How should I approach this off market potential vacation rental?

13 Replies

Hi Folks,

A family friend contacted me today to let me know that they are looking to sell or have someone manage their coast house in the area I've been buying. I love the house, have stayed there a number of times, and have daydreamed about buying it in the past. So, I'm pretty happy that they came to me for advise/help. Shows that my recent outreach is working. 

Now I need to think about a strategy that could work for us and them. They are interested in either selling it, or renting it and having someone else manage it. They are looking to me for advice and to see if I would be interested in buying or managing. 

They recently posted on Zillow FSBO at a fairly high price ($500k). I estimate that it might be currently worth about $450k. They purchased it in 2000 for $300k and I believe they've been overpaying their mortgage, though probably not all the way paid off. They've added a mud room and master bath, and various other improvements, probably have $50-100k into it.

They don't use it much. It is in a good area for vacation rental (short walk to sand dunes, some ocean view). It also has a fairly good sized garage/shop that I've always thought should be turned into a second unit. I think if I owned the place I would finish out the garage/shop as a compact 2/1, rent that out long term, and then rent the larger house (a 2/3) as a vacation rental, or maybe the other way around. 

The owners are fairly well off, and not really interested in dealing with RE. I'm thinking this is ripe for an owner financed deal or a lease option, or maybe subject to? Given that they are family friends and not desperate I'm not thinking I'll get a particularly low purchase price, but I'm thinking that if I structure something correctly they could be happy turning what is now an under used money loss into a hands free income source while I use some creativity to maximize income to cash flow and acquire. 

I'd love to get pointers/advise on how you would approach this deal. Thanks!

@Orion Walker  It sounds like you are smitten with the property, which is not a good reason to buy.  How would it cash flow?  And do you expect appreciation.  (I don't invest for appreciation, but I also don't live in an area that is ripe for it.)

If the price isn't great, the terms need to be.  In other words, it would need to be owner financed with little down.

But why not just manage it for them?  You'll get some valuable experience and have no risk.

@Orion Walker  ,

First, what is their main goal of getting this off their hands?
Secondly, what would they do with the money if they sold? (asked..?)

Would they prefer to keep the property if they could just get a steady stream of cash flow today? Do they want some cash for another project? Whatever's the best deal..?

How about working it a different creative way to get a good deal..? If you're going to operate it as a vacation rental, maybe try offering them a few weeks each year (what they're using it for already maybe) in exchange for better terms or price..?

@Larry T. has another good low-risk suggestion to manage it for them. That could be one way to ease into the buy/owner finance..

A medium-risk solution in between these two would be to give them a fixed rent for the place (whether that be relative to covering their costs so they have a free vacation home, or making money on it..), then you do all the vacation operations and make $XXXX/mo? You live and die by your own sword and they get the comfort of a monthly check.. Essentially a master lease.

But I like the idea of a seller finance deal if they're willing to do it low money down, or consider the lease option..

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One thought that came to mind is that someone fairly well off might be ripe for the owner financing model much as you mentioned. It saves them a large gain they might have if they sell it. Really though what you need is a sit down on what they are looking to get out of the deal. The pros and cons for them will help you structure the best situation for both of you.   Are they really interested in an income stream? Do they still want to use the house or are they looking to move on to something different?   You might come armed with some numbers on rental prices vacation vs. longterm for the area. property management costs etc. Since it sounds like now they are weighing selling versus keeping as a rental and they are looking for you to provide perspective and insight on whether it would work.

@Larry T., Thanks for jumping in on this thread.

Here are some basic number scenarios. Not sure how accurate they are at this stage. I'd love feedback:

Property Manage as long term rental: $1500 in rent, $150 to manage, boost track record

Property Manage as vacation rental: would need to work with someone local on the ground (I have property near by but live 1.5 hrs away). Don't know vacation rental market well enough to project income. Would be a good learning experience, might be more profitable than basic property management.

Lease Option: Pay owner $1500 per month. maximize property income at maybe $2500/mnth. would need to spend 30k to build out detached garage unit.

Owner Finance: Not sure how these numbers would work. At $450k/5% it seems like my monthly payment before taxes and insurance etc. would be about $2500, so that doesn't work. Am I missing something here?

I love when I'm responding to one post and then after I post I see that a few more posts have come in :)

@J. Martin and @Colleen F. , thanks for your comments. I definitely will need to learn more about their priorities. When I talked to them a while back they mentioned that they just don't get over there much to use the place. I think the idea of a deal where they could continue to use the place occasionally might appeal to them. I definitely need to see what information I can gather to make decent vacation rental projections. Time to hop on VRBO and look for some similar places and see if I can access the calendars to see how full they are etc. Also time to talk to local vacation manager folks. 

I've never negotiated an owner financed deal or a master lease deal, so I'm a little uncertain on what kind of numbers/terms to suggest. Any suggestions?

Thanks!

Originally posted by @Orion Walker :

I love when I'm responding to one post and then after I post I see that a few more posts have come in :)

@J. Martin and @Colleen F. , thanks for your comments. I definitely will need to learn more about their priorities. When I talked to them a while back they mentioned that they just don't get over there much to use the place. I think the idea of a deal where they could continue to use the place occasionally might appeal to them. I definitely need to see what information I can gather to make decent vacation rental projections. Time to hop on VRBO and look for some similar places and see if I can access the calendars to see how full they are etc. Also time to talk to local vacation manager folks. 

I've never negotiated an owner financed deal or a master lease deal, so I'm a little uncertain on what kind of numbers/terms to suggest. Any suggestions?

Thanks!

See #1 & #2 above..

As far as suggestions on what kind of terms, that's why I suggest to ask them what their goals are, whether they'd like to use it in the future, and what they would do with the money if they sell it. Listen carefully to what they need/want and ask some questions (they might not even completely know or understand the financials on it. - so great suggestion to help present those Colleen).

Then try to find a way to give them a better option than those! That could be covering all the expenses + paying them $XXXX/mo in a carryback until it's paid off + 3 weeks per year (w/ vacation time partially paying off note..), an equity split, master lease w/ 2 year option to buy at somewhere below their FSBO price... ?

Originally posted by @Orion Walker :

@Larry T., Thanks for jumping in on this thread.

Here are some basic number scenarios. Not sure how accurate they are at this stage. I'd love feedback:

Property Manage as long term rental: $1500 in rent, $150 to manage, boost track record

Property Manage as vacation rental: would need to work with someone local on the ground (I have property near by but live 1.5 hrs away). Don't know vacation rental market well enough to project income. Would be a good learning experience, might be more profitable than basic property management.

Lease Option: Pay owner $1500 per month. maximize property income at maybe $2500/mnth. would need to spend 30k to build out detached garage unit.

Owner Finance: Not sure how these numbers would work. At $450k/5% it seems like my monthly payment before taxes and insurance etc. would be about $2500, so that doesn't work. Am I missing something here?

A few thoughts.

First, a $450K property pulling in $2,500/mo max is not a good investment unless this is an appreciation play.

Second, you said you don't know vacation rental market but then expect income to be maybe $2,500/mo.  You need to be sure that it will cash flow in the likely worst case scenario.  (What I mean by likely worst case is taking into consideration a possible recession but not economic collapse.)

Third, with your lease option scenario, you would be putting down $30K to make $12K maximum per year--and it would likely be less than that. Plus any appreciation. To me, this would be of interest only if I expected the property to appreciate over the next several years. Otherwise, I could do just as well with ordinary SFH investments.

Fourth, if you can be certain of your vacation rental numbers, how about convincing the owners to make the $30K improvements--they'll get $1,000 more per month--and you can manage that at $250/mo.

I dont have much to ad with the creative options that hasn't already been covered above. But my family is also selling a home on the Mendocino Coast also I'm assuming this is the area you are talking about there's is about 30-40 minutes south of Ft. Brag in Manchester. And the real easte market there is much softer and slower to turn than any populated area i think they have had it on the MLS for 3 months or so.

@Orion Walker  I looked on airbnb along the coast between Fort Ross to Fortuna. There are 186 listings. Across all the listings, the average price per night is $189.78, and the vacancy rate is 75%, which is very high. 

Breaking down the listings by bedroom, it doesn't look much better for either 3/2, or 2/1.

oh, wait, fort ross is south so I guess that's the right region. That's a pretty large area though, I'd be inclined to just look at fort Bragg. Interesting though, empty 75% of the time eh, Ill have to see how that compares to a few nearby comps. Thanks!

Looking just at the 42 Fort Bragg listings, the average price per night is $155.55, and the vacancy rate is 70%, which is better than the rest of the coast. 

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@Evan R.  thanks for looking at the numbers. Kind of leaves a question mark in best strategy in that average price at average occupancy would be $1500mnth which is maybe just a tad over what most sfr's would rent for long term. Seems like might have to go on a micro/individual basis to decide if a particular property would make sense long term or short term. I'm sure there some over performers and some under performers. I'll look at some comps based on my knowledge of the area and see how they look compared to these average numbers. Also, any experience in seeing different numbers between airbnb and vrbo?