What to know when buying a fixer-upper vacation rental

Pros of buying a fixer-upper vacation rental

If you’re in the market for a vacation home and you’re thinking about buying a fixer-upper, there can be several advantages.

Lower sale price

First-time real estate investors may find a fixer-upper attractive because they have a lower budget, and fixer-upper list prices tend to be significantly lower. Once you see the inspection report, there may be even more room for price negotiation.

Due diligence is a must when you’re investing in fixer-uppers. Will the money you save on purchase price be absorbed by the repairs, remodeling, and other home improvements you have in mind? Is that a trade-off you’re willing to make?

Lower property taxes

Property taxes are, in part, assessed based on a home’s value. Sale price and comparable home prices also factor into a home’s value. So, if your vacation home’s sale price is significantly lower because it’s a fixer-upper, your property taxes may be lower, too—at least for now.

The frequency at which property value is assessed for tax purposes will vary, depending on your state and local market. In the majority of states, property value is assessed for property tax purposes every five to seven years. However, in most states, property taxes are also assessed right after the sale of a home. This can benefit you as the owner of a fixer-upper vacation home, as your assessment will likely occur before you complete your home repairs and improvements.

There are also considerations for tax breaks. When you renovate a vacation rental investment, these can be part of the cost of doing business. This means the costs of repairing and improving your fixer-upper house could be partially or completely written off during tax season. Consult with your CPA or tax preparer to learn more about the potential benefits of a fixer-upper vacation rental.

It’s a blank slate

If you’re buying a vacation home with an eye to design (or redesign) a home to your tastes and specifications, a fixer-upper might be a great property for you. A fixer-upper can be immensely satisfying when you’re buying a vacation home for personal use, or primarily to entertain friends, family, or business associates. From bathroom remodels and outdoor hot tubs to pet-friendly finishes and family-friendly kitchens, it’s possible that your upgrades will help your home appreciate in value quickly.

You want to be thoughtful about how much fixing up to do, though, if you plan to use your fixer-upper home as a vacation rental. Depending on your market, certain upgrades can earn you more rental income. Others, typically, do not.

Cons of buying a fixer-upper vacation rental

Remember, it’s not called a fixer-upper for nothing. There are important considerations for time and budget that may not be obvious when you’re searching for your fixer-upper home.

It’s a lot of work

When you’re buying a fixer-upper, working with contractors and putting in your own elbow grease will be inevitable. If you’ve got a day job, a family, or a loving partner, you’ve got to be honest about how much time you’ll dedicate to making your home vacation-ready. Even if you outsource the work to professionals, it can be a daily grind to hire, schedule, and manage contractors.

You’ll be the proud owner of a vacation home. Would it be more relaxing to kick back and actually be on vacation there instead of pouring sweat equity and money into your fixer-upper?

Renovation takes time

Renovating a vacation home is a series of layered processes that can take months. Depending on your availability, your contract teams’ availability, and even seasonality, your vacation home improvements could easily cut into fair-weather months, which is your peak season for earning vacation rental income.

If you’re planning to hire others to complete the work, you may be working with more than one contractor. It can take a long time for the work to wrap up—no matter what timeline is promised. Depending on how big a project you undertake, you might even have to start the process by hiring an architect, which adds to your timeline (and your budget) even further.

If you plan to go the DIY route, how many nights, weekends, and vacations will you pour into your vacation home? (Lots.)

Remember, every day your home is under construction is one more day you can’t vacation in it. It’s also one more day you can’t earn income from short-term rental guests.

Preparing for the unexpected

No matter how diligent your home inspection is, when you’re buying a fixer-upper, there are things that can't be seen until you start tearing out walls. You, your budget, and your calendar need to be prepared for the unexpected.

And with any renovation, miscommunication and contractor errors can crop up along the way, resulting in the need to redo or change what was already fixed. You wanted beadboard on the ceiling, not the walls? Oops. Your contractor’s subcontractor skipped a key permitting process, and now the new mudroom off the kitchen has to be demolished because it extends beyond the setback? It happens.

Ballooning renovation costs

How much do vacation home renovations cost? Ask anyone who’s ever built or renovated a home, and they’ll tell you that these types of projects are likely to go over budget. In the case of a fixer-upper vacation rental, It’s not uncommon for buyers to put so much cash into the renovations that it negates any "deal" on the list price—and that could be before the project goes over budget.

One way to manage costs is to strategically space out your vacation home improvements. For example, if you’re planning to use your future retirement home as a vacation rental first, you could start with fresh paint, updated interior design and furnishings, and maybe a new deck or hot tub. Then, as you move closer to retirement, you might tackle something larger like upgrading the kitchen, remodeling a bathroom, adding a bedroom, or doing some more elaborate landscaping.

Talk with a vacation home real estate expert to learn more about buying a fixer upper vacation rental, and get the help you need to make a decision that feels right for you.