Pros and Cons of Buying a New Beach Vacation Rental in FL

10 Replies

I wasn't originally intending on going down the path of investing in weekly rentals nor new constructions, but I found a new development that my wife and I see a lot of potential of appreciation with the ability to cash flow. I was wondering if you more experienced investors could let me know what you think.

@Darren Koenenn what immediately comes to mind for me is insurance costs.  any idea what insurance costs are?  Given what happens to properties during weather dilemmas, is there a potential issue with the property getting damaged due to weather? (you never specified location)

Will the HOA allow weekly rentals? Will you have access to a great property manager?

To me, a lot of questions should be answered before even looking at numbers of a specific property.

- It is in Inlet Beach, FL. 

- Insurance companies give big discounts to newer built homes that's one of the reasons I started considering new builds. With hurricanes unfortunately there can always be weather dilemmas. They can take out just about anything.

- The HOA fully accepts weekly rentals, every owner that has purchased a house in the neighborhood plans to do weekly rentals for at least part of the year. The houses are designed to be high end vacation rentals.

- My wife will be a property manager for the same type of rental properties in the same area. So unless she decides to disown me, I should have that covered.

Question: Since we are buying while the housing development is a quarter built, will there be forced appreciation as the lots fill up? 

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Originally posted by @Darren Koenenn:

- It is in Inlet Beach, FL. 

- Insurance companies give big discounts to newer built homes that's one of the reasons I started considering new builds. With hurricanes unfortunately there can always be weather dilemmas. They can take out just about anything.

- The HOA fully accepts weekly rentals, every owner that has purchased a house in the neighborhood plans to do weekly rentals for at least part of the year. The houses are designed to be high end vacation rentals.

- My wife will be a property manager for the same type of rental properties in the same area. So unless she decides to disown me, I should have that covered.

Question: Since we are buying while the housing development is a quarter built, will there be forced appreciation as the lots fill up? 

 There COULD be forced appreciation, as that tends to happen when you buy early in a new development, but never a guarantee of it, so view it as a bonus and not a motivation.

I'm not familiar with that particular market so I'd just say make sure the demand is there and have a firm grasp of what sort of revenue is reasonable to expect.  Understand the seasonal demands.  Build conservative estimates, account for a couple weeks a year where revenue might be interrupted due to nearby hurricanes (of course, this does not take into account one actually damaging the area), and if you're still happy with the returns, move forward.

@Julie McCoy I've actually got professional rental projections rated from Good, Better, Best that cover the average weekly price for each week of the year. Good idea to interrupt a few of the top weeks with hurricanes. The demand is there. People are flocking to Florida these days.  Every local real estate person (investors/contractors/brokers) I've spoke to has said, "If you have the capital to invest in the West End (of Panama City Beach ) or Inlet Beach do it now." Problem is that most locals don't have the ability to front up large amounts of cash or know the creative ways to invest. 

Thanks for your advice on forced appreciation in a new development. I want to investigate appreciation in a new development further. 

When does a new housing development appreciate and when does it not? For example, I'm assuming there will be no appreciation if there is a market down turn or the housing development does not get completed. What are some of the other possibilities? 

Originally posted by @Darren Koenenn:

@Julie McCoy I've actually got professional rental projections rated from Good, Better, Best that cover the average weekly price for each week of the year. Good idea to interrupt a few of the top weeks with hurricanes. The demand is there. People are flocking to Florida these days.  Every local real estate person (investors/contractors/brokers) I've spoke to has said, "If you have the capital to invest in the West End (of Panama City Beach ) or Inlet Beach do it now." Problem is that most locals don't have the ability to front up large amounts of cash or know the creative ways to invest. 

Thanks for your advice on forced appreciation in a new development. I want to investigate appreciation in a new development further. 

When does a new housing development appreciate and when does it not? For example, I'm assuming there will be no appreciation if there is a market down turn or the housing development does not get completed. What are some of the other possibilities? 

 Simply that - market corrections, development not getting completed, some other unforeseen circumstance that inhibits or prevents appreciation the way you may expect (like, for example, another hurricane!).  All I'm saying is make sure the investment stands on its own even if it doesn't appreciate in the near future.  It probably will, but be prepared in case it doesn't.

As long as you've done your research and are happy with conservative projected returns, I wish you the best!  

@Darren Koenenn I think Inlet Beach is coming up. There are several developments that I know of but please always look into the builders ratings and local reputation. There is a common misconception that newly built homes will have less issues and I have noticed that it is not always the case. I have personal experience where that is concerned. West end is really coming into hits own- it is less developed than some parts of 30A. 

Buying a rental that has never actually been on the rental market can be difficult though- I have found rental projections to be all over the map. Cash flow potential is much greater since you will self-manage. 

I recommend shopping insurance through a broker and making sure you are covered well- that has been part of the issue here since Hurricane Michael. 

I run across a lot of investors that also plan to stay in the unit.....depending on the time of year and frequency, this can make or break the deal too.

As far as appreciation- in this area, newer builds certainly hold their own but I feel like they are long-term investments. I would not expect anything for at least 3 years. The comps that they are using to price the units for the market right now are likely on the higher side- prices are up here and have been for a little while. On a national scale- larger metro areas have seen prices coming down or staying flat. Again, I believe buying new is a long game. I like to have a few options so I would like to see what the unit/home would do as a long-term rental and short. 

I hope some of this helps- I enjoy knowing that people are looking to invest in my area.....it is beautiful here.

I agree with @Melissa Jolley @Darren Koenenn, Inlet Beach is up and coming - that last stretch before South Walton County gets super expensive!  If it's the development I am thinking of, as a new rental,  one concern would be guests having to cross over 98 to get to the beach.   For vacation rental, homes will earn more $$ the closer to the beach, and the communities that offer a lot of amenities or homes that offer a pool,  also produce better income.  

If you have not compared these new builds with existing inventory and condos, I recommend you do.  You really cannot beat the condo prices right now...at least in the Bay County side... make sure you investigate similar price points or even lower price points with the earning potential of condos, especially ones that have an existing rental history.  

Also keep in mind that homes have more maintenance requirements than condos, and insurance will be more costly. Many people look at condos and complain about the HOA fees, but frankly - you will have similar costs for a house. Most Condo fees cover water/sewer/trash/wifi, insurance, grounds, pools, other amenities, management of the facilities, etc. Buying a single family home means you're covering all these costs as well.

Don't forget about the additional upfront costs especially since they're new builds, furnishings, decor, electronics, cable/internet, small appliances, kitchen wares, window treatments, etc.    

Lastly, plan an exit strategy - if the STR income is not as high as it was projected, ie doesn't even hit the Good range, then what is your plan? Does the lowest range cover all your costs, PITI, HOA, Utilities, etc... Cash flow is king ...

@Darren Koenenn

I currently own a STR in west Panama City Beach. This area and Inlet beach are very active and prices have accelerated in the last few years(Inlet might be a little overheated). I am a fan of inlet beach and insurance is better than some other areas due to the elevation. The key for STR homes is to have a water view and where you are located in regards to the beach access. Access to a pool also helps with rentals. Generally gross revenue in the area is about 5% of the home value. Beach front condos in PCB tend to trend closer to 10%.

You should also look up the legal battles in Walton county around what is public vs private beach access.

@Darren Koenenn Hey Darren! Hope all is going well, My Fiancee and I are currently running a vacation rental on Okaloosa Island and it has been going great! We are cash flowing and we have had only minor problems. I would love to help you out and give you more info on the process and the area. Feel free to ask any questions on here or message me with more details! There is some risk to being near the water, but the reward is high as well. 

@Darren Koenenn My wife and I have toyed with the idea of a vacation home in Florida, St Pete to be exact. Probably pretty similar to you, the idea was to do weekly/monthly rentals and then have a place to stay when we are down there (4-6 weekends a year and most of December) while making a little cash. I spoke with a couple of buddies who have something similar in a few states and they all advised me to think deeper on the same few topics. None were deal breakers but their insight was helpful compared to my background in workforce investment homes. 

Here is what they told me:

1. You have to get an awesome house to get top dollar per week. Pinching pennies on the purchase could cost money down the line.

1. Taxes. Obvious, but has a seat at the discussion table.

2. Upkeep Costs. To get top dollar and stay booked, one guy said he paints the house - interior and exterior- yearly to keep it in excellent shape (Outer Banks)

3.Management fees. All said the managers provided a great service, but they certainly charged for that service. Obvious again but worth running numbers on. 

4. I knew the property insurance would be expensive but after researching, I'll definitely get very strong liability insurance. Nothing like 10 drunk people in your house to keep you up at night. 

5. The craziest and biggest risk that I heard is the local municipalities ability to outlaw STR. I'm not sure why but one friend said the city banned STR and his cash cow became just a decent long term rental. You mention and HOA so that's an added layer of risk for you.

I think I ended up talking with 4 or 5 friends with homes in FL, SC and NC and they all said it was still a good venture in the end. Two of them had homes with STR revenue over $200k a year! Good luck to you on the place!