… 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.
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:
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:
So is it worth it? Yes.
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.
- £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
- 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)