Renting Your Recreational Property for Profit. Heather Bayer
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the winter when potential renters vie to book prime dates? Is everyone prepared for strangers using their beds, sound systems, etc.? Family “buy-in” may well be a deal breaker, so bring family members in on the discussion early on, or you’ll find the problems arising when you least want them to — right in the middle of a rental season.
3
Setting Goals
“The sooner you start getting some of what you really want, the more energy you’ll have to go for the rest of it.”
— Barbara Sher, Wishcraft — How to Get What You Really Want
If you are going to treat renting your recreational home as a business, think like a business owner would. No company expecting to make a profit would dream of moving into a new venture without a lot of planning. This planning consists of focusing on the current situation, having a clear vision of how things should look in the future, and then making decisions on what has to be done to move toward that goal.
Meaningful goals should meet two basic rules:
1. A goal is concrete. It will have a factual outcome, an amount, and a time, and it is grounded in reality. It is not an emotional issue.
2. A goal is what you really want. Take some time to imagine what it will be like when you have achieved your goal. Check whether you are comfortable with that, or whether your decision raises any more questions. This emotional side of your goal-setting exercise is an essential part of it, even if you have bought your cottage as an investment and don’t see renting as having particular emotional significance.
Your Vision
Start by thinking about what is currently happening with your recreational property. Maybe it’s been in the family for years and you have just decided to rent, or you’ve just bought it and have a lot of expenses to manage. You might have been renting it for some time but feel that you could make more income from it. Whatever your situation, just take a moment and make some notes on where you are now, where you want to be, and how you plan on getting there. Sample 1 shows how this simple exercise works.
Sample 1: Creating a Vision
First, set your goals, then write them down! This is the first part of what will become your rental plan — a miniature business plan — and subsequently your marketing plan. Don’t lose sight of the fact that you have decided to do this seriously and, with that in mind, you need to begin with a firm foundation.
When you’ve set your goals, remember to keep them at the forefront of your mind. Doubts may set in occasionally — you will perhaps ask yourself whether you are really doing the right thing, and you’ll need to revisit your original motives to reaffirm your commitment to renting. Skipping this part of the planning process would be a bit like setting sail in a boat without a rudder — directionless.
Financial Goals
The majority of vacation home owners rent their properties to gain additional income, so setting clear financial goals from the outset makes a lot of sense.
Take some time to consider how much you want to make annually from renting your property. Don’t constrain yourself at the moment by trying to work out if this is feasible. This exercise is more to establish some parameters for you to work with. For example, if you want to make enough money to cover your mortgage payment, that is straightforward to calculate. If you want to fund other expenses, such as winter-proofing the property, adding an additional sleeping cabin, or making major improvements, estimate the costs and then add them all up to give a total. This provides a useful starting point for what follows.
Pete and Anna have a three-bedroom lakefront cottage on Catchacoma Lake in the Kawartha region of Southern Ontario. They bought it partly as an investment, but also to spend the occasional out-of-season weekend there. They plan to rent the cottage for four to five years to raise enough money to build an extension with an additional bedroom and bathroom, rebuild the deck, and replace the roof. They see rental income as the way to achieve their aim of retiring to their cottage while also being able to enjoy time in it before they retire. Taking their plan very seriously, they wrote their financial goals within their strategic plan, setting out short-, intermediate-, and long-term objectives. With these figures they were able to develop a marketing plan that would achieve their goals.
Forecasting Expenses
Financial forecasting consists of identifying your fixed expenses — expenditures you have regardless of whether the property is occupied. These are expenses such as property taxes, telephone rental, insurance, mortgage payments, satellite TV subscription, etc. Some of these costs you will already know — taxes, mortgage payments; others you’ll need to think about and make some educated guesses. If you already employ someone to do general maintenance and yard work, include that cost in your fixed expense figure.
Variable costs are those that change dependent on whether the vacation home is occupied or not. For example, cleaning expenses, heating, electricity, and long-distance telephone expenses are variable. By using a spreadsheet program, you can adjust the anticipated expenditures to match your forecast occupancy.
Capital expenditures
Capital expenditures are one-off costs that may arise during the year. If you have just bought a vacation home there will be expenses to furnish and prepare it (see Chapter 5, Getting Ready for Renting). If your cottage is established, you may need to upgrade it to fit a higher rental category. Chapter 5 also gives some ideas on how to add value to your property for this purpose. Ask yourself what you need to set aside for major purchases through the year, and input this figure on the spreadsheet in the month you expect to make the payment. Don’t forget “surprise” expenditures: a septic pump that fails mid-season or a heated water line that needs replacing while you have winter guests in residence, to mention a couple. These might not be planned, so an emergency fund is helpful for such circumstances.
Electrical costs
Let’s assume that you are planning to rent year-round. This will mean you’ll be heating the property right through the winter, albeit on a minimum setting when it is empty. Be realistic when forecasting electricity costs. Depending on your location, take into account the strain that running air conditioning can place on a budget.
When you are making any forecast, make sure you include all the expenses, as forgetting some could have quite an impact on your break-even calculation. If in doubt, it’s better to overestimate expenses now, rather than getting a nasty surprise later.
Don’t expect your guests to economize on fuel in the winter or air conditioning in summer, although you can do some things to encourage them to be more thrifty with your power supply. Fitting individual thermostats in each room may help, but you then have to hope they will turn them down when they go out. Saving electricity is often a hit-and-miss affair with guests. Unless you are charging them separately for the fuel they use, why should they bother? Some owners stick a small label onto each thermostat as a reminder; others have a notice on the outer door so that it will be seen as guests leave to go out for the day. This is fine, but from experience, it’s sensible to forecast for the worst case: high electricity bills while you have renters in the winter and/or air conditioning units in hot seasons.
“We live about half an hour from our property and drive by regularly. In winter, you