estes Park) where the median price of condos now exceeds $750,000 and detached homes over $1,200,000.
Brown: And, of course, bad experiences aren’t universal. Many who work hard enough at managing their vacation properties can’t say enough good things about it.
“I bought a vacation home because Lake Tahoe was either too expensive to book for a last-minute weekend or I couldn’t find any vacancies,” says Sabrina Robinson of Santa Cruz, Calif., four hours from Tahoe. She says she rents her vacation condo to tourists year round, devotes about two hours a week to managing the property, mostly to deal with cleaners and renter inquiries, and covers her mortgage and utilities with about $20,000 in annual rental income. The homeowners’ association does outside chores.
Chiappe: Bingo! As Windcliff’s resident real estate broker, the first question I will ask a prospective home buyer is, “why?” What is motivating you to make this investment? Availability of a known (and beloved) second homesite is the most appropriate answer followed closely by, “we want a place we can use a few weeks a year while we are still working that we can some day live in full-time when we retire.” These are “good answers.”
Brown: But even those who are successful have to put in a lot of effort to make it work—starting with careful thinking and planning before they take the plunge. Here are things potential buyers should consider, whether they are buying for pleasure, renting or as an investment.
Buy it for the right reason. The Realtors association surveys find that the primary motivation for a vacation-home purchase is vacationing. And many experts think that’s the best way to approach the deal. Rental income is so unpredictable it should be viewed as gravy, they say, and buyers certainly shouldn’t rely on it to cover their mortgage and other expenses. And the market is too unpredictable to expect to profit on a sale.
Chiappe: True on all fronts. Although the macro trends in the Estes Park area should provide additional confidence that the investment is more sound than it might be in other markets, it important to also note that, A) Rocky Mountain National Park is not going away any time soon, B) visitor trends to the Park are UP, and C) Estes Park has yet to be “discovered” by the “big money” that has infiltrated most tourist-centered mountain communities south and west of Estes Park.
But Brown’s first point is absolutely key: “Buy it for the right reason.” That reason is typically a family’s desire to establish a family legacy in a beloved part of the Rockies that will serve as a REGULAR destination for family vacations and gatherings year-round.
Brown: The approach with the fewest risks, many experts say, is for buyers to pick a place they will enjoy and focus on that as their priority.
“Our buyers today are buying for a number of reasons, with the No. 1 reason being lifestyle and use,” says Nick Cassini, senior vice president of sales and marketing for Four Seasons Private Residences in Anguilla.
John Banczak, executive chairman of Turnkey Vacation Rentals, a booking website, says that people who buy as a lifestyle choice “are the people that realize they love spending time in one place, may even retire there, have done the research and made the decision a second home is for them. Getting additional revenue through rentals is the icing on the cake.”
Chiappe: Huh? What did you just say? That’s right, “Getting additional revenue through rentals is the icing on the cake.” Yes, by all means, I will personally help you plug-in comparable historical rental information about the home you are buying or building into the spreadsheet ALL prospective Windcliff buyers create as part of their planning and due diligence. But Brown is right: a smart planner appreciates the assistance vacation rental revenues provides but is not financially dependent on them. Seriously.
Brown: Is buying a vacation rental a good idea? It can mean putting a lot of money at risk, more work than many buyers anticipate and headaches with renters.
Pick a location that’s good for business. Although rental income shouldn’t be the top priority, it’s still going to be crucial for many buyers. So as with all real estate, location is key…
…“The owners that are most displeased are ones that rush the purchase decision because they are blinded by their dream,” says David Angotti, co-founder of SmokyMountains.com, a vacation-rental listing site in Tennessee. “For example, they fail to understand location, view, features and other amenities are critical to the overall revenue, and just want a vacation home.”
Chiappe: While this may be true even in the Estes Park area, Windcliff owners enjoy the immediate benefit of unmatched, snow-capped, front range views that will NEVER change. Sure the YMCA of the Rockies may add a few buildings to their campus across the Aspen Brook Valley, but by and large, it is reasonable to assume the Rocky Mountain National Park bordering Windcliff to the West and South and Roosevelt National Forest to the East ensure Windcliff’s choice location in perpetuity. That is in so much as anything can be assured when it comes to federally protected lands.
Brown: Another aspect of location to consider: how far the spot is from the owners. The National Association of Realtors says 57% of vacation properties are at the beach or lake, with the median distance 200 miles from home—far enough to require spending money for a manager and caretaker. Little chores an owner would do himself or herself at home can thus get costly.
“In our experience, living close is really helpful if something goes wrong, but there are a huge number of services out there to hold keys, offer concierge services or otherwise help if you live further away,” says Laura Hall, communications director for Kid & Coe, a vacation-rental website. “So anything is possible if you’re willing to pay for it.”
Chiappe: And this is where Windcliff Homes comes in. My wife and I would NEVER have purchased a home in Windcliff from 850+ miles away if we did not have confidence in and ultimately, dependence on the staff at Windcliff to look after our home. Accessing our Colorado home from Texas has its challenges, but Windcliff’s staff was ALWAYS near-by and available. That gave us the peace of mind we needed to make our investment in Windcliff.
Is Windcliff’s management expensive? Well, compared to what? As a percentage of rental income for commissions, compared to other property managers in the Estes Valley, Windcliff is on-par. But being owned by a full-time Windcliff resident and staffed by Estes Park locals year-round, there is also a great premium to be gained from Windcliff Homes’ management of your Windcliff home.
It goes far beyond just keys and coordinating maintenance vendors. Windcliff Homes’ staff not only becomes your eyes and ears on the mountain, but is also a long-running successful rental generator for its owners. Windcliff’s 47-years of continuous operations and closely held proprietary former guest list are key assets that provide a relatively consistent stream of rentals (and rents) for its homeowners.
Brown: Don’t delude yourself about costs and profits. Even if rental income is only a secondary goal of buying, pros urge a clear-eyed analysis of the expenses involved.
Among the common rookie mistakes are focusing on purchase price, rental rates and recent market trends, and counting on more renters than are likely. Doing that means missing out on other crucial considerations that can eat away at earnings, such as costs for cleaning, management, routine maintenance and repairs…
…Then there are real estate taxes, insurance costs, utilities and perhaps state sales tax on rental income.
The same holds true for buying a property with the intent to sell it. Experts warn that only a reckless buyer expects a vibrant market every year. From the end of 2007 through 2012, primary-home prices dropped by 14.8%, vacation properties by 23%, the Realtors’ group says. Sales of vacation homes dropped in 2016 to 721,000, off 21.6% from the 920,000 in 2015. Cassini says there are fewer speculators in today’s market compared with the prerecession boom.
Chiappe: Don’t forget to throw-in the occasional “500-year flood” as the Estes Valley experience in September of 2013 or “Global Pandemic” as experienced in Spring, 2020. Windcliff not only lost nearly all of its booked rentals after the flood, but vacationers unfortunately avoided Estes Park in 2014 assuming (incorrectly) that Estes Park was “wiped off the map.” It took the Estes Park CVB and DMO an extra year to convince the market that Estes Park was fully recovered and running full speed. Vacation rental incomes were severely hampered during that recovery period. The Coronavirus was kinder to us — having occurred during our slowest period. But we lost 30% of our booked reservations for the rest of the year which provided our homeowners just a fraction of the total rental income they had become accustomed to receiving.
Brown: …Don’t get tripped up by local rules. Local ordinances and homeowners-association rules can reduce the pool of potential renters. The association, for example, might ban pickups, motorcycles and pets, or mandate how much or how little time a property can be used for rental.
Chiappe: All true. However, once again, that’s where Windcliff Homes comes in. Our policies and rules are all published at Windcliff.com and anyone wishing to buy or build and become a part of the vacation rental program at Windcliff should be intimately familiar with these ordinances long before considering the purchase of a Windcliff home. Larimer County has taken a much stronger regulatory stance with vacation rentals in the Estes Valley and while those regulations have had a minimal impact on Windcliff operations, frankly, Windcliff Homes was prepared for it and assisted (and will assist) all of its owners in navigating the new regulatory waters.
Brown: Then there are government regulations that may limit an owner’s flexibility. Will owners be able to ban college students planning to party on spring break? Chiappe: When Windcliff Homes manages your home, ABSOLUTELY!!! Brown: But antidiscrimination laws limit whom they can say no to, forcing them to rent to guests they don’t want, like people with rambunctious toddlers that can boost cleaning costs or annoy neighbors. Chiappe: Not completely true. Windcliff Homes can legally deny ANYONE from renting your Windcliff home. And we often do just that. We heavily vet new renters on the phone, and provided they honestly answer our direct questions, Windcliff Homes has an excellent track record in keeping undesirable behavior out of Windcliff. The occasional “snuck one past us” not withstanding (and luckily – RARE!).
Brown: Have a plan for getting renters. Chiappe: Yes, in other words, leave it up to Windclff Homes as we again, have an excellent track record in doing just that! Brown: Finding, vetting and negotiating with renters is more work than many owners are willing to take on. Chiappe: That’s why Windcliff Homes handles all of that for you! Brown: So, many use a service to bring in business. But it’s important that owners understand what these services involve before they sign up… Chiappe: Windcliff Homes’ commission is 40% of rent. Owner stays and Guest of Owner stays are not charged rent, however, there are typically cleaning fees (actual cost to clean the home after the owners’ departure). Brown: They provide damage insurance and bar renters who have posed problems for other owners.
Brown: These days, many owners use online services like Airbnb, HomeAway and TripAdvisor, … Chiappe: and FlipKey all of which are now charging guests and an ADDITIONAL 5-12% “convenience fee” for the “convenience” of finding their rental home using their web sites’ search engines. However, Windcliff guests can avoid paying that fee simply by visiting Windcliff.com , checking availability and amenities, selecting a home and CALLING Windcliff to make the reservation directly! Consumers are smart and it won’t be long before the “800 lbs. gorillas” of vacation rental home search realize they can’t make guest pay 5-12% more for something they are entirely capable of finding online themselves and booking directly with us.
Brown: …Watch out for tax traps. Federal tax rules offer deductions for mortgage interest, property tax, insurance premiums and many other expenses on second homes. But the rules are complex, and the biggest breaks generally go to owners who use the property no more than 14 days a year themselves, reducing benefits for owners who want to use their property heavily. And when it comes time to sell a rental, profits are likely to be taxed as long-term capital gains—and not sheltered like profits from a primary home—although many owners avoid that by converting a rental to a primary residence in retirement.
Your renters may do more vacationing than you. Business and pleasure don’t always mix, experienced landlords say. For maximum rental income, owners have to offer their properties during the peak summer or winter season, which may be when they want to use it themselves.
Chiappe: In fact, Windcliff Homes’ contract with its owners REQUIRES all owners to make a minimum of 50% of the Prime and Fall seasons available to Windcliff Homes to book to vacation renters. Without 50% of the Prime and Fall seasons, we cannot generate enough income to justify the year-round expense of managing the home for its owner.
Brown: “If you’re going to essentially be competing with people interested in renting your home, then you aren’t…going to have much success,” says Adham Sbeih, CEO of Socotra Capital, a real-estate investment and lending firm based in Sacramento. “Even if you’re only trying to use your home for a week or so out of every summer month, that can create enough conflicts that it significantly reduces your ability to consistently rent the property out.”
Brace yourself for tenant demands. Renters expect perfection and won’t tolerate little annoyances that homeowners come to live with, like a balky ice maker or sticky door, and renters have no long-term stake in the property.
“Expect all the unexpected that arises when multiple people are rotating through the property and treat the property from the ‘I’m on vacation’ mind-set,” says Victoria Shtainer, an agent at the Compass real-estate firm in New York City who specializes in the Hamptons.
Chiappe: All true! While an owner (me for instance!) might tolerate a sticky door or a flickering pantry light, guests will not only “complain” (errr…”point it out”) but may occasionally even make the remark in an online review which is never desirable to say the least. We insist that all of our homes in Windcliff are 100% functional and tend to “jump” when a guest “points out” any discrepancy in maintenance or function of the home.
Brown: There’s also the question of guests who do things owners aren’t anticipating. Gail Lynne Goodwin, owner of two luxury rentals in and near Montana’s Glacier National Park, warns about things like “having a noisy guest that disturbs your neighbors, having a larger cleaning bill than anticipated, having a guest from Florida that wants to set the heat at 80 degrees, etc.”
Chiappe: Also occasionally (if not rarely) true. If you cannot handle the temporary emotions of knowing someone illegally smoked something in your home against all rules and posted prohibitions or broke something in the home or left with the keys requiring a complete rekey of the home (at the guests’ expense, naturally), then perhaps vacation rental home ownership is not for you.
Brown: And when owners use the property themselves, they may end up spending a lot of time with tenants on the brain. They may have to end their own visits emptying drawers, changing sheets, storing family photos and making trips to a storage unit with items they don’t want renters to use, like bikes, kayaks or the family silver.
So is buying a vacation rental a good idea? It can mean putting a lot of money at risk, more work than many buyers anticipate and headaches with renters. But those who have picked good properties in hot locations and have an ability to roll with the punches say they’re happy.
“Having a second home has been a dream come true and has also paid for itself,” says Robinson, owner of the California vacation home.
Chiappe: My wife and I must echo the latter. Vacation rental income and Windcliff’s professional management gave us the additional boost of confidence we needed to put us over the top on our decision to build a home in Windcliff. And things worked out well for us. We now live in our dream home in our dream location. We wouldn’t be here if it wasn’t for Windcliff and the “icing on the cake” (income from vacation rentals) they provided our family during our years of vacation rental operations. It was worth every penny of the 40% commission we paid Windcliff for their services.
Ready to buy a vacation rental home, or curious about the options? Browse our Estes Park real estate.