I am considering buying a lake house in the Texas Hill Country as a vacation home and may want to list the house as a vacation rental on VRBO or AirBnB to help offset the expenses. I have no experience with running a vacation rental so I am looking for the basics that I should be aware of. Here are a few initial questions:

- I will have a mortgage so will the loan covenants restrict ability to rent the property

- Should I own the house in a stand alone LLC to reduce legal liability since it in on the water and I don't want to be exposed to personal injury lawsuits. (I would also have umbrella liability insurance)

- Will owning the house in an LLC make getting a mortgage more difficult or impossible.

- Is there a minimum number of rental nights per year that are required before using VRBO / AirBnB makes sense. Especially since I anticipate rental activity will mostly be in the summer and likely sporadic other seasons.

- I will need to use a management company since I will not live close to the property. What are the considerations for using a management company.

- Any resources that I can read up on to help me get up to speed.

- Any other major issues that I have missed?

- The loan covenants may or may not restrict your ability to rent the property, depending on the type of loan and the lender's policies. Some loans, such as conventional mortgages, may allow you to rent the property as long as you occupy it for a certain period of time each year. Other loans, such as FHA or VA loans, may have stricter rules that prohibit renting the property at all. You should check with your lender and read the loan documents carefully before you sign anything.

- Owning the house in a stand alone LLC may reduce your legal liability in case of personal injury lawsuits, but it may also have some drawbacks. For example, you may have to pay higher fees and taxes, deal with more paperwork and regulations, and face more challenges in getting financing. You should consult with a lawyer and an accountant to weigh the pros and cons of this option.

- Owning the house in an LLC may make getting a mortgage more difficult or impossible, depending on the lender and the type of loan. Some lenders may not lend to LLCs at all, while others may charge higher interest rates and require larger down payments. You may also have to personally guarantee the loan, which means you are still liable for the debt if the LLC defaults. You should shop around and compare different lenders and loan options to find the best deal for your situation.

- There is no definitive answer to the minimum number of rental nights per year that are required before using VRBO / AirBnB makes sense. It depends on various factors, such as the rental income, the occupancy rate, the expenses, the taxes, and your personal preferences. You should do some research and analysis to estimate the potential revenue and costs of renting your lake house, and compare them to the alternative of not renting it. You should also consider the non-financial aspects, such as the hassle, the risk, and the enjoyment of sharing your lake house with others.

- Using a management company may be a good idea if you don't live close to the property and don't have the time or expertise to handle the tasks involved in running a vacation rental. A management company can take care of things like marketing, booking, cleaning, maintenance, guest services, and more. However, you should also be aware of the costs and the trade-offs of hiring a management company. You may have to pay a percentage of your rental income, a flat fee, or a combination of both. You may also have to give up some control and flexibility over your property and your guests. You should compare different management companies and their services, fees, and reviews, and choose the one that best suits your needs and expectations.

- A good resource that I can recommend to help you get up to speed is "How to Buy a Lake House", a guide by Vacasa that covers 8 tips for buying lakefront property, especially when you plan to use it as a vacation rental. It covers topics such as finding an agent, choosing a location, inspecting the property, checking insurance, researching the shoreline and weather, looking into hidden costs and utilities, knowing the upkeep and maintenance, and understanding the local rules and regulations.

https://www.vacasa.com/homeowner-guides/how-to-buy-a-lake-house.

/gpt

Do an internet search for IRS Topic No. 415.
It discusses the federal tax treatment of personal use of rental property and the impact on reporting costs and revenue.

I have a some on open LBJ waters for the past 7 yrs and here are my thoughts.

- I will have a mortgage so will the loan covenants restrict ability to rent the property
Typically not.

- Should I own the house in a stand alone LLC to reduce legal liability since it in on the water and I don't want to be exposed to personal injury lawsuits. (I would also have umbrella liability insurance)
I don't think LLC adds much and comes with increased tax paperwork. This is just my opinion. I have 9 rentals and could not imagine putting each into its own LLC. I just got a big umbrella to cover them all.

- Will owning the house in an LLC make getting a mortgage more difficult or impossible.
More complications and possibly higher rate. Just purchase it and put under LLC later if you really want. Going the reverse may not even be possible.

- Is there a minimum number of rental nights per year that are required before using VRBO / AirBnB makes sense. Especially since I anticipate rental activity will mostly be in the summer and likely sporadic other seasons.
VRBO has a yearly fee vs a owner booking fee. The bar to get to VBRO is not many days. If you are open water and constant level, go yearly b/c it Rates are high and barrier to get to the yearly fee was very few bookings.

- I will need to use a management company since I will not live close to the property. What are the considerations for using a management company.
Use a management company. If you can afford a Lake property, you should be able to afford a management Co. 20-30% is probably the going rate but well worth it.

- Any resources that I can read up on to help me get up to speed.
Just google any question or ask on bigger pockets.

- Any other major issues that I have missed?
Flood insurance is expensive. Detach yourself and look it as a business first b/c things will get ruined. I buy cheap/basic furniture and when I stop doing STRs, I will spend 10-20K to do a decent rehab with nicer furnitures. IMO the benefits greatly outweight the negatives which are obvious. You will find you do not use it that often and will be vacant 90+% of the time.


Benefits - Income which if you have open water on LBJ and a decent property gross 75K+. Having people use the property is a negative but also comes with many pluses. There have been water leaks that tenants found and repaired vs having water flood the house. Having a property manager is good so they can check on the home regularly even if not rented. Having the place cleaned 20+ times a year is great to keep the place cleaned. I would say the home is better kept having renters come with regular cleaning than if we didn't rent it. Tax benefits are great.

You mentioned your typical annual gross...how about the net? Are they at least positive? How often do you use them?

MAS444 said:

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You mentioned your typical annual gross...how about the net? Are they at least positive? How often do you use them?

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I have 3 places, 2 STR and one being renovated to become a 3rd. We probably go to the lake 3-5 times a year.

Place 1 Gross 100k/yr, NOI 70K. Cap Rate 4%
Place 2 Gross 40k/yr, NOI 20k Cap Rate 3%
Place 3 Gross prob 70k/yr, NOI around 40K Cap rate 3%

So from a cap rate standpoint, its not a great investment but its more of an appreciation/lifestyle/generational play. Place 1 has appreciated 3x over 7 years. Place 2x over 4 years and I pulled out 200K from a refinance.

Great thing about STRs rentals is when we travel, it feels like the housing is free as we are just using money from the rentals to pay for our vacation housing.

Appreciate that. If you don't mind sharing (and I understand if you do), do you have a specific formula you look for when purchasing these properties? For example, # of bedrooms, square footage, certain amenities, etc? Is there a realtor you recommend that is dialed in to potential STR properties in that area? For one, I know many areas don't allow STRs...so knowledge of that is important.

OilManAg91 said:

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I am considering buying a lake house in the Texas Hill Country as a vacation home and may want to list the house as a vacation rental on VRBO or AirBnB to help offset the expenses. I have no experience with running a vacation rental so I am looking for the basics that I should be aware of. Here are a few initial questions:

- I will have a mortgage so will the loan covenants restrict ability to rent the property

- Should I own the house in a stand alone LLC to reduce legal liability since it in on the water and I don't want to be exposed to personal injury lawsuits. (I would also have umbrella liability insurance)

- Will owning the house in an LLC make getting a mortgage more difficult or impossible.

- Is there a minimum number of rental nights per year that are required before using VRBO / AirBnB makes sense. Especially since I anticipate rental activity will mostly be in the summer and likely sporadic other seasons.

- I will need to use a management company since I will not live close to the property. What are the considerations for using a management company.

- Any resources that I can read up on to help me get up to speed.

- Any other major issues that I have missed?

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I will answer the LLC and in relation to a mortgage question. You cannot vest a conventional loan in a LLC at closing. Conventional means a loan that would be sold to Fannie/Freddie. These loans are cheapest on the market due to the implied government guarantee and likely the loans you have had on your primary homes mortgages. You can however after closing transfer the deed into a LLC if you would like after closing with no due on sale issues as long as the same names on the original loan are members of the LLC.

Also. there are non conventional loans that will allow you to close in a LLC but they will have a rate premium as well as the upfront costs will be more. But, there are options available.

Positive cap rate? Living large!

I don't mind operating at a loss. I do get hammered by the Trump tax law that won't let me deduct the depreciation because I make over $150K/year. Trump tax laws hammered large, middle class families, including everything from itemization, pandemic stimulus, real estate deductions, to home refinancing.

And Biden just removed aid for hundreds of thousands of families who have 2 or more children in college.

MAS444 said:

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Appreciate that. If you don't mind sharing (and I understand if you do), do you have a specific formula you look for when purchasing these properties? For example, # of bedrooms, square footage, certain amenities, etc? Is there a realtor you recommend that is dialed in to potential STR properties in that area? For one, I know many areas don't allow STRs...so knowledge of that is important.

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I know Lake LBJ well so can speak to this area. If you are looking at STR, I would think about this

1. Constant water - This is what makes LBJ special. Lake Travis is nice many years unusable.
2. I would do 4 BR, and 3 Bath minimum.
3. Open water. I would stay away from Channels and coves unless it is a Large cove. You need a boat Lift.
4. 2500+ sq foot
5. Nice Dock, fire pit, jumping platform, slide. People go to the lake to be outside and the more amenities the better. Inside is to sleep and cook.
6. I don't really have a realtor recommendation. I know the area well and when I am ready to buy, I tap one my friends to put in an offer.
7. Lake LBJ and all of their small communities are each different. I believe HSB and Kingsland may be the only 2 that have no STR restrictions. Even in certain HSB HOAs will not allow STRs. Kingsland doesn't have this issue that I am aware of. Other communities have varying level of strictness and some outright will not allow it. Tax rate all different too and people don't factor this in. If I were a buyer for STR with family use, I would look at Kingsland and primarily the LLano arm. The Colorado arm is not as wide and more boat traffic. Llano arm is quiet, wide, and home not as dense. It is a secret many non locals do not realize. Kingsland is unincorporated so very little building/renovation restrictions plus the tax rate is super low (1.2%) because its unincorporated and in the Llano CAD. Some areas on LBJ tax rate is twice this b/c its in the Burnet CAD. Also, if you are over 65 and use its your homestead, the Kingsland tax rate goes down to about 0.4% b/c retirees are exempt from paying the ISD portion which is about 0.8%. I can go on and on, but it is very important to know the area well because two similar houses prices similarly can have two very different STR situations and carrying costs.

Good info. Not my neighborhood, but good stuff to think about. One thing I've seen in these 2nd home/STR communities is that there's a select real estate mafia that basically trades these properties back and forth at 6% commission. They know the market in and out, but they'll gatekeep a lot of info like you just shared because they want to make the sale... to their crony at the other real estate company.

My place is a Crystal Beach, and we bought when the interest rates and valuations were low. There's a building boom right now, and people hoping to do STR are gonna get hammered on location, mortgage rates, taxes, and even flood policies. I operate at a loss on my place (even plastic corroded in that environment); I can't imagine what these newer owners are gonna be facing when people like me can charge half their rate for STR.

Great info - thanks!

You are absolutely right. I prob know more in this area than most non local RE agents. I bought 2 places before Covid and prices have 3x in the past 5-7 years. One I bought right when covid hit and during covid lockdown was a steal. Bought it for 375K move in ready, put in 50K renovations to make it STR ready., so about 150K in cash. One year after all the Covid money and STR mania, Place apraised for 800K, and I pulled out 200k in a refinance to lower rate. I literally made 50K cash plus have 400K equity in this place in about a year.

People who do not know STR market/LBJ well will get hammered. People who bought right when interest rate started to go up will get hammered. Covid made STRs a mirage and I bet the amount of STRs on LBJ went up 3-5x in about 2 yrs.

I also looked in Port A years ago for a family vacation/STR but decided to get another fresh water lake house which is low maintenance. The thought of constant sand, saltwater, hurricanes just turned me off to the maintenance problems. Buying another lakehouse and renting it out is no different than getting a beach house IMO. Just use the STR money to pay for a beach rental when I need it without the hassle of saltwater damage.

I have been to enough beach homes right on the beach that looks rusted after a few years. Plus beach living creates much more rental wear/tear than freshwater lakehouse.