Vacation homes

2 Replies

My husband and I have been toying with the idea of a vacation home in Virginia.  The town is turning into a second home community with deals to be had.  We love the location on the Chesapeake bay for our kids and the Mayberry like lifestyle!!

While down there this summer for 2 weeks we found most houses were listing for over 260k to 1.1Mil. We found a fixer upper 3/4 of a mile to the beach with more square footage then most rental homes. It is listed for 60k and we are contemplating the purchase.   My father is a contractor and feels we can do the renovations for 100k. With a contingency budget of 25k for the unknown, which there shouldn't be too many as it's down to the studs.  He would work on it starting this winter with the idea of us using it in 2015  to work out  the kinks then renting in 2016.  

Looking at vrbo/ home away we can rent for. 1400  a week and if we have  75% occupancy that is about 11,000. Doing a basic expense list tit would cost  $15000 a year to cover taxes, Reno loan, water/sewer/garbage, insurance, property management, heating/cooling and electric .  Now we won't break even but we spend 3500-4000 on 2 weeks of rent so if we are only out what we spend a year on vacations.... Would it be worth if financially??? 

So many people are positive on a vacation/ second homes that it has made me nervous. The negative talk is mostly people who bought pre bubble.  

We are located in NY and would need maintenance for weekly rentals as I plan to do the bookings, listings etc....   

Is there a profit margin where a vacation home becomes not worth it or is is all based on personal finances? It would be nice if when we rent it we break even so we can enjoy it for 2 weeks in prime season and off season maybe April / may to get it ready etc....  I'm hoping after getting into the landlord mode we can increase our occupancy and rates to break even within a year or two.  The nice thing is per the vacation rental sites there are only  a handful of 4/5 bedroom rentals and they rent for closer to 1600 so there is room for improvement on our business model!!!

I need to get my rose color glasses off and see the truth.... Thoughts on what else I should take into consideration?

Hi, there!

I don't know your market, but these are a few questions that come to my mind reading your post.

1.  What is your goal in putting so much work into a place that costs you money to run?  Appreciation?  A place to call your own someday?  Positive cash-flow once you pay down your debt?  On the face of what you posted, unless you're creating a lot of equity in the rebuild, it doesn't sound like a good business (since you're still losing money at 100% occupancy), but if you want it for other reasons, maybe it's right for you.

2.  You didn't mention the cost of furnishing the home.  I've had to buy bedspreads for all of my beds 3 times this summer, have had a half dozen towels get stained, an electric tea pot get melted, the furniture gets damaged, etc.  If you have a 5 BR, you're probably looking at at least 12 people, 6 beds, 12 sheet sets, 24+ towel sets, 12 dish sets, etc.  You need two of everything that needs to be washed between guests or you risk having to put stained stuff out for the next guests and pay housekeeping to wait on laundry.  

People are hard on your contents, and you or your manager will need to replace what gets broken or stained before the next guests check in, or you might read about it in your reviews.  Self-managing a VR at a distance is challenging for this reason.  I only want places that will still cash flow after paying for good local management.     

3.  Is the rent that you're seeing for places 3/4 mile from the beach or for places at/across the street from the beach?  What is the occupancy rate for places that are as far from the beach?  A property manager can tell you what prices and locations are actually booking rooms and at what rate.  The VRBO calendars help, but you won't know if the books represent full-ticket guests or owner usage.   

4.  How limited is the supply?  Can you afford greater losses if all of your neighbors get in on the game and undersell you and your yearly losses increase?   

Lastly, just a warning…check with the town to see if you need inspections, permits, or to collect taxes.  For example, where my property is located, there is a 3 BR limit to get a transient occupancy permit.  In the next settlement over, if you buy a home that doesn't already have a permit, you need to get the approval of your neighbors to get one.  The permits are $300-500/yr.  Guests pay 11.25% tax that needs to be submitted monthly.  I think that as the VR industry matures and problems arise, local govts. are getting more involved in their regulation for better and for worse.

Good luck to you, whatever you decide!  It can be a good business, but it's one with a lot of moving parts!

Mel Selvidge

http://www.sierrahaven.com

The plan is to get into the market at a price point that fits our budget and allows us to enjoy prime season without thinking we need to rent solely. We would like to have instant equity built in with future diversified retirement/ income once Reno loan is paid off.  We have  maxed out my husbands 403 and he has a pension but I am self employed and wanted another option for retirement income 25 years down the road.  We also like the idea of building to our taste vs having to buy into what is currently for sale.  It is cheaper for us to to buy in cash then all we have is the Reno budget and it is still less than the house 3 door down listed at $254500.  

I had thought about repurposing furniture from craigslist and new mattress purchases but hoped they would be a one time purchase or minimal at most but not about mid season purchases of sheets towels or bedspreads.  

The 4+ bedroom  rentals in a 2 block area from us are renting at 1550-2200, 3 beds in the same 2 block area rent for 1200-1500 closer to the beach the are 2500-4000 for 4 beds.  Of the total bookings only 30 have 4+ beds. And per other landlords the  rental options are going down in the 3+ bedroom options.  With being able to make this home a 4 bed with study/ pull out (5th sleeping space) we hoped to fill a niche in the town of less rentals. 

I figuring on the conservative  higher expense side with a lower rental price introduction to test the market etc... I would rather figure low and assume we owe 3k and be surprised I when we do better.  Than over estimate the profitability of the house and find we are further under water than planned. 

I think I  need to make more professional contacts down there to find out more about the actual bookings and rates.   You mentioned areas I hadn't thought of and that's the reason I joined!!!!!! I need to see both sides of the  equation with pros and cons. Thank you!!

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