Co-authored by Tim Whittemore with the Whittemore Group
If you have visited the Emerald Coast, you already know it has something to offer travelers of every kind. From sailing, snorkeling, dolphin tours, watercraft rentals, fishing, golf, and boating to name a few, you will never be bored unless you want to be. The Gulf of Mexico with its clear emerald water shimmering against the sparkling snow white fluffy sand, is a playground sure to steal your heart.
If you’ve been thinking about buying a slice of paradise for yourself and possibly to share with others, here are five things to think about when preparing your search.
Purchasing a vacation rental can be a profitable venture but there are a few things you need to keep in mind when going shopping for your Shangri-La.
- Budget-Those nasty things that can make or break your purchase and bank account.
How much can you afford to spend? Staying within your budget is paramount to making wise and not an emotional decision when it comes to finding the right place. It’s easy to get carried away to la la land when perusing some palatial resort unit with a beautiful view of the gulf, but is it within your budget and can you make a profit if you buy it?
- Out of pocket expenses-
The two most expensive items you will need to consider are Property Taxes and Condo Association Fees. Be sure you clearly understand the fees associated with both.
Out of pocket costs: Down Payment (usually 25% down for investors, lower if you plan on living there full time), Closing costs: Anywhere between $3,000 – $8,000 or more (depending on the price point). Inspection Costs: Usually around $300, EMD [Ernest Money Deposit] anywhere between $1,000 to 1% of the purchase price. This money is held in Escrow until closing where it is used to pay for some of your closing costs or refunded back to you. Appraisal: $500, this is the bank ensuring that the condo is worth what you agreed to pay for it.
Property taxes are pro-rated into your monthly mortgage payment. HOA fees are not and will need to be paid in a separate payment once a month, or quarter, or year (or whatever iteration is required).
- Other monthly expenses to keep in mind are:
- Management Fees: We strongly recommend you use a management service to hand the details for you, especially if you are living out of state. These fees can rage from 15%-25% for a turnkey solution.
- Repairs: Roof, Air conditioning/heating
- Maintenance: Cleaning fees, appliance repairs, linens, kitchenware, etc. (sometimes covered in your management fees)
- Insurance: Some companies charge more for short-term-rentals. Know in advance what monthly rates you could be looking at. ( This will be combined with your mortgage payment, if you don’t pay cash for the condo) Fun fact about insurance: This is actually considered “Content insurance” since the building itself is ensured by the HOA, so it’s only the area inside the condo that the owner needs coverage for.
- Cancellations and vacancies: Until you build up a clientele, you may have times the unit is not rented or unexpected cancellations due to weather, etc.
- Marketing expense: There are many ways to advertise your condo rental. It’s a good idea to find out what costs will be before you purchase. (Most management companies do this for you, it’s part of the 25% they are charging you to rent it out) Pro-tip. You can advertise your condo/rental in our Facebook group for a nominal charge. The audience is mostly tourists looking for recommendations, tips, and vacation rental reviews from other travelers. Get details.
Addition expenses: Utilities (if not included in the HOA) this includes such things as electric, cable/tv, etc..
This could be a very long list. You will have to evaluate the cost versus the benefits when it comes to features. Get as many as you can keeping in mind your budget and potential extra costs.
Here are a few things to consider:
- Location, Location, Location.
- How close is your property to the beach? The closer, the easier it will be to keep it rented. A lot of people want beachfront. But don’t be disheartened. There are plenty of people who want a beach vacation but cannot afford to stay right on the sand.
- How close are restaurants, grocery stores, onsite gym or weight room, and entertainment/activities?
- Hot tubs, heated pools, playgrounds, outdoor activities, boat docks, garages, parking spaces.
- Location, Location, Location.
- How much income can you expect to make?
There are so many variables that go into this equation. It is imperative that you work with a professional who understands the market and can help you with the details. If the unit is already in a rental program, you have a baseline to start with. If it is not currently in a rental program, your realtor or management company can run the numbers for you and provide you with an estimate. Don’t guess when it comes to these numbers. It could be the difference between being successful or not.
The following is for entertainment purposes only and is not meant to be used for investing advice.
We bought a VR in a beachfront condo property in Destin, FL in July, 2015. It’s in Miramar Beach, to be specific. I have 2 good years’ worth of data. I won’t give exact numbers, but you can figure it out.
- We put 25% down. Got a 30-year mortgage at 3.5%.
- It’s a two-bedroom, 2 bath unit on the 7th floor with a great beachfront view.
- Closed at just under $400k.
- Gross rental revenue for 2016: $43k.
- Gross for 2017: $45k.
- We use the on-site property management service, which charges 25% of gross rentals
- HOA fees are $649/month
If you do all that math, you’ll figure out that we come out of pocket a little bit (~$1,500-2,000/year). And actually, there was a special assessment this year that set us back another $4k.
All that said, it’s not as bad as it seems.
We use the condo ourselves for 2-3 weeks per year. That’s a few thousand dollars we don’t have to pay to rent a place. We only use it during the off-season and random weeks or weekends when it isn’t rented.
We have a 1-year old, and will have at least 1 or 2 more kids. We plan to own this place for 20+ years and bring the family here.
I’ve run the model out for that long (20 years). At the 10-year mark — if we were to sell — then the profits would average back out to around 7% year over year. That isn’t great, but it isn’t horrible. This is all assuming around 1.5% appreciation.
If we do hold onto it for 20+ years, then that number grows a lot.
Another thing to consider is the 25% property/rental management fee. If we did this all ourselves, then we’d clear $10,000/year. But, we live in Atlanta. Managing a beach rental from 5 hours away would be an absolute nightmare. The last thing I want to deal with every single Saturday during peak season is someone not happy with something, not able to get the key code to work, the unit isn’t clean, etc. There are other third-party management companies in the area that take smaller fees (20%, I think). But our rental program is on site. It’s completely seamless for guests, and the office handles everything. It’s basically like a hotel where people own the rooms.
Along with the other fees mentioned, there are a bunch of other small fees that come with a VR:
- Broken dishes/appliances/toilets/whatever
- Annual fees for certain items maintained by the that are NOT part of the HOA dues (cable boxes, fitness center, etc.)
- Replacing furniture as it wears out
So, I guess my final take is that a VR in a popular beach area is only a good investment if you’re willing to hold onto it for a long time. We went in with this mindset, so I’m pretty happy with how things are going so far. In fact, I’m typing this from our balcony right now.
You can get properties across the street from the beach or a few blocks away for a little cheaper. I’m not sure if they rent as well, but I’ve seen some gross rental numbers that are pretty close to ours. So, properties just off the beach may cashflow better, which is something to consider. You also may go to less touristy areas, but I can’t say if they will gross as much.
I think I covered most everything. Sorry if anyone was looking for a wonderful story of quick riches, but I’d rather be honest about our specific case. I’m sure every market is a little different.
Original post can be found here.