Category Archives: Buy a Florida Villa

Buying a Florida villa as a holiday rental can be a daunting task. We have put together a group of posts that highlight the types of things you will have to consider. Purchasing, real estate, taxes, running costs, and general maintenance are some examples. These are all based on over five years of running our own villa.

What do I need to buy a villa in Florida?

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What to do to purchase a holiday home in the sunshine state

So, as I sit here after a freezing cold bike ride home from the station, I am thinking to myself “who else wants to invest in a house or villa in the USA, it’s nice and toasty warm out there?”.  But how do you go about such an investment and how easy is it in reality to buy a villa abroad?

googleEarthTuscanRidge

Buy a villa in Florida….

Questions questions questions

It’s pretty simple actually.  You just need to think about what you want to budget and what’s important to you.

  • Do you intend to short term rent the villa, or just let out to friends and family?
  • What style do you want?  Condo, single family home?
  • How big do you want the villa – large villas tend to attract more wear and tear
  • What location works best for rentals?
  • How will you buy?  Do you intend to finance the villa through cash or a US mortgage, or a UK re-mortgage?
  • Are you going to list the villa and do all of the bookings yourself?  Where are you going to advertise?
  • Who will you use to manage the villa when you are away?
  • Will you use a home warranty or take the risk?
  • Which communities do you like in Florida and what sort of maintenance fee for the association are you looking for?
  • Do you want a gated community and the extra expense?
  • Where are you going to find research material before you take the plunge?
  • Who will do the book-keeping?

Realtor

Next is the realtor. A good realtor will be happy to take your money (well, it’s usually the seller’s money) in exchange for a top quality service.  Donna and I found a realtor through a holiday homes show in the UK, then arranged to visit them in a few months once we were ready for our trip to Orlando.  When we arrived in Orlando we then spent three days looking at communities and villas for sale and gleaming any advice we could get.

We learned a lot from our realtor and subsequent experience, especially to choose:

  • South facing pool
  • Large pool and deck
  • Spa
  • Turn-key condition
  • Wide plots with quiet neighborhood
  • Good home owners association
  • Single storey (our preferred choice)
  • Community with high occupancy and repeat rentals (Tuscan Ridge)
  • Recently replaced appliances including air con and pool heater

What else do I do to buy a villa?

All we needed to do on top of the realtor service was to:

  • Decide on the questions above
  • Decide on the right house, then put in an offer
  • Once the offer is accepted it is legally binding for the seller
  • Get a US bank account, we chose SunTrust but their international wire rates are high, so there may be other options such as Citibank.  All we needed was a British passport and $100
  • Get our passport verified by the British consulate in Orlando (South Orange Avenue), at a cost of $50 per person
  • Arrange for a limited power of attorney so our management company could arrange utility bills on our behalf
  • Fill out an International Tax Payers Number (ITIN) so the USA can take back what is owed to them after our expenses are deducted

And that was it!  The rest is taken care of by the realtor and then the management company.  Once you’ve decided on a property then a couple more things are needed:

  • Deposit (we transferred via TransferWise straight to the closing company)
  • House survey at a cost of $550 for wind, woodworm, and a basic survey
  • We would recommend a full survey in hindsight

Then (of course) the big transfer of the rest of the money before closing….. see this link.

Feel free to contact us if you need any more advice.

 

Will I make a profit from my Florida rental?

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… and is it worth it?

“Will I make a profit” is a question we’re often asked when potential Florida rental owners quiz us about what it’s like to own a villa in Tuscan Ridge, Orlando.

It’s best to first analyse this question without a mortgage but with travel costs from the UK to Florida.

Starting villa rentals in 2013 and visiting once or twice a year, we would have broken even after 4 years (at the end of 2016).  We believe the break even point is 35 weeks of rentals.

With a $5k per year mortgage, the break even point is 40 weeks.  For us, it took 6 years to turn a profit, helped by a 43 week 2018 season.

After 7 years of strong rentals and some great feedback we have also invested around $20k on large one-off repairs such as AC, pool heater and white goods.  These should average out over time – we bought when all the large appliances we at breaking point (circa 11 years old).

So will I make a profit then? Not unless you get up to forty weeks of rental.

will-i-make-a-profit

The dreaded tax form

In conclusion we believe 35 weeks is the break-even point without a mortgage, and 40 weeks with a mortgage.  We’ve done pretty well out of our rental in all honesty but it takes effort – every trip we take to Florida we undertake maintenance and treat the house to paint in various rooms.  Here’s some stats:

Bookings

You can see that the bookings have dropped off in 2017 due to the poor GBP USD exchange rate; it’s much more expensive to holiday abroad in the USA.  We’ve had to increase our GBP rate in order to account for this and in 2019 we had to abandon advertising in GBP due to the volatility of the currency.

  • 2013: 35 weeks ($107 average daily rate)
  • 2014: 36 weeks ($122 average daily rate)
  • 2015: 45 weeks ($118 average daily rate)
  • 2016: 40 weeks ($106 average daily rate – the GBP FX crash)
  • 2017: 36 weeks ($111 average daily rate)
  • 2018: 43 weeks ($129 average daily rate)
  • 2019: 40 weeks ($128 average daily rate)

Large one off expenses

  • 2013: $6k (pool heater)
  • 2014: $1k (renovations, pool pump)
  • 2015: $6k (air conditioning)
  • 2016: $2k (renovations, pool lights)
  • 2017: $3k (hurricane Irma, oven / stove, tumble dryer, TV)
  • 2018: $1k (washing machine, pool heat pump)
  • 2019: $1k (pool pump, leaks, and filter housings)

Profit with averaged expenses of $2k

On average a villa will cost an average of $2k per year in what I call “one off” costs.  Even in years where nothing goes wrong, an AC unit will eventually fail after 10 years so you want to even out your predicted costs.  In addition to this we average around $1k in general repairs and maintenance.

Here we have removed the large expenses and replaced with an average expense of $2k per year.

  • 2013: -$6k, 35 weeks
  • 2014: $1k, 36 weeks
  • 2015: $9k, 45 weeks
  • 2016: $3k, 40 weeks
  • 2017: $1k, 36 weeks
  • 2018: $4k, 43 weeks
  • 2019: $2k (predicted), 40 weeks

Our figures above do not include items such as mortgage costs nor the villa depreciation on the US Tax return because this isn’t a real expense in respect to book keeping (they claim it back as capital gains when you sell).

Note: Introducing a 20 year mortgage of $150k at 3.5% interest adds a $5k yearly interest bill to the mix, reducing the 2015 effective profit to $4k.

Roughly speaking you’ll therefore need 40 weeks of rentals to break if you have a 20 year mortgage.  So our 5 extra weeks in 2015 brought us a profit of $4k.  We reckon around 35 weeks to break even without a mortgage.

Note: In 2016 we hit 40 weeks with $3k profit.  Adding the mortgage then brings this back to a loss of $2k – but in 2016 we were hit by the FX crash and a lot of guaranteed booking rates made in GBP meant that we were under pricing the villa by 30%.  Another point to note about advertising your rates in GBP.

Forty weeks to break even.  Seriously?

Not exactly. Remember that we’ve had many family trips out to Florida in these figures, even if it was to repair and refresh the villa at the same time.  Not all rentals are equal.  Take mortgages or travel out of the equation and you’re making money.

If you don’t have a mortgage on your property you’ll make money at anything more than 35 weeks of rental.  And if you don’t need to travel out to maintain it (but do have a mortgage) then it’s about the same although you’ll spend a lot more money on handyman charges.  Here’s some stats without the maintenance trips and without the mortgage.  Note that these net amounts include the one off costs:

Year Weeks Net Amount No travel No mortgage
2013 35 -15000 -9000 -10000
2014 36 -3000 2500 2000
2015 45 0 5000 5000
2016 40 -2000 -600 3000
2017 36 -5000 0 0
2018 43 6000 10000 11000
2019 40 2000 8000 7000

So is it worth it? Yes.

happy-days

Happy days!

Cue cringe-worthy picture of us jumping in the air in Tuscan Ridge.

If you put the effort into your rental and enjoy it at the same time then yes, it is worth the effort.  With 40 weeks of bookings and a single maintenance trip a year you can make a long term capital investment that is paying for itself and that you can enjoy too. Be aware that you’ll need some serious energy to do this – up to half a day a week set aside to managing the property, marketing, and rentals.

So will I make a profit? If you find a popular community such as Tuscan Ridge, spend time finding bookings and maintaining the villa, then yes.  You will also be able to enjoy it as a place to visit and have fun!  

Once you stop enjoying your home, I would suggest it is time to call it a day and cash in your investment instead.

HMRC mortgage interest expenses on Florida rentals

As of April 2017 the HMRC started phasing out mortgage interest as an expense on US properties owned by UK tax payers.  Instead they switched it to tax relief on taxable income (phasing it in by 25% a year over 4 years). 

For example in the 2017-2018 tax year if you made £12k in net rental profit on a property and had £1.2k in mortgage interest, HMRC allow you to use only 75% of the £1.2k interest as expenses, and 25% as tax relief.

In 2017-18:

  • £12000 gross income
  • 75% * £1200 interest can be deducted as an expense (£900)
  • £11100 taxable income
  • 25% * £1200 interest is eligible for tax relief (£300)
  • 20% relief = £60 tax relief
  • 40% tax payer = £3440 tax – £60 relief = £3380

In 2020-21

  • None of the £1200 interest can be deducted as an expense
  • £12000 taxable income
  • 20% relief on the mortgage interest = £240
  • 40% tax payer = £3800 tax – £240 relief = £3560 (£180 more)

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.

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.