Author Topic: Vacation property as an investment?  (Read 10685 times)

Simple Abundant Living

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Vacation property as an investment?
« on: August 04, 2013, 04:28:26 PM »
I live in a climate that I love 9 months out of the year (UT).  Our ideal version of retirement would involve spending most of the year here, and escaping to a warmer climate for the winter.  There is a city 4 hours drive from here that has milder winters (50's and 60's).  We have found that we like to spend a week or long weekends there to escape the snow and hike, bike, or whatever.  I've been thinking about buying a vacation property there that would be rented out weekly to others with the exception of the week or two that we wanted to use it.  What considerations should I have about a vacation rental?  I would plan on keeping it until I am FI, then spend winter months there.  Are any of you investing in vacation rentals?  Are there books you recommend?  Thanks in advance for any advice you have.

arebelspy

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Re: Vacation property as an investment?
« Reply #1 on: August 04, 2013, 04:39:27 PM »
I've never once seen one where the math pans out and it makes sense.

People do it regardless.

I'd recommend, for a Mustachian, to get a rental property that makes sense, then use some of the cash to take a vacation anywhere you want, and you'll still come out ahead.

I outlined the argument more in a previous discussion that may help, located here:
http://www.mrmoneymustache.com/forum/real-estate-and-landlording/vacation-rentals-i-e-ski-condo/

Here's a quote from me from that thread:
Quote
Example: You have 300k.  We'll ignore mortgages for simplicity's sake.  You can buy a rental house that produces an 8% return (8-10% cap rate is fairly standard) or a vacation rental that is slightly cash flow positive and produces a 1% return (after all expenses, and keeping in mind the fact that you stay there some of the time, so that reduces the return since you aren't paying when you're there).

You make $24,000/yr in scenario 1.  You make $3,000 + free vacations in scenario 2.

I'd rather have scenario 1 with the extra 21k cash and use some of that to take a vacation anywhere and keep some in my pocket than scenario 2...
« Last Edit: August 04, 2013, 04:41:09 PM by arebelspy »
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Zamboni

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Re: Vacation property as an investment?
« Reply #2 on: August 04, 2013, 04:49:23 PM »
I'm totally with arebelspy on this one.

Would the property be in a resort location that could reliably be rented out on a weekly basis?  My good friend had a beach house 3 hours south of here that he rented out; after a couple of years he decided that it wasn't worth the hassle.  I can give more details if you want, but suffice it to say that weekly tenants are not always as considerate as you would like with things like your furniture.  Someone has to be paid to clean in between every tenant (almost no one cleans while on vacation.)  Dishes/knives/art slowly disappear, and the person who checks in between weeks doesn't always notice.  Even though his house was super nice and on a gorgeous beach, he made less money on the rentals than he had projected.

I non-seriously toy with this idea every time I stay at a beach or ski resort.  I have lots of friends who have these types of vacation homes, condos, etc.  Most don't bother with renting them anymore, and then they can use them a couple of weekends a month.  But then I get home and decide I don't want the property upkeep on a place that is far away.  And the numbers stink in terms of investing.  Also, I like visiting different places.

Do you really always want to be locked into visiting the same place between now and the retirement?  Some do, some don't. 

Simple Abundant Living

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Re: Vacation property as an investment?
« Reply #3 on: August 05, 2013, 01:54:38 PM »
Thanks guys, you've given me a lot to think about.  It seems like I really need to do the math and figure it out.  The place I am looking at is a 3bdrm/2bath condo on a resort property listed for $210k and rents for $175-$225/night.  I need to contact the real estate agent and see what the rental history is, and what kind of condo/management fees there are.  Thanks for your advice!

totoro

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Re: Vacation property as an investment?
« Reply #4 on: August 05, 2013, 02:09:59 PM »
We are living this reality and we have mortgages on both and not only live for free (including all utilities) but we are netting a fair bit too. And we are in a more expensive market. This is possible.  I will post more later.

totoro

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Re: Vacation property as an investment?
« Reply #5 on: August 06, 2013, 08:00:24 AM »
Okay, here is our situation and what we did.  I have no idea if it would work where you are, but I suspect many markets in the US are more lucrative than the ones we are in.

1.  We purchased a home in a smaller popular summer resort town across from the beach with 10% down.  The value is 1/3 the beachfront value but it is on a cul de sac adjoining a beautiful public beach and has a lake view.  We legally suited it (above ground suite).  Vacation rentals are legal here as well.   We suited, soundproofed, painted and furnished it (CL) in a one-month period. We advertised on CL and through a vacation rental site and did our own webpage.  We rent it out by the week at very high rates in the summer and we also use it as our go to vacation destination (three weeks already this summer).  In the winter one suite is rented out by the month at a much lower rate on a term lease.  We keep the other suite for us as it is also a ski town.   This property nets $5000/yr after all expenses and provides a free place to stay for our family.  This year for the first time we will also rent out the upper suite which will increase the profit by net $6000.   

We do not have property managers.  I do the bookings, which is not much work imo (approx. 12 a summer). I do the spring and fall cleaning (with help).  I organize the long-term tenants. I have family in town who I pay to organize the cleaning and respond to any issues that arise.  We have not had a problem with damage or theft in four years of renting out.  We rent to families with children almost exclusively and some of them have been coming for three years in a row.  Each year I take some of the profits and make improvements.  This year will be some landscaping and painting.  I find it fun to improve the place and make things better for us and for visitors.

2.  We bought a triplex in a bigger city with 20% down that is in a very nice, upscale, walkable area.  It was in very rough shape when we bought it (flophouse-like with tenants to match - they moved out as I don't think they wanted to live next to the landlord) and we have been working hard to renovate and improve it.  We improved the first suite that needed the least work right away (in about a week - painting and furnishings) and rented it out partially furnished to three very nice, quiet, university students.  They are staying another year at least.  We lived in the next suite and left the third unoccupied (it needed the most work - pretty horrible and dirty actually).  We have been working to improve both of these suites and finished the second suite, furnished it nicely (under $1000 from CL) and rented it for Sept 1 two days ago.  The combined rents from the two units cover the mortgage/expenses. 

We are moving to the third unit which is not finished the last week of August.  This unit does not have a finished kitchen and still needs work - we will live with it that way for a bit.   It needs a ton of finishing work. That said - it is essentially free.  It has 4 beds and 2 baths and laundry and it will be lovely when done.  Eventually we will paint the outside and landscape the property and it will match the rest of the neighbourhood. At that point we may use one of the units as an executive rental at a much higher rate.

You are right that you need to do the math.  You need to understand the vacancy rates, cleaning costs (we charge a fee that doesn't quite cover the cost), and any management costs.  Our place is more profitable because we manage it ourselves, but we need to put the time in for this.  Do not just talk to the real estate agent.  Talk to other owners who are doing this in the same place.   I would say multi-family properties (if properly organized and soundproofed) are generally more profitable.

Simple Abundant Living

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Re: Vacation property as an investment?
« Reply #6 on: August 06, 2013, 09:51:36 AM »
totoro-
Thanks for your replies!  It's great to hear that it can work if you are smart about it.  I am in the process of learning more about investment properties.  Do you have recommendations on books or blogs that you follow about this, or did you just start out following your gut?  We are not ready to act now, but we want to put a plan in place so that we can recognize an opportunity when it comes up.  Thanks again!

totoro

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Re: Vacation property as an investment?
« Reply #7 on: August 06, 2013, 10:09:54 AM »
People seem to get a lot out of bigger pockets.com

I learned by doing the math and making sure I accounted for all costs and being conservative on profits.  Spreadsheets are your friend here. MAke sure you understand taxes on rental income and properties. Make sure you understand local and any strata bylaws. Better yet, don't buy strata property.

Johnny Aloha

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Re: Vacation property as an investment?
« Reply #8 on: August 07, 2013, 12:50:36 PM »
In some cases it works, but ARS' example is most common.

We have a friend that invests in short-term vacation rentals in Kauai.  After all expenses he nets 15-18% cash on cash return ... but this is probably a rare case where it makes sense.

arebelspy

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Re: Vacation property as an investment?
« Reply #9 on: August 07, 2013, 12:57:48 PM »
In some cases it works, but ARS' example is most common.

We have a friend that invests in short-term vacation rentals in Kauai.  After all expenses he nets 15-18% cash on cash return ... but this is probably a rare case where it makes sense.

That's pretty amazing, cause he probably gets pretty darn good appreciation too.  Does he do a lot of the work himself, or has he got it all outsourced?
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tryan

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Re: Vacation property as an investment?
« Reply #10 on: August 09, 2013, 10:56:21 AM »
Look at Homeaway and VRBO for the comps in the town your considering.  The online calendar will tell you what bookings to expect.

I said on another post our vacation rental grossed 45k last year .... but I didn't make much.  We use it alot ... that's why we did it.  The rents are secondary.

Johnny Aloha

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Re: Vacation property as an investment?
« Reply #11 on: August 11, 2013, 01:07:37 PM »
Does he do a lot of the work himself, or has he got it all outsourced?

It's all outsourced.  The management, maintenance, repairs, etc since he lives in a different area (different island). 

Sydneystache

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Re: Vacation property as an investment?
« Reply #12 on: January 19, 2014, 07:49:18 PM »
I'm totally with arebelspy on this one.

Would the property be in a resort location that could reliably be rented out on a weekly basis?  My good friend had a beach house 3 hours south of here that he rented out; after a couple of years he decided that it wasn't worth the hassle.  I can give more details if you want, but suffice it to say that weekly tenants are not always as considerate as you would like with things like your furniture.  Someone has to be paid to clean in between every tenant (almost no one cleans while on vacation.)  Dishes/knives/art slowly disappear, and the person who checks in between weeks doesn't always notice.  Even though his house was super nice and on a gorgeous beach, he made less money on the rentals than he had projected.

I non-seriously toy with this idea every time I stay at a beach or ski resort.  I have lots of friends who have these types of vacation homes, condos, etc.  Most don't bother with renting them anymore, and then they can use them a couple of weekends a month.  But then I get home and decide I don't want the property upkeep on a place that is far away.  And the numbers stink in terms of investing.  Also, I like visiting different places.

Do you really always want to be locked into visiting the same place between now and the retirement?  Some do, some don't.

Just bumping up and joining this thread.

Am toying with these ideas too. I've paid off my home and I feel I should be using the equity in my home for some investment purpose and buy a rental. Spent the time at a beach place here (Port Stephens) and it is a very attractive location as a future retirement place too. However, I dread the paperwork, the furniture movings, 5 hour drive round trip, etc. I feel I should buy a house instead of a condo although the latter is easier to maintain. The house for the land appreciation. I shouldn't make purchase decisions on impulse, so might revisit the place during winter. What has triggered this is I also stayed at a friends' place which they bought years ago. I can see the pros and cons but the pros are outweighing as their family uses it and I can see how much they love the place and how it relaxes them too. Their kids and grandkids now use it and it is a proper second home. For me, I'd buy a place and won't use it until the mortgage has been paid off by that time, I will probably do a big major reno job.

Am definitely not thinking of buying a stand alone land as the hassle of building is turning me off too - more paperwork.

I suppose there is no such thing as a perfect vacation rental, but having the freedom to be able to decide is a good thing...

Simple Abundant Living

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Re: Vacation property as an investment?
« Reply #13 on: January 20, 2014, 08:15:45 AM »
Not sure if Mrs. Green'stache will see this since it's been several months, but I'll give it a shot.  Did you ever purchase something down south?  I'm assuming you mean the St George area, which is where I live.  (It was a sunny 61 today.)

One of my business partners had a 6,000 sq.ft. house that we used as a vacation rental for about a year and a half.  It was starting to make a good return, right up until the city said we couldn't rent it out any longer since it wasn't zoned properly for nightly rentals.  Oops!  In the first year alone we had it rented out over 50% of the nights even though we started late by the time he decided to rent it out.  The second year we had March-June booked almost solid and people were already looking for later in the year, but we had to stop accepting reservations.  Apparently the city started cracking down on private rentals that weren't zoned properly.  We did our marketing on HomeAway and VRBO, which is what the city was using to find the properties.  Oh well, it was a good run while it lasted.

Anyway, I'm just curious if you ever bought something down here.  There are several resort areas that are zoned for nightly rentals, but from what I saw, not too many of them made sense from the financial side.  But, it has been about a year since I last looked.  Hopefully some good deals popped up for you and you're down here enjoying the warm weather.

Yes, St. George was the place. I haven't found a place yet, but I'm no longer actively looking. My parents have decided to purchase a second home there (not to rent) and it would be silly to buy a place if they are going to have one I could use for free. Right now, I'm trying to get more informed on rentals as an investment before I do anything. What I'm founding out is that the UT market may not be the best one for cash flow investments. I hope you're enjoying that 61 degree weather!  Hopefully I'll be there in a few years!

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Re: Vacation property as an investment?
« Reply #14 on: February 12, 2014, 06:15:57 AM »
I wouldnt do it. I have my house and vacation home paid for but have been trying to sell my vacation property for 2 years.  I love the place but I agree with one of the other posters go on long vacations somewhere. I am sure there are cases where it works but most of the time not. While i will miss the place even if i give it away the monies invested will pay for a half dozen nice vacations. 

Scandium

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Re: Vacation property as an investment?
« Reply #15 on: February 17, 2014, 10:26:17 AM »
So consensus from experienced  people here is that this podcast is too optimistic?
https://www.biggerpockets.com/renewsblog/2014/02/13/57-buying-vacation-rental-matt-landau/

Perhaps, unless you have significant time (and skills) to make it worthwhile?

arebelspy

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Re: Vacation property as an investment?
« Reply #16 on: February 17, 2014, 12:43:21 PM »
So consensus from experienced  people here is that this podcast is too optimistic?
https://www.biggerpockets.com/renewsblog/2014/02/13/57-buying-vacation-rental-matt-landau/

Perhaps, unless you have significant time (and skills) to make it worthwhile?

Basically yes, and yes.

If it's treated as a business, it can work.

However there's a reason why most real estate investors don't invest in vacation rentals, but in other types of real estate (hint: they're more profitable and/or less risk and/or less work).

And always be skeptical when listening to someone touting their own products.  Nothing against Matt L, but always think about someone's bias when you listen to them.

:)
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Johnny Aloha

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Re: Vacation property as an investment?
« Reply #17 on: February 17, 2014, 05:40:45 PM »
I haven't listened to the podcast yet, but am happy to report that short term vacation rentals are extremely profitable in my area. As with all real estate, it's very market dependent.

Of course, it's slightly more work since you'll have spend about 1 hour per week managing bookings and maybe some cleaning. 

There are 2 important tricks:  1. make sure all your systems are in place - booking, welcome packets, directions, cleaning, etc - to minimize your effort and 2.  pass on as many expenses to the renter as possible (cleaning fee, taxes, etc).

I'll be listening to the podcast tomorrow; if it changes any of my opinions or outlooks I'll come edit this post.

totoro

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Re: Vacation property as an investment?
« Reply #18 on: February 17, 2014, 05:55:01 PM »
I haven't listened to the podcast yet.

I'd say you need to do the math, know your market, and be somewhat organized.  My vacation rental is profitable, but it is two units and does require some management. 

I looked at buying a ski condo in the same area and it was most definitely not profitable as a vacation rental. 

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Re: Vacation property as an investment?
« Reply #19 on: February 19, 2014, 10:36:16 AM »
I own three short term rentals and one long term rental.  Two of the short term rentals were regular long term rentals, and then after crunching the numbers we determined that we could do much better with short term.  These two are in a unique market, college town with lodging shortage for football games.  We rent those weekends for top dollar then fill in the rest of the year with stays of varying lengths (weekends - semesters).  The third short term property is a foreclosed beach condo we picked up at a decent price in 2009.

We looked long and hard at the numbers and these work for us.  HOWEVER, we self manage and so you have to take that into a consideration.  Managing short term rentals is along the lines of operating a small hotel.  There were a number of folks who got in the short term market here a few years ago and got back into long term because of the hassles.  I have been looking at outsourcing some of the management to something like a virtual assistant, but my husband is wary that our football fans will not receive that well.  On the plus side, our short term rentals have had much less wear and tear than when renting them long term.  That has been a nice expense reduction.

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Re: Vacation property as an investment?
« Reply #20 on: February 19, 2014, 05:41:18 PM »
I agree with you. Short term can be very lucrative, but it does take work and time when you self manage. I happen to enjoy the managing part. And just like any rental, long or short, picking the right tenants/guests is 90% of the job. I screen carefully and put in lots of restrictions which seem to work. And a large damage deposit helps in weeding out the bad apples.