Oak Ridge, NC · Member since 2017 · 15 posts · 5 votes
I have always wanted to own a beach house, and I am hoping that by investing in a vacation rental I can make this a reality. I have a few questions, as I am still researching feasibility.
Is it ideal to form my LLC prior to purchasing my first rental?
How much should I expect to put down?
Are mortgage rates different for investment properties?
How do you determine the market for a rental? Is looking at VRBO and calendars a decent way to assume average rents? How do you know if a new rental in the same location will have similar rents? Isn't it possible that highly booked properties have an established clientele?
Is it worth it to purchase a condo that will have positive cash flow if it is in danger due to beach erosion? What happens if your property gets condemned? Does insurance have a role in this instance?
For those that manage their own properties with VRBO and housekeeping, how do you deal with the minor complaints from a distance (3-4 hours away)? Things like broken coffee pots or ceiling fans?
I have many more questions. Thank you in advance for reading this, not thinking I'm an idiot, and hopefully replying with helpful information!
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
@Valery Mora Kepley I don't know much about the Coastal Carolinas but here are some generalities when it comes to beach rentals:
1.) You're probably looking at 20% of gross rents as a property management cost. You can try and do it yourself but you're selling the "experience" more than the physical property and it's hard to outsource that "experience" to a handyman and a cleaner.
2.) You really need to get a statement from a professionally managed beach rental that's currently in service (ideally, on the same stretch of land) to see what occupancy looks like between peak and non-peak times. Odds are, it's lower than you'd think. You can see in what periods you can demand a "full week", what periods you'll have to accept "Friday - Sunday" and in what periods you'd be lucky if anyone shows up!
3.) Highly booked properties do (generally) have an established clientele. However, that's also linked to their presence on websites, a certain management company, etc. Family are prone to stay in the same home for the same week summer after summer. In more "incremental" than anything else but it's there.
4.) Insurance for oceanfront is higher than you think and I have no idea what happens if the property gets condemned! Who knows, I've heard of some properties that are uninsurable for that reason.
5.) Furniture and linens wear out. The last thing you want is someone writing a review saying they had to sleep on stained or torn bed sheets! So expect additional costs.
6.) Budget at least $150 for cable/satellite TV as well as internet service.
7.) Expect to put down 25% but you might be able to get away with 20%. It depends a little on the lender.
8.) Worry about the LLC after you've figured out if this financially works for you.
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
@Valery Mora Kepley I don't know much about the Coastal Carolinas but here are some generalities when it comes to beach rentals:
1.) You're probably looking at 20% of gross rents as a property management cost. You can try and do it yourself but you're selling the "experience" more than the physical property and it's hard to outsource that "experience" to a handyman and a cleaner.
2.) You really need to get a statement from a professionally managed beach rental that's currently in service (ideally, on the same stretch of land) to see what occupancy looks like between peak and non-peak times. Odds are, it's lower than you'd think. You can see in what periods you can demand a "full week", what periods you'll have to accept "Friday - Sunday" and in what periods you'd be lucky if anyone shows up!
3.) Highly booked properties do (generally) have an established clientele. However, that's also linked to their presence on websites, a certain management company, etc. Family are prone to stay in the same home for the same week summer after summer. In more "incremental" than anything else but it's there.
4.) Insurance for oceanfront is higher than you think and I have no idea what happens if the property gets condemned! Who knows, I've heard of some properties that are uninsurable for that reason.
5.) Furniture and linens wear out. The last thing you want is someone writing a review saying they had to sleep on stained or torn bed sheets! So expect additional costs.
6.) Budget at least $150 for cable/satellite TV as well as internet service.
7.) Expect to put down 25% but you might be able to get away with 20%. It depends a little on the lender.
8.) Worry about the LLC after you've figured out if this financially works for you.
Oak Ridge, NC · Member since 2017 · 15 posts · 5 votes
9y
Thank you Andrew (I haven't figured out the @).
Good information. I was forgetting about cable/internet. I will definitely have to look into insurance costs. My initial thought is a sound/canal front single home, as I hope that will be easier to insure and offer protection from hurricanes. It won't rent as well as oceanfront, but it will rent well in the summer for kayak/boaters. I ask the condemning question because there are oceanfront condos going for $50,000 with what appears to be good rental history, but high tide is only yards away, and there is a sandbag wall in front! The cashflow might make sense, but since you mentioned it, I'm sure they couldn't be insured!
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
Valery Mora Kepley Sandbag walls? That's a new one. When it comes to vacation rentals they all do well in the summer. You make money hand-over-fist then and typically use that to cover your losses in the down months. It's very hard to make them pencil out in a popular area because you're competing with people like yourself: those who *want* a beach rental. They are either content with break-even or are buying for the potential of appreciation. I don't want to be discouraging at all, deals are out there, just plan on looking at A LOT of them. Also, because the "dirt" is worth more there far less value in the structure so it isn't as beneficial for depreciation as other property.
Property Manager · Raleigh, NC · Member since 2014 · 728 posts · 596 votes
9y
we originally were looking at the same idea. buy beach front, get rent, and maybe enjoy it with the family on occasion. i talked with a friend who owns several and he talked me out of it. instead i went into year round rentals. the issue is you have to have everything I vacation rentals (pans, pillows, sheets, etc). it had to be a fully functioning house. on top of that, maintenance will be more than toy can possibly imagine. I would definite lyrics usr a management company of you go the beach route and know the house will get trashed. sand.. sand... and more sand.
Oak Ridge, NC · Member since 2017 · 15 posts · 5 votes
9y
Thanks again Andrew-also didn't think about the lot being worth more than the structure. I will have to look at the tax cards and see if depreciation makes sense.
Curtis, thank you. Can I ask what turned you off to the vacation rentals? Was it the maintenance costs? Any other cons?
Also, where are your year round rentals? I've been considering that, but I have been burnt with tenants trashing a place and having to evict them (without a PM company, so I understand the worth of having one for sure!). The rental property I had was near a college and I had a PM company find the tenants and do background check. The damage they did to the property and the months they stayed until eviction just killed me and make me leery of rentals now. I was thinking of renting in a good school district to a family, but the cashflow in the area I am looking at does not make much sense. I'm afraid to go into lesser neighborhoods at this point. Your thoughts?
Investor · Fort Worth, TX · Member since 2016 · 107 posts · 62 votes
9y
Wow Valery you're not really getting much positive information on your quest to owning a vacation rental on the beach. Let me change that and provide you with a different opinion.
I own and self manage a vacation rental about as far from you as it can be, and still be in the US. It is across the street from the beach. Do we get some wear and tear on the place because of the proximity to the beach, yes. We also get top dollar and better occupancy rates because of that.
We make more than double what our place would rent out as a long term rental.
Long-term rentals, for the most part, won't be maintained by the tenants better than our vacation rental. I've owned long term rentals too, and most tenants don't clean as often as they sure, and certainly not as thoroughly as they should. When they move out, then it's time to repaint, perhaps replace carpets, repair damage and neglected maintenance items, dripping pipes under sinks, running toilets, etc.
Our condo is cleaned from top to bottom after each guest. The wear and tear on it is actually very minimal, our guests treat it very well, and they are out enjoying their vacation, long term renters "live there".
Management isn't all that difficult and if you honestly represent your property and the condition, and it is clean when your guests arrive, you'll get 5 star reviews, even if your vacation rental isn't a 5 star place.
Since I'm not familiar with your specific area I can't speak about the market conditions, occupancy rates, or the lending requirements.
Good luck...it can be a great investment as long as you continue do your research.
Investor · Roseville, CA · Member since 2016 · 893 posts · 1k+ votes
9y
@Valery Mora Kepley I currently manage my vacation rental about 2 hours from my primary residence. I couldn't agree more with everything @Andrew Johnson mentioned above (he's a sharp guy).
I use a hybrid management approach with allowing a company to handle the advertising, booking and payments and I take over when the guest arrives. I try to leverage technology to handle most of the workflow and beyond that, you simply need to be 'available' by phone to the guest for their questions and concerns and that goes a long way with them. Just make sure you have a local handyman, plumber, etc on speed dial if anything pops up and you will be fine.
I think you are on the right path just based on your first sentence when you said...'I've always wanted to own a beach house'. And I will tell you right now, that if you do your due diligence you will make that dream a reality. I did (cabin, not beach house) and the main reason for that is because I didn't think of it as a normal real estate investment or something that had to cash flow positive at a certain cash on cash percentage....it just needs to pay for itself and even if you lose a little cash flow, you still get to use it for yourself for up to 2 weeks a year which has it's own value, especially to you!
All that being said, VR's are not as simple as regular rental for sure...they really don't cash flow well due to the high operating expense, after all you are literally paying for everything! Cable, utilities, HOA, landscaping, etc, etc. so don't be surprised if you are running at a 60-80% Op Ex ratio. Just make sure you are providing a value to your guests at a fair price and you will get the bookings that will cover it in most cases in the right areas. Also 3 more tips:
1. Spend extra on photos for your ads and listings, don't go cheap, they will pay themselves back 10 times over in the first year
2. ALWAYS remember the guest is right, even if they are wrong! Swallow all your pride and just make sure that guest leaves knowing you did whatever you could to make sure they vacation was treated as special as possible even when somethign went wrong. You will be amazed how many bad reviews (which are VR killers) can be avoided by simply putting the guest first
3. Don't fall in love with your rental! It's difficult because you achieved your dream home, make it all pretty and ready to share with the world, but be prepared for the world to not treat it as well as you would have. The sooner you think of it as a business asset first and vacation home second, the easier that first year of rentals will be.
There is plenty of other tips I can give you from my personal experience but those are the big ones. Good luck to you and remember, it's just math, a little due diligence and doing your best to limit risks and you should be able to have something you can enjoy for years and still have it pay for itself.