Take a loss rather than sell rental property, experts advise

August 16, 1992|By Aminah Franklin | Aminah Franklin,The Allentown Morning Call

If you're anything like the Bear family Mama, Papa and Baby you probably aren't thrilled at the thought of a complete stranger roaming about your home, eating at your kitchen table and sleeping in your bed.

But what if Goldilocks had forked over a couple hundred dollars each month to save the Bear family from paying out of their own pockets for the eaten porridge, broken chair, and use of the beds?

That would make a completely different story.

In light of today's real estate market, many investment property owners, although not left high and dry like our fuzzy friends, are losing money on vacation homes due to decreasing rental rates.

Overbuilding in the mid-1980s resulted in an abundance of rental properties on the market competing for tenants, driving rental rates down by as much as 15 percent and forcing many homeowners to dig into their own purses to meet mortgage payments. Homeowners who can't make payments and want to bail out, given the market, may be forced to take losses.

In essence, owners can choose to take a loss now and sell their vacation property, creating an immediate tax deduction for any losses, or they can continue to rent the property and operate at a loss.

Cathy Chung said most of the homeowners her eastern Pennsylvania company, Pocono Vacation Rentals Inc., finds tenants for are extremely discouraged.

"Homeowners are experiencing a great deal of worry and aggravation and are struggling to meet their mortgage payments," she said, offering as an example a woman fighting to meet payments on a home purchased for more than $100,000 three years ago.

She said her client is trying to hold onto the home because, if she tried to sell it now, it would only be worth $60,000.

"These days there are lots of people renting their homes through a broker as a last resort because they cannot sell them without taking a tremendous loss," Ms. Chung said.

Michael Yocovelli, a New Jersey accountant, bought a large, four-bedroom vacation home in Pennsylvania's Pocono Mountains five years ago for $75,000 and spent about $8,000 making repairs and renovations.

He initially bought the home for personal use but, for a variety of reasons including a tax break, decided in January to convert the home to a rental property.

Rental property owners who limit personal use of the home to less than 15 days each year or to 10 percent of the total time it's rented if it's left vacant for part of the year, deduct not only property taxes and the interest on the mortgage from their taxes, but also deduct the cost of insurance, maintenance, and cleaning and depreciation on the property itself.

Although Mr. Yocovelli is pleased that Pocono Vacation Rentals has consistently rented his home, he expects to operate at a loss for a while.

The cost of operating the home each month is about $1,000, including the mortgage, electricity, phone bills and club dues. During the peak winter and summer months, the home can be rented for about $400 per weekend, but rental rates drop to about $280 during the off months, he said.

Thirty percent of the rent goes to the rental agency.

The crunch is not limited to the Pocono region of Pennsylvania; experts say it has the appearance of a nationwide trend at all but a few retreat areas.

Al and Roseanne Miller, who live in Northampton, Penn., have a vacation condominium in Myrtle Beach, S.C.

Mr. Miller said the house he purchased for $89,000 five years ago is not a money-maker.

He usually pays more than $200 of his own money each month to meet mortgage and other operating costs.

But Mr. Miller said the benefits of owning a vacation home far outweigh the costs.

"When I go on vacation, it's like staying someplace for free," he said. "And the tax benefits are great."

Overall, investment property sales are on the decline. But experts note that while buying a home for investment purposes is on the downswing, there is an increase in the number of individuals buying a second home strictly for personal use.

Industry watchers said they would encourage anyone thinking of purchasing a vacation home to do so now because the real estate market is in excellent condition.

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