The Vacation-Home Dilemma

The soft economy may be prompting thoughts of dumping that second home, but there are plenty of reasons to consider renting it out instead

From Standard & Poor's weekly investing newsletter, The Outlook

It seemed like a great idea 20 years ago. You'd buy that condo in Florida, vacation there as often as possible, then someday sell your primary residence and spend your golden years basking in the sun. Now, someday is here and, lo and behold, you've changed your mind. Now, you have grandkids you don't want to leave, all your friends are nearby, and frankly, the idea of nonstop sunshine with no autumn leaves or snowfalls has lost its luster. You'd hate to sell your vacation getaway, but keeping up two homes has gotten too pricey for comfort. Is there a solution?

"Absolutely yes," says Christine Karpinski, director of Owner Community for and author of How to Rent Vacation Properties by Owner. "Renting out your vacation home allows you to have your cake and eat it, too. And the good news is it's easy to do it yourself, not to mention surprisingly lucrative."

Many seniors find themselves in this position, she adds. A good percentage of second homeowners fall into the retirement age demographic, and quite a few of them have at one time or another kicked around the idea of selling their primary residence and moving into that beachfront condo or mountain chalet full-time. But there are six reasons why you might consider renting your vacation home instead.

First, income from renting is better than foreclosure. According to government data, close to 40%, and perhaps as many as 50%, of the foreclosures in 2007 were of nonowner-occupied homes, which generally means vacation homes. S&P Chief Economist David Wyss expects this trend to continue into 2008 and 2009, pointing out that it's psychologically easier for people to skip payments on a secondary home, whereas they will scrimp and save in other ways in order to hold on to their primary home.

"If you have a mortgage on your second home, renting it out only 17 weeks will cover your mortgage payments for an entire year," says Karpinski. "If it's paid for free and clear, only five off-week rentals will cover costs like bills for your phone, power, cable, and association dues. All the rest is profit! When you consider that in some markets you can earn as much as $30,000 to $40,000 in rental revenue per year from your vacation home, you're looking at a nice raise for yourself."

Second, circumstances have changed since you made your retirement plans. Maybe grandchildren have arrived on the scene and you can't bear the thought of moving hundreds of miles away from them. Or your parents are in poor health and need you nearby. Or your spouse has passed away and retiring in the Great Smoky Mountains was his idea, not yours. Regardless of specifics, your life bears no resemblance to what you thought it would be when you made your retirement plans.

"Life rarely turns out to look like we thought it was going to look," notes Karpinski. "That's O.K. Some of the happiest, most successful people I've met during my years working in this field never dreamed they would rent out their vacation home, and yet once they tried it, they love doing it. It pays to be flexible and keep your options open."

Third, you've suddenly realized there's no place like home. You've decided you like being near your friends, you don't want to leave your church or synagogue, and your Tuesday lunch with the girls or Thursday bridge night with the guys is a tradition you just don't want to give up. Or perhaps you'd like to stay in your hometown most of the year (you kind of like the change of seasons) and spend the bitterest winter months in your beachfront condo. Renting your second home out during the time you are not staying there makes it financially feasible to keep both homes.

"Traditionally, many retirees would sell the home they lived in for 40 years, downsize to a smaller house or apartment, and split their time between that home and their vacation place in, say, Florida," explains Karpinski. "But there are drawbacks to doing that: you lose your neighbors, you're no longer close to your familiar grocery store, and so forth. And you don't get to pass the homestead down to your kids. But by renting out your vacation home, you can have the best of both worlds. You can afford both places. It's the perfect balanced solution."

Fourth, you've decided to "retire" from retirement. It is not unusual for people to test-drive retirement and find that it's jusLet not for them. Work can provide many rich rewards—structure, social interaction, mental stimulation, and a sense of purpose—that people keenly miss when they retire. And when they discover that quitting the rat race isn't quite what they thought it would be, more and more people are opting to return to the workplace. And (let's be honest), sometimes people simply can't afford to retire.

"When people decide to postpone retirement, they may also postpone moving to their retirement home," says Karpinski. "Even if they do retire and then rejoin the work force either full-time or part-time, they may not want to live in the city they associate with retirement. It's a psychological thing. And so, in these cases, it's better to keep the vacation home a vacation home. Renting it out allows them to do that."

Fifth, your fixed income hasn't kept up with your lifestyle. Admit it. Even when you're happy to give up the daily grind of your job, losing the paycheck that comes with it can be pretty painful. Factor in inflation, rising taxes, and unexpected new expenses, and you may find that what seemed like a manageable cost of living five years ago doesn't seem that way anymore. Your second home, even if it's paid for, may start looking like a liability due to property taxes, homeowner's association dues, and maintenance costs. Not if you rent it out, says Karpinski. Then it becomes a source of new income.

Sixth, you're currently renting your vacation home through a property management company, but you'd like to make more money. Ditching the middleman may be the way to go. Property managers simply charge a hefty fee for their services. In fact, as Karpinski's book points out, you have to rent 10 more weeks with a management company to end up with the same amount of money you'd make renting by owner. And with the growing popularity of vacation home rental Web sites like or Vacation Rentals By Owner, finding renters is surprisingly easy.

"Here's another good reason for seniors to rent by owner: they typically have time to handle the details," says Karpinski. "Not that there's a huge amount of work involved, but it is easier to respond to renter inquiries, do bookkeeping, orchestrate routine maintenance details when you aren't tied down to small children and/or a demanding career."

And here's a surprise: people who try renting by owner often end up liking it so much that they pour their earnings into another vacation home. In fact, a recent survey by the National Association of Realtors found that some 55% of vacation homebuyers said they were likely to purchase another property within two years.

"Who knows: becoming a vacation rental property owner may become your encore career," says Karpinski. "Buying and renting out vacation homes is addictive. I've done this for years and I can't imagine ever not doing it. It's more than a way to make money. It's a richly rewarding way of life at any age."

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