Earn More From Your Vacation Home

Take advantage of growing demand for rentals to boost your income from your second home.

When John Tierney's salary as a financial analyst dropped along with the stock market, he and his wife, Darcy, decided to try to squeeze more income from the Lake Placid, N.Y., townhouse they bought in 2002. It turns out there's plenty the South Orange, N.J., couple could do.

The Tierneys have typically earned about $10,000 a year from their vacation home in the Adirondacks. But Christine Karpinski, author of the book How to Rent Vacation Properties by Owner (Kinney Pollack, $26), says the average vacation rental brings in about $30,000 a year, while high-end homes in popular destinations, such as North Carolina's Outer Banks, can rake in $150,000. The Tierneys' rental agent, John LaSelva, suggests that they could triple the rental income and that upscale homes in the area could generate up to $100,000 a year.

Ironically, the recession helps the Tierneys' cause because tough times boost demand for vacation rentals, which generally offer better value than resort hotels. At the most popular vacation-rental Web site, HomeAway.com, the number of inquiries for homes in some of the hottest travel destinations has skyrocketed. For example, in January the number of inquiries for rental homes in Ocean City, Md., and Santa Fe, N.M., jumped 86% and 52%, respectively, from the same month in 2008.

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Marketing strategy. The Tierneys, both 56, want to catch some of that growing interest by casting a wider net. Darcy plans to start advertising on HomeAway.com, which charges $329 to list a property (with up to 12 photos) for a year. And in January, LaSelva added their home listing to at least five different Web sites, including Craigslist.org, which lets you post ads free, and LakePlacid.com, which charges $300 per season.

Karpinski agrees that advertising is key. While the Web is the best vehicle for getting the word out, she says, print advertising is not dead: "Newspapers still have a role to play -- but not the ones in major metropolitan areas." That's because the cost of advertising in the big papers is prohibitive. Instead, she suggests posting ads in local papers, church bulletins and around the office. And she stresses the importance of including high-quality photos: "More often than not, a good photo is what sells a place."

The Tierneys are not going to use the townhouse themselves during peak season, when they can collect higher rents and they're certain to find occupants. For example, last year the couple rented out their place over the Christmas season, something they haven't done in the past. "Right now, it's more important to get the money," Darcy says.

The Tierneys sealed the deal just a couple of weeks before Christmas by reducing the rate for last-minute Christmas travelers. Although their house would typically go for $350 a night during the holiday season, they accepted the renters' offer of $275 a night. But, Karpinski warns, don't hand out discounts too soon and miss out on extra revenue.

If you rent out your home for more than 14 days per year, you'll have to report all of your income to Uncle Sam (if you rent it out for 14 days or less, you can keep the money tax-free). But you can write off expenses that are exclusive to the rental business, such as the cost of advertising, and deduct part or all of the other costs associated with that home, from mortgage interest and insurance premiums to housekeeping and maintenance.

How much you can deduct depends on how often you use the home for personal trips. For example, if the Tierneys use their Lake Placid property for ten days a year and rent it out for 90 days, 90% of such costs would be considered rental expenses. Because of the complex tax rules involved with owning a vacation rental, Karpinski recommends hiring an accountant or tax lawyer. If you have the time and the inclination, you can net more cash if you manage the property yourself. A management firm can claim 30% or more of the rental rate in commissions.

Stacy Rapacon
Online Editor, Kiplinger.com

Rapacon joined Kiplinger in October 2007 as a reporter with Kiplinger's Personal Finance magazine and became an online editor for Kiplinger.com in June 2010. She previously served as editor of the "Starting Out" column, focusing on personal finance advice for people in their twenties and thirties.

Before joining Kiplinger, Rapacon worked as a senior research associate at b2b publishing house Judy Diamond Associates. She holds a B.A. degree in English from the George Washington University.