Buying a Rental / Vacation Home
Contractor · Pittsburgh, PA · Member since 2013 · 143 posts · 36 votes
Hello everyone, for the last year and a half I have been deeply considering and researching purchasing a vacation home. When I say that I mean, I want to buy a property and be able to visit there once in awhile, but for the most part, have it rented out the rest of the year. More specifically, I have been looking into the Outer Banks, NC. I feel that going with a condo would most likely be better for an owner living 300 miles away, but the condo association fees are expensive. I am very on the fence about this because I am not only considering returns and costs, there is a bit of emotion involved in my decision because I actually want to vacation there as well (and I have been going there all my life). Does anyone have any experience with this? Or have any tips on what to look out for? Thanks again everyone, this community rocks!
Aloha Justin,
I own two vacation rental condos in Waikiki. I stay in either condo when I need a sun fix, but otherwise, I rent them out through VRBO. Both condos are really popular with guests and get booked out months ahead of time. So, your idea of buying a vacation rental condo in an area you like can work… IF the numbers work out and, like @Heather Bayer suggested, you do your research to find out what kind of properties rent best in your area.
I don’t know what condo prices are like in the Outer Banks, but here in Waikiki, condos are expensive. So, in order to make the numbers work for me, I had to purchase my unit in a certain price range. It took almost a year of looking before the right unit came on the market. When it did, I put in an offer that day.
Vacation rental purchases can be emotional, I know. Especially when you are purchasing a rental in an area you want to visit. You can already picture yourself in your new condo, sipping a Mai Tai on the lanai, watching the sun set over the Pacific Ocean. Sounds ideal. But ha ha, then you rent out your place and a guest calls you at midnight your time to say the toilet is overflowing and what should she do?
So, buy smart. Forget the Mai Tai on the lanai until you’ve run the numbers to see if condo purchase makes financial sense.
Good luck! I’ve had a lot of fun renting out my condos to guests all over the world.
@Justin Escajeda What are the numbers for the condo you are trying to buy? If the HOA fees are expensive, it is probably not going to be a good deal but let's stay motivated and positive.
Hi Justin
This is my first post on Bigger Pockets - your question fired me up to join! I've been involved in the vacation rental business for 20 years and have bought/sold seven of my own properties in the last ten.
One word jumped out at me from your post - 'emotion' - and I'd advise removing that as much as possible from any buying decision when looking at purchase that involves a vacation rental goal.
Of course, your own criteria comes into play because you want to use the place yourself, and you have experience with visiting the area, but you should also consider the needs, wants and desires of your potential guests. They may be very different. Take some time and seek out the competition in the area, looking at the popular vacation rental sites. Check out the reviews that travellers have posted after they have stayed at Outer Bank properties, and you'll find out what their criteria are. Seek out the most popular properties; look at the amenities and facilities they offer, as well as the location, which should give you a good idea of what vacationers find most appealing.
Doing thorough research from a guest viewpoint can help you establish solid criteria when making a buying decision.
Heather
I have owned a vacation rental company for several years and I agree with Heather. I would also call a couple of vacation rental companies in the area and tell them you are thinking about buying there and ask them what areas rent best, what size house you should get, what amenities you should put in (wifi, hot tub, pool table, etc). Unless you have someone local, you will need to hire a company to manage it for you. Believe me, managing it yourself from afar is a headache. Shop around and find the best fit for you.
We own vacation rentals in NC, SC, and OR. where we live. We bought them because we liked to vacation there and hoped we would make a little money.
We self manage two and use property management on two. Typical charges are 30% to 40% of rent. HOA's run $250 to $750 per month. The properties are rented 33% to 65% of the time. Ours run on the high side.
We use VRBO for properties that we self manage. We are 3,000 miles away and don't find management too bad if you don't mind phone calls.
I hope that our experience is of some help to you.
Bill
Aloha Justin,
I own two vacation rental condos in Waikiki. I stay in either condo when I need a sun fix, but otherwise, I rent them out through VRBO. Both condos are really popular with guests and get booked out months ahead of time. So, your idea of buying a vacation rental condo in an area you like can work… IF the numbers work out and, like @Heather Bayer suggested, you do your research to find out what kind of properties rent best in your area.
I don’t know what condo prices are like in the Outer Banks, but here in Waikiki, condos are expensive. So, in order to make the numbers work for me, I had to purchase my unit in a certain price range. It took almost a year of looking before the right unit came on the market. When it did, I put in an offer that day.
Vacation rental purchases can be emotional, I know. Especially when you are purchasing a rental in an area you want to visit. You can already picture yourself in your new condo, sipping a Mai Tai on the lanai, watching the sun set over the Pacific Ocean. Sounds ideal. But ha ha, then you rent out your place and a guest calls you at midnight your time to say the toilet is overflowing and what should she do?
So, buy smart. Forget the Mai Tai on the lanai until you’ve run the numbers to see if condo purchase makes financial sense.
Good luck! I’ve had a lot of fun renting out my condos to guests all over the world.
I've owned property in Pittsburgh as well as the Mid Atlantic beach areas. The season in the Mid-Atlantic is 12 weeks period. Its from Memorial Day to Labor Day. That's the time period where you will make your money. If you rent the property out on a years lease 12 month period, you'll find that the rental amount is about the same as the 12 week period of weekly rentals.
But if you rent for a 12 month yearly lease then there will be no time for you to stay there. And if the return is to be maximized on a 12 week basis, then you rent all 12 weeks out and only use for personal use during the other 40 weeks of the year. September is particularly nice and the water is still warm.
The property management is high and in some resort areas they charge 1% to 25% of the gross rent. That really cuts into your already thin or negative margins.
The condo fees are also generally on the high side and you will have to pay that for all 52 weeks even if you only rent for 12 weeks. So the expense is a 12 month expense and the income is a 12 week income.
One alternative would be to focus on a warmer location that has a longer season. Some BPers have mentioned San Diego, Hawaii, and other warm places. I know people from Pgh who have places in FL for example and its still warm there all winter as are places in TX, AZ, NM & NV, as well as other part of CA.
Another alternative would be to buy more than 1 unit. Perhaps a duplex or a place with a small accessory unit. Rent out one unit and keep the other unit for exclusively your use. Or rent one unit on a 12 month basis and the other on a 12 week basis, saving some prime season weeks for your self.
Hi Justin, I'm from MN and at this time of year (never ending winter), I think about vacation rentals all the time. I'm looking at a complex now, but it's all about the numbers and finding the right set of circumstances.
Watch out for condo rules and regs. Many have rental restrictions. How often would you use it, how often would you rent it? What about furnishings? Community features? Would you allow 1-night stays, where you're basically a hotel? That's a lot of management, housekeeping, wear and tear, etc.
I know several families who rent their vacation condos from one to three to six months seasonal, often to the same families year after year. This is more stable, but still no guarantees.
I also know people who bought a vacation condo and rent it now, with the intention to move in after retirement. They're in it for the long term, so the rentals cover some ongoing expenses as they build equity over time.
My first investment property was a vacation home in FL and it's been a weak performer. High expenses, including insurance and out-of-state management, have eaten into cash flow. On the positive side, it's all been an education.
I agree with @Thomas Fortune that you can do better elsewhere from a cash flow perspective, but vacation rental condos do offer many benefits, depending on your long term goals and personal use.
Thank You everyone for your great input on the subject. I definitely feel like these (and felt like this previously)types of properties don't cash flow as well as other deals I am involved in, but like I said this is a personal purchase as well, but at the same time I do not want this to cost me anything by any means. This is not on the top of my priority list, but am definitely going to be more involved in researching properties and analyzing the numbers. I am sure I will seek you out again as the process progresses! Thanks again!
Before you buy in a coastal area, you might want to read up on the upcoming flood insurance changes. Here are some related threads.
http://www.biggerpockets.com/forums/48/topics/108241-flood-plain
It is unlikely that money can be made with beach property in short season areas. In that sense it is not a good investment.
If you rent it on a weekly basis the 12 week season when the expenses are deducted if not a money maker.
If you rent on a yearly basis, then there is no time for you to enjoy the property. If that's the case why not invest in Pgh, which reduces your expenses, and you don't have to worry about hurricanes and ocean flood insurance. Just look at the Super Storm Sandy damage along the Jersey coast.
I definitely agree with what you said, as far as investing in Pittsburgh, that is primarily where I invest (and Washington, PA). Like I said this vacation / rental for me, is a bit more personal (because I love the Outer Banks) and I am having feelings of letting certain numbers ride that I normally wouldn't in one of my regular investments only because I want to have a place down there. Im starting to get the feeling that is a bad idea to think like that, so I just wanted some feedback on this (and anyone else's experience in similar situations). Case in point, the numbers do not really cash flow, and I do not have a lot of cushion by any means on this condo Im looking at, but still want to purchase something down there. However, I am trying to avoid a money pit, perhaps I should just wait until my financials are more secure. Anyways, thank you for your insight, sorry for rambeling.
As far as insurance, the short term rental insurance is one of the most expensive insurance policies you can buy. The reason is there is a lot of vacancy time and there are a lot of different people/families staying in the home during the year. If you dont rent the properties to others, you could get a policy for a vacation home. That is still more expensive than a typically homeowners/condo policy but less expensive than a short term rental landlord policy. If I were you I would shop around and get some rates so when you consider your purchase and rental rates it makes sense for you. Insurance agents can give you an insurance quote on a home "you are thinking about buying.".
@Justin Escajeda If the condo doesn't make sense from a cash flow perspective, then I wouldn't really consider this an investment. I think you'd be better off looking at this as an annual expense (partly offset by rental income).
As someone else mentioned, you are likely to need to need a large down payment to buy this property, so don't forget to consider your cost of capital on that down payment. You are losing access to that cash that you'd otherwise have available for real estate investment (or something else).
If you're ability to invest that cash as a real estate investor is high (10-30%), then this purchase will likely be negative cash flow for you, so again more likely an expense than an investment.
Your own mention of this being an emotional decision suggest to me that you know this is a luxury expenditure and not an investment. There's no room for emotion when investing in real estate but buying a car... maybe. see my point?
Of course, we all want to take vacations right? When friends and co-workers talk about buying vacation homes I always advise them to also consider their typical annual expenditures on vacations and if you are ready to feel the pressure of vacationing predominantly at one location (and one property).
Having your own place is great, but if you plan to rent it out a lot, you won't be able to fully personalize it with nicer things due to damage risk from short term tenants.
Personally speaking, the world is an amazing place. My wife and I try to go some where we've never been at least twice a year... there's a lot of value in having the flexibility of choosing where you vacation. Just a thought.
I know somebody who has a condo in Miami, on the 6th floor and they were required to carry flood insurance.
I know somebody who has a condo in Miami, on the 6th floor and they were required to carry flood insurance.
Noah's flood. A 10,000 year flood.
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My oceanfront condos carry flood insurance though HOA (POA)
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I just logged in to post basically the same exact question, the only difference is that my wife and I were considering some place in the Caribbean. Anyone have experience with a vacation / rental property in the Caribbean?
Prices are very high in Carib, not sure about what the cash flow is. It does have a longer season, though Dec to Mar is the high season. And Aug to Nov. is the hurricane season, less tourist and lower rents. At one place i went to in July the occupancy was only 10% because of being the off season.
Check out what all the expenses are including property management, taxes, and insurance including hurricane insurance.
Best advise I have heard is keep your business and pleasure separate. If you are buying for an investment you won't want to use it for your own because you will eat up the profits. If you are buying for pleasure but need the income because you can't afford it solely for pleasure, then you can't afford it.
Vacation there and rent a place until you can afford to purchase only for pleasure. Use your capital to grow to that point. Use it as vision and motivation. It'll be your dream. You'll be surprised how soon you can have your dream and it's be better than trying to marry the dream and business.
Absolutely agree. There is the popular notion that resort/beach rentals are easy money. The opposite is true. Its a lot easier to make money in your home turf than in some seasonal area. The allure, the sex appeal of being able to say, "Yes, I own property at the ocean." doesn't pay the bills.
In much of the Mid-Atlantic coast the market was stagnant and prices did not move up from 1986 (tax law changes) until 1997 (tax law changes & boost in the general economy. You could have bought a place in the late 1980s and kept it for almost a decade and just be able to sell for what you paid.
Cash flow is cash flow. A dollar in net earnings does do know or care whether it came from a working blue collar neighborhood in the rust belt or prime ocean front.
Sorry to rehash an aging thread, but...I have an extremely wealthy friend who owns nothing but his home and an office space as far as real estate goes. He made his money by taking a company public and then consulting others on how to make money. He is an astute businessman who has started and run many, many companies. This thread reminds me of his advice on beach/rental property. He said "Why would I want to own anything that costs me money? I invest in things that make me cash flow, and once a year, I take out my check book and write a huge check to stay a month in Hawaii, or two weeks in Martha's Vineyard, and then forget about what it cost me. I don't have a mortgage or headache that way and I'm not tied to one place." So his advice is basically to separate pleasure and business and you might be better off just paying the cost to rent what you want once a year and invest elsewhere. I fantasized about beach property for a long time, now once a year I just go pay what I pay to enjoy and unwind. I'm still not real wealthy, but I have less of a headache : )