Masters week home rentals have long been a source of income for local residents. The pandemic pushed the 2020 tournament to November which hurt rentals. Many who had already rented their house out for 2020 deferred the rental to 2021. Now with the 2021 tournament having a drastically reduced number of patrons, the need for those deferred rentals is reduced. The Masters rental market across the board has suffered.
The value that a Masters week rental adds to a home can vary widely.
A house’s value is typically calculated by comparing it to other similar houses and what they recently sold for. In a normal market, this “comparable approach” is very efficient. The method uses a price per square foot and then makes adjustments to bring the subject property and comparable sales into line with one another, so you are comparing apples to apples.
Masters week income can add value over and above what the home would normally be valued at per square foot. However, there are several criteria that must be met in order for the rental to add value
- The rental income must be recurring. If you rent the house every other year and the rental amount varies, then the value increase will be lower. Having a stable, multi-year contract for a predetermined amount is more attractive. The buyer who is ultimately going to pay you the extra value for the Masters rental must be able to count on the fact that the rental income is “in place” and will remain “in place” after they purchase the home.
- The home must be competitive amongst other Masters rentals. Not every house in the CSRA will rent during Masters week. If the home is not competitive as a rental every year, then I would make the argument that Masters rental income adds very little—if any—value. To be competitive, the home should be located in an A+ location. (What a C, B, A, A+, A++ or A+++ location is subjective). Being located within subdivisions that have golf courses or other amenities is a plus, but not required. Generally, the further away from the Augusta National the property is, the lower the rental value is.
- The layout of the home should be optimal for a Masters rental. Having one bathroom per bedroom is a big plus. Sharing bathrooms hurts the rentals value. Having the layout of the home more open for parties and events also helps. Swimming pools and other amenities increase value of the rental.
- Having quality tenants. Not all Masters week tenants are equal. Having a contract with a large company such as Georgia Power, Coca-Cola or Mercedes has much more value than renting through Craigslist or person-to-person. Investigate the tenants thoroughly and make sure you have a strong rental agreement that includes insurance provisions.
Calculating the additional value a Masters week rental brings is challenging but I do believe there is a formula that can be used. Without getting too technical, here is how I would calculate the value.
In my analysis, I assume a $10,000 annual rental income.
To put this another way, you could look at this from the debt perspective. How much more can a person pay for a house with the income stream attached with it? This would be a similar analysis if a house had an apartment or cottage attached to it that could be rented out.
In our above scenario, the net income from the rental is $8,000 after expenses (the discount rate is simply there to account for risk and is not a real expense). The $8,000 divided by 12 monthly payments is approximately $650 per month. An amortization schedule that accounts for 120 months at 5.00% interest would equate to roughly $60,000. This means that a home buyer could pay $60,000 more for the same home and after factoring in the $8,000 net Masters week rental would be even. If you go back and apply my 25% discount for risk that brings the value down to $45,000, which is very close to the $40,000 estimate of value above.
There are a few issues that I didn’t address. It will cost you money to rent a home or go on vacation while your home is rented out. That could be factored in as an expense in the analysis. As of now, Masters week rental income is tax-free. There has been much debate on that issue in the state legislature. If taxes have to be paid by the tenant, then what they are willing to pay will be lower and the net rental income—and thus the value of the rental to the home owner—will be lower. If that law changes, the value will also decrease.
The main challenge with my methodology is financing. Banks do not like to allow for rental income when calculating monthly payments. In other words, the bank wants you to be able to cover the mortgage on your home even if Masters week gets canceled. Homeowners should never rely on Masters week income to cover their mortgage.
Another issue related to financing is the appraised value. When you get a mortgage on a home, your bank will require an appraisal. Appraisers are using that comparable approach I mentioned earlier. They will not give you any value for Masters week income. This means that the house must appraise for what you are paying for it on its own merits outside of Masters week. If it doesn’t, then the bank won’t loan you the money to buy the house.
There is a balancing act with valuing homes with Masters rentals. The house must still be in the range of other comparable homes in the area but still giving it some value for the Masters week rental. If you are a seller, you can wait for a cash buyer or you can refuse to budget on your price regardless of whether the home appraises or not.
The CSRA is experiencing a shortage of homes for sale. Available homes both new construction and resales are at a ten-year low. You can read more about that here.
As long as the home shortage continues, homeowners won’t need to factor in Masters week rental values to get a higher price. It is a sellers’ market and prices are steadily on the rise, which is good for sellers in the CSRA but bad for buyers.