In down economy, owning a vacation home may be more business than pleasure

Tina Lambert and her husband wanted an investment that would help them pay for their kids' college tuition someday. When he insisted on paying $49,000 for a condominium in Ocean City in 1997, she worried. But by the middle of this decade, when housing markets were in full boom, the condo's value had increased nearly fivefold. It worked out so well, they decided to buy another condo, this time for $160,000.

They rarely used either condo, but they were able to pay most of their expenses with weekly rentals of $1,500 or more on each during the summer.

Then the economic crisis hit. Renters became scarcer, so Lambert had to lower the rent. In 2007, the couple almost fully booked the condos for the summer. But last year, rental income -- which they had hoped would cover all of their expenses, or even bring in a profit -- covered only half of the annual mortgage costs.

On top of principal and interest, the properties carry other expenses: condo fees, insurance, utilities, repairs.

Finding renters has hardly been a day at the beach, either. Lambert said she has been slaving to book rentals, posting ads on Web sites such as Craigslist and Rentalo.com almost every day. A few years ago, she would have to field about 10 phone calls to get one booking, but now it takes even more effort. Sometimes she's on the phone so much that her children get annoyed, but she has to tell them to be quiet because she can't afford to hang up and lose potential renters. "It's a business we work hard at that provides very little -- if any -- pleasure at this time," Lambert said.

If you were hoping to pay off your mortgage with rental income, don't bank on it. To be sure, monthly rents have held relatively stable in many areas while the purchase price of vacation real estate has dropped. And mortgage rates are at record lows. So recent buyers may find that rental income covers a larger proportion of the ongoing costs than if they had bought the same property at 2005 or 2006 prices.

Marie Cahill, sales manager at Connor Jacobsen Realty in Bethany Beach, said that the average sales price for a single-family home in her area was $707,525, compared with $1.4 million at the market peak in 2006. Yet the average rental income for a single-family home has remained at $22,000 to $25,000 per year.

Rental income typically "would pay more of your costs now than it did five years ago, because prices have come down," Cahill said. "But it's such a gamble. And it's different every year." She said that cash the owners paid upfront for a home affects the monthly carrying costs. If they made a large down payment, the monthly mortgage would be lower, and rents would cover a larger portion of it.

Even so, rental income typically pulls in only a fraction of the costs of a vacation home, real estate agents and lenders say. And lenders are taking a hard line on using rental income to help a buyer qualify for a mortgage.

"If you're buying, you have to be prepared to qualify without counting on rent," said Jamie L. Wetzelberger, branch manager at SunTrust Mortgage in Ocean City. "That's the responsible thing to do, period."

Brett Wolf, president of Professional Mortgage Services, which provides home loans in Ocean City and Berlin, Md., said he hasn't financed a single investment property this year that counted weekly rent to help the borrower qualify.

"I haven't seen anyone come to buy property planning to pay it off with rental income," said Sherry Bezold, an agent with Century 21 New Horizon in Ocean City. She said that what a homeowner would make in a season would be enough only to cover things such as taxes, condo fees and expenses. "They wouldn't be able to use the income to cover their mortgages."

The amount of rent a homeowner can charge depends, of course, on the property and location.

"Traditionally, oceanfront has the biggest demand, but in the crazy times we've had, you just never know what to expect," said Lisa Cafferty, a broker at Coldwell Banker Seaside Realty in North Carolina's Outer Banks.

Eric Schwartz bought a house at Rehoboth Beach in August 2008 and planned to rent it out for more than 10 years. Rental income covers a little less than two-thirds of the mortgage. But that defrays some expenses -- and is in line with his expectations. "That's the price for a home," said Schwartz, who lives in Bucks County, Pa.

Because Schwartz has three children in his family, he wanted to make the place inviting to renters with families. So he put a foosball table in the dining room and equipped the house with four TVs.

The development also has family-friendly features such as pools and a tennis court. Soon after buying the place, Schwartz made a Web site that includes pictures as a way to get an edge over the competition on Craigslist.

Schwartz said he has rented out the house for every prime-season week that he made it available, this year and last.

Most people who buy vacation homes just want to use them for fun.

A survey of vacation-home buyers by the National Association of Realtors released in March shows that only about 25 percent of those who bought vacation homes last year planned to rent them out. When the survey was first done in 2002, only about 16 percent had plans to rent.

"Vacation-home buyers are looking for ways to generate a little income" in the tough economy, said Paul Bishop, vice president of research at NAR. "The second aspect is that there are more ways that vacation-home owners can market their properties."

According to the survey, 26 percent of vacation-home buyers planned to make the place their primary residence someday. Buyers' median age was 46, with a family income of $87,200.

Thirty-four percent bought a vacation home within 100 miles of their residence; 40 percent bought vacation homes more than 500 miles from home.