After living in Florida for seven years, a second home in South Florida has landed on the short list of big goals for my wife and me. We love being near the beach, the calmness of the water, the amazing restaurants and bars, and the nightlife. There is a calmness of the pace of life in coastal cities — something that has been a calming and centering place for me since we lived there. Our kids love playing at the beach, hanging out, and enjoying sunshine almost every day.
We will achieve the goal of buying this house. Now it’s all about timing, executing, and finding the right one.
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Overall Thought Process
The idea of having a second home is exciting, but also daunting. First, you have the cost of buying the second property. But also, questions arise on how to maintain it, how to know what property to buy, what area to buy in, and what it costs you to buy, maintain, and operate the house long-term.
Selecting a Location
If you are already familiar with a city, area, or neighborhood where you would want to buy, then you are already ahead of the game and have a clear locale you want to buy in. If you aren’t clear, you need to think on a city or area, such as Southern California, the beaches in South Carolina, the South of France, or the West coast beaches in South Florida. You have some homework to do. Maybe you need to think about the lifestyle goal — what you want to do, be around, or experience with this property.
Whatever you are looking for, you need to go to the area you think would be ideal long-term — and actually stay there. Start with a similar amount of time you would want to be away — one week, two weeks — and stay at a hotel or Airbnb-type of property in an area that looks interesting.
The most cost effective way is to stay in a nice but reserved AirBNB property where you can enjoy the comforts of home, cook, do your laundry, and have a nice place to stay that’s not a one-room tiny hotel room. You also have (hopefully) ease of use with a car to travel around, or pick a location that is close to the local mass transit if that is available.
If you were, for example, three years out from selecting a location, but you knew you wanted to be in South Florida, take one winter trip to Tampa, and then the next winter trip to Jupiter, and then the next one to West Palm Beach. Whatever the cities are, take your time, stay there, wander there, have fun, and learn the vibe of the city by BEING there. Taking the time in each area will help influence and then solidify where you want to buy and give you a lot of confidence going into the purchase.
As a second home, you can get regular conventional financing for this property and use a 20% or 25% down payment, depending on your lender. Assuming you are required to put 25% down, and let’s say a purchase price of $300k for your property, you would need $75k plus closing costs for your down payment.
Using the same example, you have a three-year timeline before you purchase, so you need a plan to save for that down payment. Call it $75k plus $5k for closing costs, and you’ll need to save up $80k in three years. That equates to $26k a year — roughly $2,200 each month.
A few other examples for reference: For a $150k condo, you’d need to save $1,100 each month, and for a $500k house closer to the beach, you would need to save about $3,500 each month (for the down payment).
Type of Property
I am most familiar with Florida, so I will use that as our example. In Florida, there is a wide variety of options when deciding on locations, HOA, landscaping and amenities, neighborhoods in a community versus not, and price range. For instance, you could be within a few blocks of the beach in a condo for $300k, but it might be tiny, not renovated, and have costly HOA fees. A beautiful neighborhood with a 3/2 condo with 1,500 sq ft would run you around the $250-300k price point, could be within 10-15 minutes of the beach, and have around $400 a month in HOA fees between the master HOA and the smaller community where you condo is located.
Related: I Just Stayed in a Vacation Rental: These 7 Things Would’ve Made Me Return
If you went for a single-family home within a community, the housing prices could start more in the $300k-$400k range and will likely go up dramatically depending on location and the amenities. Here, you could have your own pool instead of the common one for the condo (but you’d also have to allow for maintenance of it), and you’d have a little more freedom with not having people directly across from, above or below you, like in a condo or townhouse.
Make sure you understand the rules within the HOA on everything — paint colors, lawn maintenance, the common areas, the pool, and use of your home in regard to rentals. There are a lot of different rules and specifics that govern the property you are about to buy.
Make sure you have a real estate agent who is helping you navigate these questions when you go to buy the property, and understand what you are getting into! If you have budgeted for $300 a month for your HOA fees because you love the landscaped areas and the large pool in the neighborhood, that’s wonderful. Just remember, if the community votes to tear out the pool and add $300 a month to your HOA fees, guess who is on the line for it. YOU!
You’ve saved your money, found your perfect location, and purchased your property. Amazing! For my family, we’re making sure we can use the property as a vacation rental during the times we’re not personally there, at least for a number of years. By doing this, we are:
- Allowing cash flow for the property
- Able to pay off the property faster
- Having people in it a lot, ensuring we know of any maintenance issues and have them addressed
Back to the $300k example:
$225k 30-year mortgage with 25% down = $1,100 or so PI, and then insurance and taxes
For example’s sake, the final mortgage payment ends up at $1,800 a month PITI (principal, interest, taxes, and insurance).
You plan to visit 3-4 times a year and then rent it out all other times. You average $300 a night and have 30% occupancy as a vacation rental. That would mean 10 nights per month and $3k a month in rental income. It also means you can stay for 1-2 weeks at a time and still keep that rental income cash flow up for all 12 months within your projection.
At the $3k number for rents, you can pay your mortgage at $1,800 monthly, save $300 a month (10%) for maintenance, keep $400 in income or cost of a manager to manage the rental or HOA fees, and pay $500 additional towards principal. I have left this open for good reason. There are a lot of variables. All of this is meant for proof of concept, not that something important is left out.
The Grand Plan
If you were to buy this property today, you would expect to be cash flow positive within a month or two once you had established the property (yourself or a manager if necessary), getting renters lined up and cash flow in. If you used this example and executed this process, your rental would be MAKING you money.
To take it a step further, you could have the property paid off in roughly 16 years, using it 3-4 times per year personally, averaging 1-2 weeks per trip. You’d positively cash flow every month, on average with 30% occupancy, creating roughly $1,200 a month additional revenue to cover expenses, HOA, management, and debt payments, however you want to do that. If you are able and committed to paying $500 additional principal monthly, you’d have it paid of in 16 years and own it free and clear.
At that point, you could either continue as you were (except now pay yourself the additional $1,800 monthly), or you could take that, buy another one in another place, and do it all over again.
The vacation rental is an awesome idea, and many people dream of owning one. Think of how you can operate within this idea, what specifically you want in the property, and how often you can visit. Make it so you can comfortably operate it and use it to the joy and benefit of your family and friends and that it does not become a larger stress and problem. Dream about what you want to do and where you want to live, and then see it to fruition.
Do you dream of owning a vacation home one day? How are you going about making that a reality?
Let me know your thoughts with a comment!