Starting off buying vacation properties?

Question

Hey All,

My wife and I are still looking for our first property. Then the other night while talking we were discussing how we still wanted a vacation property.

Has anybody here just started off by buying vacation properties? I would think if you found ones that would be more of a year round destination that you could generate more cash flow. I could be wrong also, but that's why I'm asking. :D

Trashman

Frank Adams · Answer

Advertising yourself may be a possibility, managing it yourself much less so, unless you live in that particular VACATION spot!

So if I owned a place in Vail I'd have to fly up every Saturday morning, wash the linens, clean the place, do any minor maintenance, greet the incoming tenants and fly home that night. Since the cost of overnight accomodations kind of precludes me staying over.

We have a "destination" resort, Horseshoe Bay TX, across the lake from us, about a 15 minute drive. It would be fesible for me to do everything myself, but then I'm locked into spending my weekends at home during the summer. And I figured with 70% occupancy (which might be optimistic, here or in Gatlinburg) I'd make about 5%/year, cash on cash.

Let me just check and see what my money market account is doing these days, hmmm, I'll keep my extra money in it.

all cash

Garrick Solberg · Answer

Well, I think the vacation rentals can be profitable if you're willing to advertise and manage it yourself.  Obviously the location is key as well.  When I went to school in Maine during the winter, I rented out a beach house on the cheap ($650/month, directly on the beach, but cooooold).  I inquired out of curiosity what the summer rate was, which ended up being $2000/week for the studio apt below the house, and $3500/week for the upper part.  The landlord put up an ad on the lawn in the early spring, and told me to "take down the damned sign" because he was overcome with calls from the ad, and he had already rented the entire summer out.  The house was probably worth a million at the time, but he bought it for about $400k a few years earlier.

Frank Adams · Answer

I've had the same thought as you for the last 25+ years and I still don't own a "vacation" property. I've never seen anything that would qualify as "year round" high occupancy.

Sure people go to Aspen and Vail in the summer and fall, but not in great numbers. SAme problem with the warm weather destinations.

Another HUGE profit killer is the "commissions" charged by management companies. First you have to "give" them a certain number of weeks, plus the exhorbitant payment commissions.

And you're talking about a condo so there are going to be the high condo fees. Then in order to maintain a really high "star" rating in a destination resort you'll put more into remodeling and updating than you ever would a "typical" rental.

I have two friends that own(ed) places in Vail. The one had told me that it was not a money maker but that he didn't have to pack a bag when he traveled, and that he got  lot of use out of it. The other bragged that it had been a "killer" profit maker for him. Then we sat down with 15 years of his records. IIRC he had netted about 5%-6%/year.

BTW, both of these guys did some of their own work, annual painting, some of the appliancce updates etc, during their "off-peak" stays.

While we're actively looking for a "second" home in a more moderate climate, both of our places will be strictly for our personal use.

all cash

Richard Warren · Answer

At my REI Club last night someone was pitching vacation cabins in Gatlinburg TN.  Apparantly this is a hot vacation destination near Dollywood and the Great Smokey Mountains.  The demographics themselves were impressive.  The developer was pitching luxury cabins with prices ranging from 450k-650k with 5% down.  There was on-site rental management with an anticipated occupancy rate of 70-80%.  The developer was offering a 1 year leaseback guarantee at 70% occupancy.  Everything was looking great until they got to the proforma statement.  With a 23k down payment the monthly cash flow came to a whopping $70 per month, that’s a cash-on-cash return of 3.65%!  After the first year guarantee then what?  People were lining up for the information, I don’t get it.  If you gave them a 5k deposit and got pre-qualified they would fly you there and give you a 3 night stay.  Not my cup of tea.

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