Author Archives: Dave

Florida Villa Rental Ownership Costs – part 1 – buying

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An insight into the buying / closing costs of owning a Florida Villa

Most Florida Villa vacation rental owners will likely tell you that it’s a field of roses, skipping from rental to rental, bookings galore, and without any problems at all.  In this series of blog posts I intend to highlight all the costs involved with owning a vacation rental in Tuscan Ridge, so that you know all the expected costs if you are deciding whether to go into the vacation rental business.

Closing costs

Buying a house isn’t that expensive in the USA, especially not in Polk County, Florida.  Most of the costs either come from signing up to a new Home Owners Association (HOA) who look after the community upkeep, or from paying taxes and other costs part way through a year where the current owners have already paid for the full year – such as yearly taxes.  In Tuscan Ridge there are 2 HOAs to pay – a master and a sub.  Our bill for closing towards the end of December was broken down as follows:

  • County taxes – paid until the end of the period (known as Real Estate taxes)
  • Non Ad Valorem taxes – paid until the end of the period (non ad valorem taxes are not based on the value of your house – such as the fire service)
  • Assessments (HOA) – paid until the end of the current period
  • Sub Assessments (HOA) – paid until the end of the current period
  • Closing fee paid to the legal people ($250)
  • Recording fee ($10)
  • HOA initiation fee ($100)
  • HOA transfer fee ($75)
  • HOA sub initiation fee ($75)
  • HOA sub transfer fee ($75)

 

Depending on the time of the year the above could vary wildly.  We also had to pay the 2013 HOA fees.  It also depends on the HOA you are signing up to for your community.  Tuscan Ridge is much lower than some other community fees because the owners are responsible for lawn care and some maintenance themselves.

Here’s a link to Polk County Taxes: http://www.polktaxes.com/

And HOAs explained: http://www.wisegeek.org/what-is-a-homeowners-association.htm

So that’s the easy bit explained – whereby most of the costs are incurred by the owners of the property rather than the buyers.  The only extra cost is a survey which costs around $500 for a 4 bedroom property with a pool.  We recommend getting this done if you don’t know much about construction and buildings in the USA.

Finding a cheap Orlando flight

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Struggling to find a cheap Orlando flight that won’t break the bank?

cheap orlando flight

Up up and away!

People plan their holiday in different ways.  Some will find their villa first, some may look for certain dates, and some may simply try to find the best deal on flights and then search for everything else afterwards with fingers crossed!  Whatever your approach, a cheap Orlando flight for your family usually a big factor in booking your next big holiday, so we’ve put together some tips to help you find the best deal.  It’s something we’re often asked as villa owners, but it’s important to realise it’s not an exact science and may take patience.

Flights vary in price. A lot.

flight-prices

Flight prices depend on supply and demand

All airlines try to fill their planes for the maximum price and profit.  This leads to fluctuation in prices.  Typically, a last minute deal for a long-haul flight just doesn’t exist any more and you’ll find that booking a few months in advance is the best bet for getting a cheap Orlando flight.  For USA flights Skyscanner suggest about 18 weeks in advance.  A good article examining short-haul flight prices is here.

The time of year you are shopping makes a difference.  When tickets aren’t selling, typically just before Christmas, sales appear and prices can drop.  We bought our last tickets to Tampa just 3 days before Christmas.

Do some research a year beforehand if you can – know what price to “buy” at, as if you were trading stocks.  For example if the UK to Orlando is ever close to £400 to £450 per person (prices as of 2016) then we buy.

Be flexible with dates

If you don’t really care when you travel, which is rare, then be flexible.  Search for entire months of flights.  Use skyscanner.  Then check the airline sites directly.  Watch out for indirect flights because they just aren’t worth the hassle and you’ll run the danger of ruining your holiday.  Also try to book to fly out on a weekday and avoid weekends when you can.

Try fly-drive

For our last 5 holidays, 4 have been fly-drive and only one was cheaper to book flights and a car separately – and it was a cheap car as well.  We have never found a nice car and separate flight for cheaper than a fly-drive.

Watch out for hidden costs

hidden-costs

Hidden costs can be a pain

One example is Virgin fly-drive.  Their basic insurance package doesn’t include collision damage waiver (CDW).  British Airways’ does.  We ended up forking out another £70 on CDW on one trip when we got to Orlando airport and realised.  A tip for this is to opt for the daily CDW ($20) then book your own CDW through a 3rd party site (we used www.icarhireinsurance.com) and cancel the airport CDW within 24 hours.

Check other things such as the baggage allowance, and optional extras that you might otherwise have to buy separately.

Change your destination!

No, we don’t mean fly to Scunthorpe, we mean fly to Tampa, Miami, or Orlando.  Have a road trip.  Our next holiday will fly into Tampa instead of Orlando and was £200 cheaper.  It’s about 20 minutes longer to drive to from our villa on Tuscan Ridge, but it’s a quicker airport to get through and quick to get a hire car too.

Free cash through cashback

free_cash

Theres no such thing as a free gift

Cashback is always worth a shot.  For every trip we’ve booked, the flights were through quidco.  Here’s a link for £1 off your next quidco purchase!  You can do the same with insurance, car hire, and pretty much anything.

Patience

Last but not least, don’t rush into anything – do some research, ask friends, or send us an email to get some cheap Orlando flight advice.  Good luck in finding flights for your next holiday to our villa.

 

Florida Villa Rental Ownership Costs – part 2 – taxes

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Florida vacation rental taxes taxes taxes!

How can $30,000 vacation rental income turn into $0 taxable income…..?

That heading should actually read “taxes” six times over.  Once you start to rent out your property for short term periods of less than 6 months then you are subject to the following taxes (correct as of April 2013, in Polk County, Florida).  Note that this is based on the average person on a Davenport rental – there are some concessions available for military personnel and so on.

  1. Sales tax (6%) http://dor.myflorida.com/dor/taxes/sales_tax.html
  2. Tourist tax (5%) Link
  3. Discretionary sales surtax (1% in Polk) collected as part of the sales tax form
  4. Tangible personal property tax (a tax on the value of goods in the rental, but exempt if less than $25k) needs to be filed before April each year – you can do this online at Polk County: https://tangible.polkpa.org
  5. Local business tax / occupational tax (a license fee of roughly $60) a yearly one off fee that your management company will normally sort out for you – this means your business is granted the privilege of doing business in Polk County
  6. Income tax normally filed yearly: http://www.irs.gov/Filing
tuscan ridge tax

Tax tax tax tax tax tax!

Gross income amounts (before expenses) for a 4 bed vacation rental are unlikely to get above $30k, putting the tax bracket firmly in the 15% mark for everything you earn above $9k.  In fact, with your earnings minus the taxes mentioned above, minus additional HOA costs (a future blog instalment), minus running costs, a rental is unlikely to get much above the 10% bracket (the upper threshold of which is $9k profit).

Compared to the UK, there is no tax-free amount in the USA so you start paying tax with the first dollar of profit you earn.

It is safe to assume therefore that you are effectively paying 12% tax on your gross rental income, plus 10% income tax on any profits you make.

A great tax guide from Polk county is here: pdf link. Be sure to read this before you take the plunge into the vacation rental market – not just to get awareness of costs, but to also get an idea of what you need to set up to avoid the tax people chasing you for unpaid taxes.

Real estate tax (similar to council tax in the UK)

On top of this tax, there are 2 additional taxes for everyone in the county, regardless of whether they own a vacation rental or just a single family home:

  1. Real estate tax http://www.polktaxes.com/propertytaxes/taxesandassessments.asp
  2. Non ad-valorem tax (for services)

Non ad-valorem tax is used for services and not based on the value of your home.  Real estate on the other hand, is.  Real estate tax is based on the millage rate and the value of your home.  More details can be found in the link above.  Roughly speaking a 4 bedroom villa with a pool and spa in Tuscan Ridge will have between $2k and $3K real estate tax and $300 to $500 non ad valorem tax.

License fee

One sneaky late entrant to the game is the license fee – or “state resort dwelling license”.  In 2013 this cost us $360 as a one off set up fee and gives us the right to rent our villa out to the general public.  Annual renewal is around $170 (as of 2019).

http://www.myfloridalicense.com/dbpr/

How do I set up my tax accounts?

Either you can get an accountant to do it all, or a more common method is a hybrid choice of doing some yourself and some via a management company.

Each of the taxes above needs a separate account.  Some but not all have the ability to register and pay online.  The easy ones to set up are the sales tax, the real estate tax, and tangible tax.

Tourist tax needs a pdf form filled in and returned online.  This is paid over the phone via a credit card.

Summary of costs / taxes per year (not including running costs)

In summary a rough idea of the taxes and licensing costs of owning a vacation rental in Florida are as follows:

  1. Fixed costs and tax: $3,000 – $4,000
  2. Gross tax percentage on all rental income: 12%
  3. Tax percentage on net income: 10%

A worked vacation rental tax example

Note that this example is for when you have no personal use of the property.  Once again, complications occur when you use the property with regards to how much of the expense you can offset.  Further complications arise if you use the property for more than 10% of the total days rented, or 14 days (whichever is greater).

When working out your income tax, there are another two very valuable ways of offsetting your profits.  The first is your personal tax-free exemption amount –  for 2013 this is $3,900 but there are non-resident considerations to make if you are married and filing returns jointly (best to check).  The second is in the USA there is a depreciation of the total value of the property (not the land!) over 27.5 years.  So say your rental is worth $110k then every year $4,000 can be counted as depreciation and taken off your profits.  This does have capital gains implications though.

An example:

  1. Your villa earns roughly $30,000 gross for a 36 week occupancy @ $120 a night
  2. You pay 12% of this to the various taxes listed above: $3,600
  3. Your fixed costs and fixed taxes are $4,000
  4. Other running costs amount to $14,000
  5. Mortgage interest works out at $4,000
  6. Depreciation over 27.5 years is $4,000
  7. Net profit is $400

This is lower than the threshold exemption amount of $3,900, so no income tax to pay.

Don’t forget that if you are a UK citizen you will need to file an HMRC tax return in the UK too.  However, any tax due will be offset by the tax you paid in the US.  More on this in a future blog post.

Florida Villa Rental Ownership Costs – part 3 – maintenance

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Running Costs – the ugly truth

Clearly the biggest factor in making a vacation property act as a decent investment boils down to running costs vs rental income.  Rental income and taxes were discussed in a previous blog post.  This blog post attempts to dispel any rumours that a vacation rental makes good money, with factual advice and actual running costs we’ve experienced thus far.  It’s not pretty, but would you rather trust the advice of a realtor or the advice of an actual Florida home owner?

Villa running costs

Villa running costs – the ugly truth?

So what sort of bills are you going to rack up?  This depends on several factors, but I’ll look at the most common type of rental (and the one we have experience with) which is a 4 bedroom detached villa with pool and air conditioning, and a sprinkler system for the outside landscaping.  Inside the house, cable TV is installed with free wireless internet.  The villa is just over 2,000 sq ft so fairly big, with 3 bathrooms.  Single glazed, and the pool has a Jacuzzi spa.  These factors influence mainly the electricity cost, pool cost, and repair costs.

I’m going to reduce the electricity bills by the amount we charge for pool heat, due to the reasons stated below – basically because pool heat charges don’t make any profit.  I’ll also assume 25 rental bookings per year, of an average of 10 days each.

  • $1200 Electricity background cost @ $100 per month
  • $1000 Electricity cost for air conditioning @ $250 per month in the peak
  • $1440 Water charge @ $120 per month
  • $600   Gas cost @ $50 per month
  • $1440 Cable TV and Internet @ $120 per month
  • $800   Insurance (and theft coverage) costs
  • $600   Finance costs such as licenses
  • $2400 Management costs @ $200 per month
  • $600   Marketing costs – advertising on rental sites
  • $2160 Pool, pest and landscaping charges @ 180 per month
  • $1440 Repair costs @ $120 per month
  • $1000 HOA (Home Owners Association) fees
  • $2500 Property taxes
  • $820   Renovation costs to keep the villa up to date
  • $2000 Cleaning costs @ $80 per clean and 25 bookings

$20,000 Total running costs

A nice round figure – coincidence?  Not intended.  Compare this to between $14,500 and $16,500 that a realtor usually quotes (and quoted to us at the time) and you start to understand why it’s good to read blog posts as opposed to biased statistics that don’t show the ugly truth.

This is based on our experience of 5 years of costs – our average is just higher than this ($21k), but note we have had some large expenditures that we hope not to have again for a few years.

When will I break even? Will I ever?

If you put a lot of work into the marketing of the villa and make it one of the best on the market, then you may be able to average over 250 days’ occupancy a year, which is pretty good going and above average for Orlando, Florida.  An average price of $120 a night including any discounts brings home $30,000 per annum.  State and tourist tax cuts out 12% of this, reducing your net income before costs to $26,400.

If you have no mortgage to pay, then in a good year without any major repair costs on top of your running costs you will make $6,400.  Note that with the USA tax break of house value (not land value)depreciation over 27.5 years your taxable amount drops to $2,400 for a villa value of $110,000 – remember to ignore the land cost.  Most owners will have some sort of mortgage costs and these are likely to wipe out any profit you might have made.

Personally, our renovation costs have amounted to several thousand dollars this year, and with a brand new pool heater we are well into the losses despite getting a healthy 33 weeks of bookings so far in 2014!

The intention of this blog entry is not to deter though – the villa is an investment in the USA economy, and is also to be enjoyed by ourselves, friends, and family. How could you not enjoy our pool?

Pool renovation

Pool renovation

 

How have you worked this all out?  Back of a cigarette packet?

It’s not an exact science because running costs depend on how many rentals you get, how conscious your renters are of the air conditioning, and how hot the weather is.  Luck plays a big part.  Do you want to get a warranty or not?  Will anything major break in the house?

Summer months actually draw more almost as much electricity usage through air conditioning compared to running a pool heater.  So any extra income in high season is offset by air conditioning which runs at up to $10 a day.  Remember that even if your house isn’t occupied your management company will still probably set the air conditioning to 82F, which costs money.  Running costs can be reduced quite easily for air conditioning, but each solution will cost and initial investment amount of a few hundred dollars.

Pool heat seems to cost around $10-$20 a day for a decent sized pool and spa.  This depends on the ambient air temperature.  Factor in the costs of replacement pool parts ($3,000 for a heater, $1,000 for a pump) every few years and you’ll find your pool heat charges doesn’t actually make you any profit, but it does draw in the bookings which is where it counts.  Pools can actually cost a lot in top-up water costs in the drier months of the year too.

I’ll be returning to the blog to finish off the ownership and running costs series once we’ve completed our UK and USA taxes near the end of 2013.

 

Running a villa: money transfers

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Beware: retail banks charge a fortune

So, the first dilemma is how to get money efficiently from the UK to the USA without paying large and unreasonable charges from my local Natwest bank.  This isn’t a big problem for a small amount, but for frequent and large amounts then it’s time to look elsewhere to keep your running costs low.

A renter, buyer, or general eBay purchaser should never use their bank for FX transfers – they are a bordering on a scam.

 

Small money transfers

After lots of searches and research I came up with a few solutions.  The first is TransferWise, which charges a low percentage and uses the interbank spot rate.  Up to £300 is only a £1 fee, and higher amounts rise to less than 0.5% fee.  Much better than a bank that charges a fee and also uses a spot rate thats up to 3% lower.

I’ve transferred using Transferwise around 20 times now, and it’s fast and secure every time.  Here’s my personal link so you can get a free transfer of up to £500: Transferwise.

Large money transfers

The second solution is to use somewhere like Frontierpay (The FX Firm), Moneycorp or UXForex.  These usually charge no fee for large amounts, and offer a fairly good spot rate, but not as good as TransferWise.

It turns out TransferWise want around £600 to move large amounts of money from the UK to the USA via FX transfers – because it’s a percentage fee and not capped.  Whilst they are good for values of up to £3000 it soon falls apart after that.

Hence my search for FX transfers continues, but not too far.  I found Frontierpay (formally The FX Firm) offer the best rates at the moment, but it’s close to UK Forex and Moneycorp.  Hopefully I can get a good rate for the transfer of GBP to USD – silly really because the sellers are UK based so the money is wiring around the world purely for USA tax purposes!