Is buying a Vacation Rental a good investment?

Buying & Selling Real Estate
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Is buying a Vacation Rental a good investment?

Steven C. Suarez
Hurst, TX · Member since 2016 · 192 posts · 114 votes
Hi BPers! I'm looking to buy a condo in South Padre Island, TX. There are plenty for sale down there at what appears to be good prices. But that's part of my hang-up. Why would so many people be trying to get rid of there's at lower prices than purchased? I'd like to have one to use and rent out on Airbnb and make profit each year if possible. There's plenty of variables involved, the biggest one being my wife is about to have our 1st baby any day now! Condo details: approx 1,000sf, 2b2b 3rd floor walk up, fully furnished. Negotiated price 107,800. Has a pool, no ocean view though. Mortgage 900/month, HOA 267/month (pays for cable, internet, water, trash, exterior.) insurance 87/month, electricity est. 100/month. In all I'm looking at paying about 22k down, 1350/month. Oh and they just built a new roof and has new a/c. Breaking even each year would be ideal, but conservative estimates I'd probably be losing money on it each year. Now an old saying that has stuck with me from coach Bill Parcels on horse betting. Bet a little, to win a lot. Don't bet a lot to win a little. This keeps ringing in my head. So BPers, what do you think? We do love it down there. We're not rich by any means, so would this be a sound investment? Or a luxurious burden on our finances? Thx! Stevo from Hurst
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Esteban Flores
Flipper · Mcallen, TX · Member since 2015 · 7 posts · 15 votes
9y

Hey Steven, 

I have 2 condos in South Padre Island, that I use for vacation rentals and manage them myself. SPI market is can be a little tricky and you have to be well aware of seasonal price adjustments to keep your place booked and consistently cash flowing. I would be more than happy to share my numbers with you and give you and any extra advice if you like.

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  • Jeremy BakerPro Member
    Real Estate Investor · Aurora, CO · Member since 2014 · 240 posts · 109 votes
    9y

    Hi @Steven C. Suarez vacation rentals can definitely be a great investment, but just like any other deal it's all in the numbers.  What your missing in your post (or maybe I missed it) is what would be the nightly rates and the expected occupancy rate.  You also need to figure in how much you believe it will cost to replace sheets, kitchen items, beach chairs, towels, etc... each year.  

    One thing to keep in mind with condos are special assessments that may come up. So when you have a property that has an HOA you need to make sure to have some reserves built up for when, not if, they come.

    Everyone has different goals and it sounds like you would be happy to break even and use your property yourself, which many people do with a vacation rental.  Others want a substantial amount of cash flow, so some may say it's a bad deal while others may view it as a great deal.  So hopefully you get some good feedback in this thread and everyone can help you come up with the best decision for you.  

    Also if you plan to use the property yourself, which is a great perk with vacation rentals, make sure you are familiar with tax laws regarding personal usage of your investment property.  Use it too much and it gets classified as a second home and you lose quite a bit in tax deductions!

    0Reply
  • Steven C. Suarez
    OP
    Hurst, TX · Member since 2016 · 192 posts · 114 votes
    9y
    Thanks Jeremy Baker , great advice! Yes, we plan on using it quite often. I work for American Airlines and it's a quick trip from dallas Fort Worth airport to McAllen or Brownsville airport. I hope to Airbnb it and manage it myself to save some money. Management companies charge 20-25% ... ouch! Yeah, I definitely need to take into account sheets and stuff. We'd love to have it and hopefully we get a lot of feedback in this thread to help us make this decision. You invest in Texas?
    0Reply
  • Jeremy BakerPro Member
    Real Estate Investor · Aurora, CO · Member since 2014 · 240 posts · 109 votes
    9y

    @Steven C. Suarez  No, we're not invested in TX.  We have vacation rentals in Maui.  There are several BP members that are invested in TX and the South Padre area, so hopefully you get some feedback from them.

    1Reply
  • Robin Boyer
    Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y

    I am also looking to maybe get a vacation rental if anyone has pointers not hi jack this thread. 

    1Reply
  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y
    Steven C. Suarez I think I just fell out of my chair. $108K negotiated price, 25% down, mortgage of $900 per month for an $81K mortgage that's 30 year fixed? I don't know what your quoted interest rate is but find another lender! You will have to factor in a weekly cleaning cost. Managing it yourself is a little dicey. Vacation rentals tend to be a review-based business. Regardless of price-per-night you're stuck providing a "5-star experience" or you become a 2-star option. And it takes a while to build back and star-based reputation. And outside of peak times you'll likely get (if you're lucky) 50% occupancy. You won't be to able to mandate weekly rates so you'll get the Friday-Sunday crowd. You might get a snowbird that wants a condo for the winter months but they'll want a discount (not that that's a bad thing). My advice, if it's a good sized complex then someone is renting it out through a vacation rental agency. I would: 1.) Recommend and agency even if it's just for the first year so that you can get off on the right foot. Right now it appears you're going in blind. And do you really want to take tenant calls while trying to feed a 1 month old? 2.) Ask them for a revenue analysis. If they're already renting a unit in the same building I guarantee they can give you a decent estimate of occupancy, nightly rates, etc. Anyway, my two cents.
    1Reply
  • Steven C. Suarez
    OP
    Hurst, TX · Member since 2016 · 192 posts · 114 votes
    9y
    Andrew Johnson the bank is Wells Fargo. The say Interest rate is over 6% due to it being a vacation rental, 22k includes all the fees and closing costs. The mortgage includes taxes. I've got my other 2 houses w them and they've treated me good but you're right, I should shop around. Good tip on letting them run it for me initially. Thx for the tips. Maybe I can get pre approved through lending tree or other online banks? Thoughts?
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  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y

    @Steven C. Suarez Ask the listing agents for referrals.  They, no doubt, have gone through the mortgage song-and-dance with a ton of buyers specifically for vacation rentals.  I'm sure they know the 2-3 best lenders for these types of properties.  Even at 6% the overall $900 number seems high, maybe I'm nuts:

    Morgage:  $86K @ 6% = $516/month

    Property Tax:  $108K * 2% property tax / 12 months = $180/month

    I must be missing something in my math as it *should* be $696/month instead of $900.  I'd be trying to figure out where that extra $200/month mortgage expense is coming from.  Assuming the $180/month estimate is right for property taxes that means you're paying $720/month for the mortgage.  At $86K that works out to a 9.5% interest rate (assuming it's 30 years).  

    I must be missing something.

    1Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    9y
    6%? Yikes. I'll give you those terms :-)
    1Reply
  • Steven C. Suarez
    OP
    Hurst, TX · Member since 2016 · 192 posts · 114 votes
    9y
    Cody L. Good thing I made this post! I'll definitely shop the loan around now! Inbox me your info!!
    0Reply
  • Nick Costello
    Flipper · Los Angeles, CA · Member since 2016 · 6 posts · 4 votes
    9y

    @Steven C. Suarez

    I read an interesting piece in the New Yorker the other day and among other things it referenced AirDNA which can be used to assess local airbnb markets. It costs a few bucks but has data on listings, average rates, occupancy, etc. Might be a good idea to find out what kind of competition you'd be up against before pulling the trigger...

    1Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    Better check first to confirm the HOA will allow airbnb. Most would not appreciate a turnstile tenant situation.

    Based on the amount of money down and initial cost you should not expect to break even on this property. It may not work out as a rental property at all due to location. Doubtful you will be able to manage a airbnb yourself if you are not close by on a daily bases. 

    1Reply
  • Steven C. Suarez
    OP
    Hurst, TX · Member since 2016 · 192 posts · 114 votes
    9y
    Jeremy Baker Robin Boyer Andrew Postell Cody L. Nick Costello Thomas S. Good thing I posted here on BP! As per yalls advice I shopped around for a better loan. Lending tree hooked me up w Quicken loans at a 4.3% rate 15/yr loan and my payments will be actually cheaper than Wells Fargo and the loan paid off in half the time! This makes my decision and numbers look far better! Just when I feel like hating on BP , they come through and potentially save me thousands of $$$!! Love this site! Thx y'all!
    2Reply
  • Blair Russell
    Investor · Las Vegas, NV · Member since 2015 · 273 posts · 217 votes
    9y

    Won't that 15/yr loan mortgage payment really affect your profit though? 

    1Reply
  • Steven C. Suarez
    OP
    Hurst, TX · Member since 2016 · 192 posts · 114 votes
    9y
    Blair Russell I thought of that. But the idea of owning it free and clear for the same monthly payments that Wells Fargo was offering on a 30yr sounds awesome. Also, i have a daughter on the way so it would be great to have it paid off before she graduates high school. It could in turn pay for her college ;)
    0Reply
  • Esteban Flores
    Flipper · Mcallen, TX · Member since 2015 · 7 posts · 15 votes
    9y

    Hey Steven, 

    I have 2 condos in South Padre Island, that I use for vacation rentals and manage them myself. SPI market is can be a little tricky and you have to be well aware of seasonal price adjustments to keep your place booked and consistently cash flowing. I would be more than happy to share my numbers with you and give you and any extra advice if you like.

    2Reply
  • Steven C. Suarez
    OP
    Hurst, TX · Member since 2016 · 192 posts · 114 votes
    9y
    Esteban Flores yes please! Message me if you could! I still haven't pulled the trigger yet and your advice and wisdom would help me tremendously with my decision! Thx so much!
    0Reply
  • Edward Jimenez
    Member since 2019 · 2 posts · 0 votes
    7y

    @Esteban Flores and @Steven C. Suarez could you please share your numbers and any advice you may have please. working on a townhome there at the moment

    0Reply
  • Esteban Flores
    Flipper · Mcallen, TX · Member since 2015 · 7 posts · 15 votes
    7y

    Sure feel free to send me a private message. 

    1Reply
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