Buying a Vacation Rental Property as an Investment

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ny_knicks
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Buying a Vacation Rental Property as an Investment

Post by ny_knicks » Sun May 20, 2018 9:53 pm

Anyone ever invested in a vacation rental property? If you have did it work out?

Parents live in a vacation destination year round. Oceanfront houses go for $500K-$750k and can generate between $45k-$65k in rental income depending on size/location between May through September. Judging from the realty websites almost every house is completely booked up over the course of a summer.

Parents would go 50/50 on the downpayment with me (20%). They would basically live next door and could do all marketing/logistics for renting. Seems we could service the annual expenses and still come out ahead. Would redirect all positive income into paying down mortgage/buffer account for repairs. Neither would need to cash out anytime in the foreseeable future. Idea would be 10 years from now the house is paid off, hopefully it has gone up in equity value and we have something spitting off $50k a year in income. All for our initial $80k investment.

Tell me I am crazy and these things never work out. I brought it up with them as a joke but after looking into it more it seemed slightly viable.

Quickfoot
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Re: Buying a Vacation Rental Property as an Investment

Post by Quickfoot » Sun May 20, 2018 10:17 pm

How much of your wealth would it take to make the investment? Investment properties tend to do very poorly in recessions because people eliminate unnecessary expenses. This means your income generation goes away and at the same time your ability to sell the property evaporates too because no one is interested in buying a vacation property. Vacationers are also very fickle, city ordinance changes, climate change, and many other unanticipated things can drastically affect demand.

IF you do this make sure you have sufficient reserves to make the mortgage with little to no income for at least a year OR be willing to walk away from the property and allow the bank to foreclose. Only commit money you can afford to lose. Expect expenses to be at least 25% higher than what you estimate.

In general research has found vacation properties are BAD for the owner's finances and people on average do not wind up better off financially because of vacation rentals (a lot of that research has been done by realtor organizations which are the very people that would love to sell you a vacation home).

Don't make a decision out of excitement, take 90 days and think about it. Do research, find out what people are really earning, talk to rental companies that book the properties. Put together a business plan and plan for lower revenue and higher expenses (what happens if you only get 75% of the revenue you expect and your expenses are 25% higher? Not an uncommon situation).
Last edited by Quickfoot on Sun May 20, 2018 10:27 pm, edited 1 time in total.

WanderingDoc
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Re: Buying a Vacation Rental Property as an Investment

Post by WanderingDoc » Sun May 20, 2018 10:26 pm

A few of my friends made and continue to make a killing off of vacation/Air BnB rentals in desirable vacation destinations. They gross over $75K in annual rents on a single property. This requires a significant amount of time and/or systems compared to a regular rental. I like relatively passive real estate investing. Where is the property located? Usually I don't recommend reading books to invest in real estate, but this is one niche where I would suggest to pick up a book or read a blog specific to vacation rentals.
ny_knicks wrote:
Sun May 20, 2018 9:53 pm
Anyone ever invested in a vacation rental property? If you have did it work out?

Parents live in a vacation destination year round. Oceanfront houses go for $500K-$750k and can generate between $45k-$65k in rental income depending on size/location between May through September. Judging from the realty websites almost every house is completely booked up over the course of a summer.

Parents would go 50/50 on the downpayment with me (20%). They would basically live next door and could do all marketing/logistics for renting. Seems we could service the annual expenses and still come out ahead. Would redirect all positive income into paying down mortgage/buffer account for repairs. Neither would need to cash out anytime in the foreseeable future. Idea would be 10 years from now the house is paid off, hopefully it has gone up in equity value and we have something spitting off $50k a year in income. All for our initial $80k investment.

Tell me I am crazy and these things never work out. I brought it up with them as a joke but after looking into it more it seemed slightly viable.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

WanderingDoc
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Re: Buying a Vacation Rental Property as an Investment

Post by WanderingDoc » Sun May 20, 2018 10:35 pm

The bolded below is a common misconception, and intellectually dishonest. Rental properties do better in recessions. Housing is a basic need. During a recession, while SUVs/doggy day care/lattes etc. go out the window, families double down and focus on the essentials, ie. housing and food.

Do you honestly think, during a recession millions of people die or go live on the streets? This is a myth that someone said and is regurgitated over and over by people with no experience. My mentors and colleagues in real estate actually noticed a decrease in vacancies during 2006-2009. Many areas saw rent growth as well. Sure, some people invested in A class/luxury assets didn't do well because people moved to a slightly smaller or "B class" asset, but the best assets for investment are B/B- to begin with. "A class" assets are for investors with lots of cash and experience who don't mind speculating on appreciation.

Rentals do better in recessions. Many people who could buy, or wanted to by, are now scared and RENT. Maslow's heirarchy of needs comes to mind. I am actually praying for a real estate recession, as I would be able to pick up properties below their retail inherent value, and capitalize on the human basic need for housing. Shelter will always be needed.
Quickfoot wrote:
Sun May 20, 2018 10:17 pm
How much of your wealth would it take to make the investment? Investment properties tend to do very poorly in recessions because people eliminate unnecessary expenses. This means your income generation goes away and at the same time your ability to sell the property evaporates too because no one is interested in buying a vacation property. Vacationers are also very fickle, city ordinance changes, climate change, and many other unanticipated things can drastically affect demand.

IF you do this make sure you have sufficient reserves to make the mortgage with little to no income for at least a year OR be willing to walk away from the property and allow the bank to foreclose. Only commit money you can afford to lose. Expect expenses to be at least 25% higher than what you estimate.

In general research has found vacation properties are BAD for the owner's finances and people on average do not wind up better off financially because of vacation rentals (a lot of that research has been done by realtor organizations which are the very people that would love to sell you a vacation home).

Going in the middle of your price range results in a property value of 625K which means you would invest 62.5K as the down payment.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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Watty
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Re: Buying a Vacation Rental Property as an Investment

Post by Watty » Sun May 20, 2018 10:39 pm

Your parents would be doing a lot of the work and could not schedule any travel during the summer months. They will also probably need to be there when people arrive so they will have to work their schedules around that.

It would be good to price it as if you were using a property management company and then your parents could decide if they really want to do that much work for free.

BigLaw Survivor
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Re: Buying a Vacation Rental Property as an Investment

Post by BigLaw Survivor » Sun May 20, 2018 10:56 pm

WanderingDoc wrote:
Sun May 20, 2018 10:35 pm
The bolded below is a common misconception, and intellectually dishonest. Rental properties do better in recessions. Housing is a basic need. During a recession, while SUVs/doggy day care/lattes etc. go out the window, families double down and focus on the essentials, ie. housing and food.

Do you honestly think, during a recession millions of people die or go live on the streets? This is a myth that someone said and is regurgitated over and over by people with no experience. My mentors and colleagues in real estate actually noticed a decrease in vacancies during 2006-2009. Many areas saw rent growth as well. Sure, some people invested in A class/luxury assets didn't do well because people moved to a slightly smaller or "B class" asset, but the best assets for investment are B/B- to begin with. "A class" assets are for investors with lots of cash and experience who don't mind speculating on appreciation.

Rentals do better in recessions. Many people who could buy, or wanted to by, are now scared and RENT. Maslow's heirarchy of needs comes to mind. I am actually praying for a real estate recession, as I would be able to pick up properties below their retail inherent value, and capitalize on the human basic need for housing. Shelter will always be needed.
Quickfoot wrote:
Sun May 20, 2018 10:17 pm
How much of your wealth would it take to make the investment? Investment properties tend to do very poorly in recessions because people eliminate unnecessary expenses. This means your income generation goes away and at the same time your ability to sell the property evaporates too because no one is interested in buying a vacation property. Vacationers are also very fickle, city ordinance changes, climate change, and many other unanticipated things can drastically affect demand.

IF you do this make sure you have sufficient reserves to make the mortgage with little to no income for at least a year OR be willing to walk away from the property and allow the bank to foreclose. Only commit money you can afford to lose. Expect expenses to be at least 25% higher than what you estimate.

In general research has found vacation properties are BAD for the owner's finances and people on average do not wind up better off financially because of vacation rentals (a lot of that research has been done by realtor organizations which are the very people that would love to sell you a vacation home).

Going in the middle of your price range results in a property value of 625K which means you would invest 62.5K as the down payment.
You are leaving out a major factor in your analysis. The OP isn't talking about investing in rental properties generally, he is talking about VACATION rental properties specifically. While it may be true that rentals go up generally during recessions, the value of vacation rental properties in areas with lots of second homes and vacation rental properties do NOT. To the contrary, their values tend to get hit the most and take the longest to boomerang.
A prime example is the Outer Banks of North Carolina, where home values plummeted during the great recession and still haven't come close to recovering. Sure, housing is a "basic need," as you suggest, but second homes and vacation homes are not.

I bought a beach rental property in 2004 for $875k, sold it in 2013 for $525k, and it's now on the market again at an ASKING price of $499k. Biggest financial mistake I ever made by far. What I also learned through the process is that costs are always higher than you anticipate and that wear on tear on fully occupied rental properties is just incredible. The whole experience was a huge headache. Never, ever again.

BigLaw Survivor
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Re: Buying a Vacation Rental Property as an Investment

Post by BigLaw Survivor » Sun May 20, 2018 11:00 pm

Quickfoot wrote:
Sun May 20, 2018 10:17 pm
How much of your wealth would it take to make the investment? Investment properties tend to do very poorly in recessions because people eliminate unnecessary expenses. This means your income generation goes away and at the same time your ability to sell the property evaporates too because no one is interested in buying a vacation property. Vacationers are also very fickle, city ordinance changes, climate change, and many other unanticipated things can drastically affect demand.

IF you do this make sure you have sufficient reserves to make the mortgage with little to no income for at least a year OR be willing to walk away from the property and allow the bank to foreclose. Only commit money you can afford to lose. Expect expenses to be at least 25% higher than what you estimate.

In general research has found vacation properties are BAD for the owner's finances and people on average do not wind up better off financially because of vacation rentals (a lot of that research has been done by realtor organizations which are the very people that would love to sell you a vacation home).

Don't make a decision out of excitement, take 90 days and think about it. Do research, find out what people are really earning, talk to rental companies that book the properties. Put together a business plan and plan for lower revenue and higher expenses (what happens if you only get 75% of the revenue you expect and your expenses are 25% higher? Not an uncommon situation).
SPOT ON advice in every way, based on my personal experience.

gotester2000
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Re: Buying a Vacation Rental Property as an Investment

Post by gotester2000 » Mon May 21, 2018 2:59 am

I would stay out away from VACATION rental properties - highly priced and not worth the ROI - plus management is a big headache. To manage, needs self effort or a professional agency.

mrgeeze
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Re: Buying a Vacation Rental Property as an Investment

Post by mrgeeze » Mon May 21, 2018 8:12 am

Owning any rental property is a JOB.
Owning a vacation rental property is more of a job

There is no free lunch here.

If you gross 10% of property cost per year you are very lucky.
With that you can just about afford to pay your mortgage (20 years, 25% down) after expenses.
You can't believe all the expenses you will have, especially if the property is oceanfront.

Given all the work you will do to earn that mortgage payment, you might not think it worth it.
If you sub it to a mgt firm, you will find it hard to make any real money.
They pretty much know your level of pain ($$$ wise) before you do.

We live at the beach. Our property (beachbox 1 back from the ocean) was in a rental program for 3 years.
The rental model looked great on paper.
Reality was much less rewarding.
We took it out of rental and moved in.

I would pass.

Quickfoot
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Re: Buying a Vacation Rental Property as an Investment

Post by Quickfoot » Mon May 21, 2018 8:46 am

WanderingDoc wrote:
Sun May 20, 2018 10:35 pm
The bolded below is a common misconception, and intellectually dishonest. Rental properties do better in recessions. Housing is a basic need. During a recession, while SUVs/doggy day care/lattes etc. go out the window, families double down and focus on the essentials, ie. housing and food.
As others mentioned I was specifically talking about vacation properties which as has been pointed out absolutely do NOT do well in recessions (indeed they tend to get foreclosed on). Rental properties actually don't necessarily do better either, in 2008-2009 a LOT of even multi-family rental properties were forclosed on and they are far more rececision resistant than single family rentals (which effectively provide almost no protection). As people with jobs lose their houses to foreclosures they tend to migrate to multi-family which conventional wisdom says makes them safer in downturns but is not always the case (it is only the case if people keep their jobs).

While housing is a basic need that doesn't necessarily mean people will rent, people that are displaced by large economic disruptions are likely to go live with family members instead because they unable to afford rent. In 2008-09 people didn't just lose purchased houses they also lost rented single family homes because they couldn't afford to make rent (the media just didn't cover it). The average American can't cover even a $400 unexpected expense so when they lose their job and can't immediately get a new one there is no "doubling down" they simply don't make the mortgage or rent. This is also why demand on food aid shoots through the roof, they don't have money for the "essentials" like food and housing.

Single family rentals provide very little recession resistance. Might you evict them and find a new renter that can pay? Absolutely but eviction incurs cost and takes time, tenants that are being evicted tend to trash properties and you are going to miss out on income and likely have to pay to make repairs. In a large recession demand for single family rentals isn't going to be very high (people aren't going to have the money for deposits or will hoard it out of fear and go multi-family OR go live with family instead).
Last edited by Quickfoot on Mon May 21, 2018 8:59 am, edited 4 times in total.

JoeRetire
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Re: Buying a Vacation Rental Property as an Investment

Post by JoeRetire » Mon May 21, 2018 8:54 am

ny_knicks wrote:
Sun May 20, 2018 9:53 pm
Tell me I am crazy and these things never work out. I brought it up with them as a joke but after looking into it more it seemed slightly viable.
I have a home in a beach community. Lots of folks do the same. Most find that it's more work than they anticipated, but they still like it. They seem to suggest that most of them ended up putting more money into the property (maintenance, repairs, improvements) than they expected.

Of course there is always risk. Risk of bad tenants. Risk of economic downturn. Risk of local environmental changes. etc.

Take special care that you understand all of the local ordinances, tax laws, flood insurance, liability insurance, etc. For example, in my community, you would be prohibited from using something like AirBnB.

(We bought our house during a "down" period in the market. The house was originally on the market for 42% more than we ended up paying. The market has since gone back up. We have been lucky so far. But we never intended to rent it out.)
Last edited by JoeRetire on Mon May 21, 2018 9:00 am, edited 1 time in total.

WhyNotUs
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Re: Buying a Vacation Rental Property as an Investment

Post by WhyNotUs » Mon May 21, 2018 8:59 am

ny_knicks wrote:
Sun May 20, 2018 9:53 pm
Anyone ever invested in a vacation rental property? If you have did it work out?

Yes, had a loser in HI and a winner in CO. The difference was largely timing, externalities, and going into the second one better informed.

Parents would go 50/50 on the downpayment with me (20%). They would basically live next door and could do all marketing/logistics for renting. Seems we could service the annual expenses and still come out ahead. Would redirect all positive income into paying down mortgage/buffer account for repairs. Neither would need to cash out anytime in the foreseeable future. Idea would be 10 years from now the house is paid off, hopefully it has gone up in equity value and we have something spitting off $50k a year in income. All for our initial $80k investment.
This may require more effort than your parents are expecting. I would build the financial model based on paying someone to perform these tasks in case they find it more than they want. If it can't work without your parents doing the work, then I would be skeptical.

Tell me I am crazy and these things never work out. I brought it up with them as a joke but after looking into it more it seemed slightly viable.
Sometimes it works out. Some locations with constrained supply can carry high vacation rental rates over the longer term. More often, that is not the case. Expenses are consistently underestimated, especially wear and tear. A comment from someone on a review site about old sheets, or chipped bowl and you are spending more money. People on vacation are a mixed bag, some take great care of the property while other feel like they are paying for destruction :shock:
Sharpen your pencil before you take the next step.
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JoeRetire
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Re: Buying a Vacation Rental Property as an Investment

Post by JoeRetire » Mon May 21, 2018 9:03 am

WhyNotUs wrote:
Mon May 21, 2018 8:59 am
People on vacation are a mixed bag, some take great care of the property while other feel like they are paying for destruction.
Very true.

Before buying our own beach home, we rented for about 20 years.

Most of the people who occupied the unit before us apparently were okay. But a few left the place in such disrepair that it was still being cleaned and repaired long after we arrived. Once, we had to go to a hotel for 1.5 days while the cleaners/owners "untrashed" the place. Very sad.

Cyp011
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Re: Buying a Vacation Rental Property as an Investment

Post by Cyp011 » Mon May 21, 2018 9:36 am

We have been looking at a beach area rental but really struggle with the 25% service fee for management companies. I’ve researched and since we would be an out of state owner it is hard to avoid.

Raabe34
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Re: Buying a Vacation Rental Property as an Investment

Post by Raabe34 » Mon May 21, 2018 9:43 am

WanderingDoc wrote:
Sun May 20, 2018 10:26 pm
A few of my friends made and continue to make a killing off of vacation/Air BnB rentals in desirable vacation destinations. They gross over $75K in annual rents on a single property. This requires a significant amount of time and/or systems compared to a regular rental. I like relatively passive real estate investing. Where is the property located? Usually I don't recommend reading books to invest in real estate, but this is one niche where I would suggest to pick up a book or read a blog specific to vacation rentals.
ny_knicks wrote:
Sun May 20, 2018 9:53 pm
Anyone ever invested in a vacation rental property? If you have did it work out?

Parents live in a vacation destination year round. Oceanfront houses go for $500K-$750k and can generate between $45k-$65k in rental income depending on size/location between May through September. Judging from the realty websites almost every house is completely booked up over the course of a summer.

Parents would go 50/50 on the downpayment with me (20%). They would basically live next door and could do all marketing/logistics for renting. Seems we could service the annual expenses and still come out ahead. Would redirect all positive income into paying down mortgage/buffer account for repairs. Neither would need to cash out anytime in the foreseeable future. Idea would be 10 years from now the house is paid off, hopefully it has gone up in equity value and we have something spitting off $50k a year in income. All for our initial $80k investment.

Tell me I am crazy and these things never work out. I brought it up with them as a joke but after looking into it more it seemed slightly viable.
I agree on liking the passivity and in my own mind I think about the vacation/airbnb as a true business not a passive real estate investment.

Rupert
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Re: Buying a Vacation Rental Property as an Investment

Post by Rupert » Mon May 21, 2018 9:50 am

Quickfoot wrote:
Sun May 20, 2018 10:17 pm

IF you do this make sure you have sufficient reserves to make the mortgage with little to no income for at least a year OR be willing to walk away from the property and allow the bank to foreclose. Only commit money you can afford to lose. Expect expenses to be at least 25% higher than what you estimate.

+1. Don't forget hurricanes. If a major hurricane hits the area, it may be years before you can rent the property out again. It takes time to re-build the local infrastructure so that you even have access to the property. Then you get in line with everyone else for insurance payouts and contractors to make needed repairs. I know people on the Florida panhandle who went bankrupt following Hurricane Ivan because they couldn't rent their properties for 2 years and couldn't make the mortgage payments without renters. (I was frankly stunned to learn during this time how many people don't realize that, yes, you do have to continue to make mortgage payments even when your property is uninhabitable). You can make money doing what you propose, but you need a very large emergency/reserve fund and a little bit of luck.

ddurrett896
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Re: Buying a Vacation Rental Property as an Investment

Post by ddurrett896 » Mon May 21, 2018 9:58 am

ny_knicks wrote:
Sun May 20, 2018 9:53 pm
Anyone ever invested in a vacation rental property? If you have did it work out?
The way I look at anything I purchase to rent or flip, I always ask myself "would I be happy if I was stuck with this?"

For example, when I bought my last boat book was around $15,000 and the guy fire sold it to be for $7,000. At the time, $7,000 was nothing to me and if I was stuck with the boat I wouldn't stress the $$$ being tied up.

If you purchased the rental property and could never get it rented and was solely used by you, would be still be happy? If yes, buy. If no, don't buy.

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Re: Buying a Vacation Rental Property as an Investment

Post by bloom2708 » Mon May 21, 2018 10:01 am

Check if rentals of less than 30 days are allowed in the area you are thinking of owning in.

Many locales do not allow short term rentals. Many vacation rentals are the week to 10 day variety and are not allowed.

Owners skirt this issue by saying they are friends or relatives, but some locals crack down on short term rentals.

I would treat it as a second job. Do your parents want a second job? or Job if they are retired?

Do a lot of up front checking and research.
Last edited by bloom2708 on Mon May 21, 2018 11:31 am, edited 1 time in total.
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Sandtrap
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Re: Buying a Vacation Rental Property as an Investment

Post by Sandtrap » Mon May 21, 2018 10:13 am

Lot's of excellent info already provided by others.

Some random thoughts:
Given CCR's and local code, etc, allow short term and other vacation rental type investments. . .

1. Purchase the R/E investment with the option of switching to long term standard rentals and make it as lucrative to do so.
2. Purchase in an area of high appreciative value so you are not entirely dependent on net annual CAP for positive overall gain. Ideally. . . even if rent was not collected for a year, the property would still have a positive ROI because of the high appreciation rate. (turning it into a potential "flipper" if you decide to sell and no longer rent).
3. Research AirBnB and VRBO, terms and expenses, as well as the expenses associated with high turnover. It is not as rosy as it may seem. Can be excellent. Just be aware.
4. As others have pointed out. In a down economy, luxuries are cut back. Be prepared to turn the vacation rental into long term residence rental. Thus, purchase the property with that in mind. Area is good for living and commuting to work, high demand, etc. And, a standard investment rentable unit criteria, 2 bdrm, 1-2 bath, low HOA fees, low or no mortgage, desireable area of town, etc, etc.
5. Finally, resist the allure of "easy money". There are no free rides. Renting, whether vacation, short term, or otherwise, is still landlording and rental property ownership with all that entails. And, renting, whether short or long, is still to a "tenant", with all that entails.

aloha
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NotWhoYouThink
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Re: Buying a Vacation Rental Property as an Investment

Post by NotWhoYouThink » Mon May 21, 2018 10:40 am

Please do this if it is right on the beach, I'd love to pay an exorbitant price to rent it for a week once every 3-4 years. We promise to be good guests and not trash the place. But we will call if the wifi doesn't work or if the pool needs to be cleaned or if there are rats in the garage.


After talking to friends who rent lake houses, I would never want to buy the home and rent it out. People can be really destructive, it would just depress me. Small example - at our church rummage sale every year we always sell all the flatware and kitchen tools to the lake house owners. Because the renters "clean up" after their meals by throwing away all that stuff. Huh????

It could work out, but will be more cost and work than you expect, and you'll learn some things about people you wish you didn't know. But every 3-4 years you'll get great guests like us and think this might turn out to be a breeze.

WanderingDoc
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Re: Buying a Vacation Rental Property as an Investment

Post by WanderingDoc » Mon May 21, 2018 10:49 am

Quickfoot wrote:
Mon May 21, 2018 8:46 am
WanderingDoc wrote:
Sun May 20, 2018 10:35 pm
The bolded below is a common misconception, and intellectually dishonest. Rental properties do better in recessions. Housing is a basic need. During a recession, while SUVs/doggy day care/lattes etc. go out the window, families double down and focus on the essentials, ie. housing and food.
As others mentioned I was specifically talking about vacation properties which as has been pointed out absolutely do NOT do well in recessions (indeed they tend to get foreclosed on). Rental properties actually don't necessarily do better either, in 2008-2009 a LOT of even multi-family rental properties were forclosed on and they are far more rececision resistant than single family rentals (which effectively provide almost no protection). As people with jobs lose their houses to foreclosures they tend to migrate to multi-family which conventional wisdom says makes them safer in downturns but is not always the case (it is only the case if people keep their jobs).

While housing is a basic need that doesn't necessarily mean people will rent, people that are displaced by large economic disruptions are likely to go live with family members instead because they unable to afford rent. In 2008-09 people didn't just lose purchased houses they also lost rented single family homes because they couldn't afford to make rent (the media just didn't cover it). The average American can't cover even a $400 unexpected expense so when they lose their job and can't immediately get a new one there is no "doubling down" they simply don't make the mortgage or rent. This is also why demand on food aid shoots through the roof, they don't have money for the "essentials" like food and housing.

Single family rentals provide very little recession resistance. Might you evict them and find a new renter that can pay? Absolutely but eviction incurs cost and takes time, tenants that are being evicted tend to trash properties and you are going to miss out on income and likely have to pay to make repairs. In a large recession demand for single family rentals isn't going to be very high (people aren't going to have the money for deposits or will hoard it out of fear and go multi-family OR go live with family instead).
I agree with you about vacation rentals in a recession. I wouldn't recommend vacation rentals to almost everyone, esp. someone without at least 10 years investing in real estate.
Read your statement again. "Investment properties don't do well in recessions". If you were talking about vacation rentals, say "vacation rentals". A very small minority go to live with family. And there absolutely is "doubling down". When times are tough, the luxuries go away but housing does not.
Talk to real estate investors, not those dabbling in real estate. Big difference. The former prosper through recessions. I have spoken with many. My mentor and colleagues saw improved vacancies, and stable or increasing rents. Don't listen to CNN/Fox/internet, talk to actual investors. Thats why we joyingly plot and pray for another real estate correction/recession.
Notice how real estate noninvestors say a recession is bad for real estate.. while those who understand the game literally cannot wait for another one! Mindset.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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Pajamas
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Re: Buying a Vacation Rental Property as an Investment

Post by Pajamas » Mon May 21, 2018 11:44 am

ny_knicks wrote:
Sun May 20, 2018 9:53 pm
Anyone ever invested in a vacation rental property? If you have did it work out?

Parents live in a vacation destination year round. Oceanfront houses go for $500K-$750k and can generate between $45k-$65k in rental income depending on size/location between May through September. Judging from the realty websites almost every house is completely booked up over the course of a summer.

Parents would go 50/50 on the downpayment with me (20%). They would basically live next door and could do all marketing/logistics for renting. Seems we could service the annual expenses and still come out ahead. Would redirect all positive income into paying down mortgage/buffer account for repairs. Neither would need to cash out anytime in the foreseeable future. Idea would be 10 years from now the house is paid off, hopefully it has gone up in equity value and we have something spitting off $50k a year in income. All for our initial $80k investment.

Tell me I am crazy and these things never work out. I brought it up with them as a joke but after looking into it more it seemed slightly viable.
So your parents would be actively running a vacation rental business and you would be passively investing in it? Do your parents really understand the hassles and time involved even when everything is going well? There are very good reasons why the local property management firms charge as much as they do to handle vacation rentals.
BigLaw Survivor wrote:
Sun May 20, 2018 10:56 pm
You are leaving out a major factor in your analysis. The OP isn't talking about investing in rental properties generally, he is talking about VACATION rental properties specifically. While it may be true that rentals go up generally during recessions, the value of vacation rental properties in areas with lots of second homes and vacation rental properties do NOT. To the contrary, their values tend to get hit the most and take the longest to boomerang.

A prime example is the Outer Banks of North Carolina, where home values plummeted during the great recession and still haven't come close to recovering. Sure, housing is a "basic need," as you suggest, but second homes and vacation homes are not.

I bought a beach rental property in 2004 for $875k, sold it in 2013 for $525k, and it's now on the market again at an ASKING price of $499k. Biggest financial mistake I ever made by far. What I also learned through the process is that costs are always higher than you anticipate and that wear on tear on fully occupied rental properties is just incredible. The whole experience was a huge headache. Never, ever again.
The real estate listing websites are littered with vacation properties that have never recovered their value since the housing crash. It's interesting to see the listings languish while the prices get reduced over time. It's not strictly vacation properties in certain instances, it's entire housing markets at vacation destinations such as Las Vegas and Southeast Florida.

JoeRetire
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Re: Buying a Vacation Rental Property as an Investment

Post by JoeRetire » Mon May 21, 2018 12:15 pm

ny_knicks wrote:
Sun May 20, 2018 9:53 pm
Parents would go 50/50 on the downpayment with me (20%). They would basically live next door and could do all marketing/logistics for renting. Seems we could service the annual expenses and still come out ahead.
Since they or a service are doing all the work, why do your parents need you in this deal?

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Re: Buying a Vacation Rental Property as an Investment

Post by Prudence » Mon May 21, 2018 1:37 pm

This is a very timely post. My daughter wants us to partner with her on buying a vacation house which she (and us) would use for occasional getaways and vacations and rent out for short term rentals. So, maybe she would rent it out for 60 or 70 days a year (probably in the summer) or whatever the market would bear. Is this essentially the same thing as the OP and should be avoided for all of the reasons mentioned in the thread? Or is it different because I think her main goal is to have a family vacation home and generate as much income as possible to help pay for it?

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Re: Buying a Vacation Rental Property as an Investment

Post by bungalow10 » Mon May 21, 2018 1:50 pm

Every new person I seem to meet these days is buying up vacation rental properties. Most have appreciated more than the rest of the market in recent years and they are seen as a "sure thing" from investment standpoints - which is a clue that we are at the top of the cycle.

I met a couple this weekend that could barely afford to buy a house two years ago and now has TWO VRBO properties they are closing on this month and in contract to build a third in a couple months.
An elephant for a dime is only a good deal if you need an elephant and have a dime.

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Re: Buying a Vacation Rental Property as an Investment

Post by psteinx » Mon May 21, 2018 1:55 pm

There are a lot of tasks associated with short term vacation rentals. Among them are:
A) Marketing the property and handling reservations
B) Handling guest arrivals and checkouts
C) Routine cleaning
D) Routine landscaping (lawnmowing if there is a lawn).
E) Other routine maintenance (Pool? Opening/closing at beginning/end of season, etc.)
F) Irregular maintenance (i.e. something breaks). If property is oceanside, that implies a lot of salt in the air, which, IIUC, is pretty rough on various things.
G) Repairing interior damage that occurs in general, but is likely to be higher due to short term rentals and oceanside location. i.e. Just about everything inside will wear out fairly quickly, and you should have a system for regular evaluation and assessment. I don't necessarily mean something that breaks, but rather just straightforward wear and loss on sheets, cushions, mattresses, decor items, silverware, etc.
H) Dealing with rare weather events - floods, hurricanes, etc.
I) Accounting and tax issues
J) Dealing with the occasional problem tenant
K) ???

So, how many of the above are you or your parents going to undertake, and how many would be contracted out? If there's a lot of contracting, who finds and manages the hired help? How will the time spent on these tasks and/or management be accounted for in the split of any profits (or losses)?

Note, my direct experience with near-ocean rentals is limited to being a customer, not a landlord (though we have some in-laws who've done it). It seems like it would be a rather labor intensive endeavour.

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Re: Buying a Vacation Rental Property as an Investment

Post by Pajamas » Mon May 21, 2018 1:55 pm

Prudence wrote:
Mon May 21, 2018 1:37 pm
This is a very timely post. My daughter wants us to partner with her on buying a vacation house which she (and us) would use for occasional getaways and vacations and rent out for short term rentals. So, maybe she would rent it out for 60 or 70 days a year (probably in the summer) or whatever the market would bear. Is this essentially the same thing as the OP and should be avoided for all of the reasons mentioned in the thread? Or is it different because I think her main goal is to have a family vacation home and generate as much income as possible to help pay for it?
It seems different to me for two main reasons:

Your daughter wants to buy a vacation house for her own and your personal use AND as a rental property.
You seem to imply that SHE would be doing the work involved in managing a rental rather than YOU doing all the work.

In this situation, I would be inclined to think of it as a personal vacation property with the possibility of an occasional rental but wouldn't plan on renting it in making a decision about whether or not to buy a place.
JoeRetire wrote:
Mon May 21, 2018 12:15 pm
ny_knicks wrote:
Sun May 20, 2018 9:53 pm
Parents would go 50/50 on the downpayment with me (20%). They would basically live next door and could do all marketing/logistics for renting. Seems we could service the annual expenses and still come out ahead.
Since they or a service are doing all the work, why do your parents need you in this deal?
Seems like it is his idea. His parents probably don't need him involved in order to do it and probably wouldn't even consider it if he hadn't asked them about it. I can see this situation serving as the basis for a comic strip, sitcom, or comedy film.

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Re: Buying a Vacation Rental Property as an Investment

Post by dknightd » Mon May 21, 2018 2:14 pm

Watty wrote:
Sun May 20, 2018 10:39 pm
Your parents would be doing a lot of the work and could not schedule any travel during the summer months. They will also probably need to be there when people arrive so they will have to work their schedules around that.

It would be good to price it as if you were using a property management company and then your parents could decide if they really want to do that much work for free.
This! I would not consider it unless you wanted to move in next to your parents, as your retirement home, assuming they are still alive

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Re: Buying a Vacation Rental Property as an Investment

Post by dknightd » Mon May 21, 2018 2:17 pm

Pajamas wrote:
Mon May 21, 2018 1:55 pm

Seems like it is his idea. His parents probably don't need him involved in order to do it and probably wouldn't even consider it if he hadn't asked them about it. I can see this situation serving as the basis for a comic strip, sitcom, or comedy film.
Me too. It could make a great comedy film.
Wait, I don't get to use the property during prime vacation times ?!?!?!?

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Re: Buying a Vacation Rental Property as an Investment

Post by JoeRetire » Mon May 21, 2018 2:29 pm

Pajamas wrote:
Mon May 21, 2018 1:55 pm
Seems like it is his idea. His parents probably don't need him involved in order to do it and probably wouldn't even consider it if he hadn't asked them about it. I can see this situation serving as the basis for a comic strip, sitcom, or comedy film.
It's fun to be "the idea man"!

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Re: Buying a Vacation Rental Property as an Investment

Post by islandguy63 » Mon May 21, 2018 2:48 pm

My wife and I own and rent two beachfront condos in SWFL. Much of what has been posted regarding the amount of work that goes into managing and maintaining the properties is true. The key is to do your research. Know the market in terms of what is a good value to purchase a property, but always back into the value using conservative assumptions on potential rental revenue and costs. Also, do research on realistic expectations of rental income potential and then compare that against purchase price + improvements and then of course, operating costs.

It took us over 3 years of evaluating properties before we were able to find ones that offered decent returns. We did make a few offers along the way, but they were low offers based on what our analysis told us were supportable purchase prices.

Bottom line: vacation rental properties can be lucrative: we make over a 12% cap rate and our property values are up over 20% in last 3 years...

But, before getting into vacation rental property investment:
1. Know the market
2. Back into property value using conservative operating profit assumptions
3. Buy where you live (we live where our properties are) so you can tend to and manage the property
4. Be prepared to work on managing the property

On #4, we use mainly VRBO and spend time managing reservations, positioning the properties favorably using online prominence tactics like photos, key words, always asking tenants to leave 5 star reviews. We try to meet all of our clients to make sure they are happy and satisfied, etc. We are realtors, so we also feel them out to see if they have interest in purchasing in the area.

We enjoy it, love the properties and the cash flow, plus we love meeting the people.

Hope this helps

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Re: Buying a Vacation Rental Property as an Investment

Post by SouthernCPA » Mon May 21, 2018 3:34 pm

When you factor in 25% management fees for local property managers, ever increasing VRBO website listing fees, higher cleaning fees due to short tenant lives of vacation properties, etc I just believe you can find much better and more passive returns in other sectors of real estate if you want RE exposure.

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Re: Buying a Vacation Rental Property as an Investment

Post by Carefreeap » Mon May 21, 2018 4:19 pm

Prudence wrote:
Mon May 21, 2018 1:37 pm
This is a very timely post. My daughter wants us to partner with her on buying a vacation house which she (and us) would use for occasional getaways and vacations and rent out for short term rentals. So, maybe she would rent it out for 60 or 70 days a year (probably in the summer) or whatever the market would bear. Is this essentially the same thing as the OP and should be avoided for all of the reasons mentioned in the thread? Or is it different because I think her main goal is to have a family vacation home and generate as much income as possible to help pay for it?
y
Equal in that both "children" are asking their parents to invest in an expensive scheme they can't afford to do on their own and have no experience doing.

People get excited about the daily rental fees without understanding that about half of that goes for various fees. Vacancy rates are high mid-week and off peak times of the year. And people don't care about your utility bills. They will leave lights on all the time and let the heater go while the windows are open because they are paying premium daily rates. And because you must be rich since you can afford a vacation home. :oops:

I'm writing this post from our vacation rental property. We are now in our 16th year of vacation rental ownership. We have no loan on the property and we're lucky if the expenses are covered by the rents. We went in with our eyes open and did not expect to make money. We wanted to keep FIL's home in the Southern California mountains because we love the town and it is about two hours away from friends and family.

From a financial point of view, it makes no sense. We would have been better off selling the property and investing the proceeds the Boglehead way and spend the dividends on vacations in other location. But we love the home (it always feels like I'm headed to adult summer camp) and we're happy with our decision and grateful we can afford it.

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Re: Buying a Vacation Rental Property as an Investment

Post by dknightd » Mon May 21, 2018 4:26 pm

Carefreeap wrote:
Mon May 21, 2018 4:19 pm
we love the home (it always feels like I'm headed to adult summer camp) and we're happy with our decision and grateful we can afford it.
If you can smile and be happy - it is a good thing :)

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Re: Buying a Vacation Rental Property as an Investment

Post by Carefreeap » Mon May 21, 2018 4:31 pm

WanderingDoc wrote:
Mon May 21, 2018 10:49 am
Quickfoot wrote:
Mon May 21, 2018 8:46 am
WanderingDoc wrote:
Sun May 20, 2018 10:35 pm
The bolded below is a common misconception, and intellectually dishonest. Rental properties do better in recessions. Housing is a basic need. During a recession, while SUVs/doggy day care/lattes etc. go out the window, families double down and focus on the essentials, ie. housing and food.
As others mentioned I was specifically talking about vacation properties which as has been pointed out absolutely do NOT do well in recessions (indeed they tend to get foreclosed on). Rental properties actually don't necessarily do better either, in 2008-2009 a LOT of even multi-family rental properties were forclosed on and they are far more rececision resistant than single family rentals (which effectively provide almost no protection). As people with jobs lose their houses to foreclosures they tend to migrate to multi-family which conventional wisdom says makes them safer in downturns but is not always the case (it is only the case if people keep their jobs).

While housing is a basic need that doesn't necessarily mean people will rent, people that are displaced by large economic disruptions are likely to go live with family members instead because they unable to afford rent. In 2008-09 people didn't just lose purchased houses they also lost rented single family homes because they couldn't afford to make rent (the media just didn't cover it). The average American can't cover even a $400 unexpected expense so when they lose their job and can't immediately get a new one there is no "doubling down" they simply don't make the mortgage or rent. This is also why demand on food aid shoots through the roof, they don't have money for the "essentials" like food and housing.

Single family rentals provide very little recession resistance. Might you evict them and find a new renter that can pay? Absolutely but eviction incurs cost and takes time, tenants that are being evicted tend to trash properties and you are going to miss out on income and likely have to pay to make repairs. In a large recession demand for single family rentals isn't going to be very high (people aren't going to have the money for deposits or will hoard it out of fear and go multi-family OR go live with family instead).
I agree with you about vacation rentals in a recession. I wouldn't recommend vacation rentals to almost everyone, esp. someone without at least 10 years investing in real estate.
Read your statement again. "Investment properties don't do well in recessions". If you were talking about vacation rentals, say "vacation rentals". A very small minority go to live with family. And there absolutely is "doubling down". When times are tough, the luxuries go away but housing does not.
Talk to real estate investors, not those dabbling in real estate. Big difference. The former prosper through recessions. I have spoken with many. My mentor and colleagues saw improved vacancies, and stable or increasing rents. Don't listen to CNN/Fox/internet, talk to actual investors. Thats why we joyingly plot and pray for another real estate correction/recession.
Notice how real estate noninvestors say a recession is bad for real estate.. while those who understand the game literally cannot wait for another one! Mindset.
How many properties do you own and have you gone through a recession with them?

I ask because what happens in recessions is very area specific. In the greater Phoenix area not only did we see housing prices plummet (some by 50%!) but rental rates also dropped by about 25% from 2005. A lot of jobs connected with real estate and growth disappeared so many people relocated out of the area. Adding to the mess were investors scooping up foreclosures that were previously owner-occupied and flooding the market with rentals. I don't think we saw recovery on the rental side until 2013. And the rent on my house hasn't changed in the last 3 years because so many people are buying. At least the value is finally back up to 2007. We're in a really good area. Some places STILL haven't recovered. And they are building more! It will be interesting to see what happens with the next cycle. I understand the local economy is a little more diversified than in 2007 but one never really knows the downside risk until the fit hits the shan.

WhiteMaxima
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Re: Buying a Vacation Rental Property as an Investment

Post by WhiteMaxima » Mon May 21, 2018 4:38 pm

I see it's more of liability than an investment. Why not invest in Reits?

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Re: Buying a Vacation Rental Property as an Investment

Post by Hockey10 » Mon May 21, 2018 4:44 pm

islandguy63 wrote:
Mon May 21, 2018 2:48 pm
My wife and I own and rent two beachfront condos in SWFL. Much of what has been posted regarding the amount of work that goes into managing and maintaining the properties is true. The key is to do your research. Know the market in terms of what is a good value to purchase a property, but always back into the value using conservative assumptions on potential rental revenue and costs. Also, do research on realistic expectations of rental income potential and then compare that against purchase price + improvements and then of course, operating costs.

It took us over 3 years of evaluating properties before we were able to find ones that offered decent returns. We did make a few offers along the way, but they were low offers based on what our analysis told us were supportable purchase prices.

Bottom line: vacation rental properties can be lucrative: we make over a 12% cap rate and our property values are up over 20% in last 3 years...

But, before getting into vacation rental property investment:
1. Know the market
2. Back into property value using conservative operating profit assumptions
3. Buy where you live (we live where our properties are) so you can tend to and manage the property
4. Be prepared to work on managing the property

On #4, we use mainly VRBO and spend time managing reservations, positioning the properties favorably using online prominence tactics like photos, key words, always asking tenants to leave 5 star reviews. We try to meet all of our clients to make sure they are happy and satisfied, etc. We are realtors, so we also feel them out to see if they have interest in purchasing in the area.

We enjoy it, love the properties and the cash flow, plus we love meeting the people.

Hope this helps
Islandguy - this is a great first post! Welcome to Bogleheads.

OP - be very careful in how you count the expected rental income. Depending on what location you are talking about, the rental season may be a lot shorter than you think. Some areas in the mid-Atlantic for example have a peak season of only 6 weeks - from early July to mid-August.

Carefreeap
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Re: Buying a Vacation Rental Property as an Investment

Post by Carefreeap » Mon May 21, 2018 5:19 pm

islandguy63 wrote:
Mon May 21, 2018 2:48 pm
My wife and I own and rent two beachfront condos in SWFL. Much of what has been posted regarding the amount of work that goes into managing and maintaining the properties is true. The key is to do your research. Know the market in terms of what is a good value to purchase a property, but always back into the value using conservative assumptions on potential rental revenue and costs. Also, do research on realistic expectations of rental income potential and then compare that against purchase price + improvements and then of course, operating costs.

It took us over 3 years of evaluating properties before we were able to find ones that offered decent returns. We did make a few offers along the way, but they were low offers based on what our analysis told us were supportable purchase prices.

Bottom line: vacation rental properties can be lucrative: we make over a 12% cap rate and our property values are up over 20% in last 3 years...

But, before getting into vacation rental property investment:
1. Know the market
2. Back into property value using conservative operating profit assumptions
3. Buy where you live (we live where our properties are) so you can tend to and manage the property
4. Be prepared to work on managing the property

On #4, we use mainly VRBO and spend time managing reservations, positioning the properties favorably using online prominence tactics like photos, key words, always asking tenants to leave 5 star reviews. We try to meet all of our clients to make sure they are happy and satisfied, etc. We are realtors, so we also feel them out to see if they have interest in purchasing in the area.

We enjoy it, love the properties and the cash flow, plus we love meeting the people.

Hope this helps
Your cap rate looks good because you're not charging for your time. In addition I'm assuming there's also some handyman labor in there too.

How is laundry/cleaning handled? Do you do it or do you contract it out with an outside service?

Over the years we've had a couple of managers who were real estate agents. I always figured that the vacation rental part of their business was kind of a loss-leader in order to get buyers and later sellers when folks got tired of dealing with the second home. My FIL observed that the typical vacation rental owner lasted about five years before they got bored going to the same place all the time and threw in the towel.

I think it's great that you enjoy it. We recently stayed at a couple of VRBOs in New Zealand that were either in or next door to their main residence. They, like you, really enjoyed meeting people and the ability to have a home-based business. :beer

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Re: Buying a Vacation Rental Property as an Investment

Post by LarryAllen » Mon May 21, 2018 5:50 pm

WanderingDoc wrote:
Sun May 20, 2018 10:35 pm
The bolded below is a common misconception, and intellectually dishonest. Rental properties do better in recessions. Housing is a basic need. During a recession, while SUVs/doggy day care/lattes etc. go out the window, families double down and focus on the essentials, ie. housing and food.

Do you honestly think, during a recession millions of people die or go live on the streets? This is a myth that someone said and is regurgitated over and over by people with no experience. My mentors and colleagues in real estate actually noticed a decrease in vacancies during 2006-2009. Many areas saw rent growth as well. Sure, some people invested in A class/luxury assets didn't do well because people moved to a slightly smaller or "B class" asset, but the best assets for investment are B/B- to begin with. "A class" assets are for investors with lots of cash and experience who don't mind speculating on appreciation.

Rentals do better in recessions. Many people who could buy, or wanted to by, are now scared and RENT. Maslow's heirarchy of needs comes to mind. I am actually praying for a real estate recession, as I would be able to pick up properties below their retail inherent value, and capitalize on the human basic need for housing. Shelter will always be needed.
Quickfoot wrote:
Sun May 20, 2018 10:17 pm
How much of your wealth would it take to make the investment? Investment properties tend to do very poorly in recessions because people eliminate unnecessary expenses. This means your income generation goes away and at the same time your ability to sell the property evaporates too because no one is interested in buying a vacation property. Vacationers are also very fickle, city ordinance changes, climate change, and many other unanticipated things can drastically affect demand.

IF you do this make sure you have sufficient reserves to make the mortgage with little to no income for at least a year OR be willing to walk away from the property and allow the bank to foreclose. Only commit money you can afford to lose. Expect expenses to be at least 25% higher than what you estimate.

In general research has found vacation properties are BAD for the owner's finances and people on average do not wind up better off financially because of vacation rentals (a lot of that research has been done by realtor organizations which are the very people that would love to sell you a vacation home).

Going in the middle of your price range results in a property value of 625K which means you would invest 62.5K as the down payment.

100% wrong in my experience. I was renting some great vacation rentals for absolute joke of prices back in 2007-2011. The owners were happy to get any tenants. Hawaii, Tahoe and So Cal were the ones I recall. Hawaii a few times. Half price that of the peak. That confirmed to me I did not want to own a vacation rental. Also, I own investment real estate and the commercial investment property also was way down during the recession. The personal rentals did fine though a bit softer on rents in my personal experience.

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Re: Buying a Vacation Rental Property as an Investment

Post by LarryAllen » Mon May 21, 2018 5:52 pm

Carefreeap wrote:
Mon May 21, 2018 5:19 pm
Your cap rate looks good because you're not charging for your time. ...

So true. My time at my normal professional rate is high but my my time in my personal life is priceless. So many real estate owners do not factor in that they, in some cases, have created a job for themselves. Thus cap rates are a bit fluffy to say the least.

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Re: Buying a Vacation Rental Property as an Investment

Post by bayview » Mon May 21, 2018 6:46 pm

BigLaw Survivor wrote:
Sun May 20, 2018 10:56 pm

... While it may be true that rentals go up generally during recessions, the value of vacation rental properties in areas with lots of second homes and vacation rental properties do NOT. To the contrary, their values tend to get hit the most and take the longest to boomerang. A prime example is the Outer Banks of North Carolina, where home values plummeted during the great recession and still haven't come close to recovering. Sure, housing is a "basic need," as you suggest, but second homes and vacation homes are not.

I bought a beach rental property in 2004 for $875k, sold it in 2013 for $525k, and it's now on the market again at an ASKING price of $499k. Biggest financial mistake I ever made by far. What I also learned through the process is that costs are always higher than you anticipate and that wear on tear on fully occupied rental properties is just incredible. The whole experience was a huge headache. Never, ever again.
Every time we head home after a week on Ocracoke, I’m in a frenzy working out how we could buy a classic old beach house (think screen doors, floors tilting this way and that, unpaved sand roads, bicycles everywhere), live there mid-September through mid-May, and rent it out for four months in the summer while we flee to the mountains. By the time we get home, I’ve let it go.

What finally killed the dream for me were the sea level projections over the next decades (the ones that were published despite Raleigh’s attempts to ban them.) Much of the island underwater during storms, and that’s better than a lot of the rest of the Outer Banks. :(

We can rent for 3-4 weeks in the off-season for the cost of ownership, cancel in case of hurricanes, and not stick our heirs with an unsalable property in 30 years. The impending loss of our East Coast barrier islands is just a tragedy.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

timemoveson
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Re: Buying a Vacation Rental Property as an Investment

Post by timemoveson » Mon May 21, 2018 7:37 pm

BigLaw Survivor wrote:
Sun May 20, 2018 11:00 pm
Quickfoot wrote:
Sun May 20, 2018 10:17 pm
How much of your wealth would it take to make the investment? Investment properties tend to do very poorly in recessions because people eliminate unnecessary expenses. This means your income generation goes away and at the same time your ability to sell the property evaporates too because no one is interested in buying a vacation property. Vacationers are also very fickle, city ordinance changes, climate change, and many other unanticipated things can drastically affect demand.

IF you do this make sure you have sufficient reserves to make the mortgage with little to no income for at least a year OR be willing to walk away from the property and allow the bank to foreclose. Only commit money you can afford to lose. Expect expenses to be at least 25% higher than what you estimate.

In general research has found vacation properties are BAD for the owner's finances and people on average do not wind up better off financially because of vacation rentals (a lot of that research has been done by realtor organizations which are the very people that would love to sell you a vacation home).

Don't make a decision out of excitement, take 90 days and think about it. Do research, find out what people are really earning, talk to rental companies that book the properties. Put together a business plan and plan for lower revenue and higher expenses (what happens if you only get 75% of the revenue you expect and your expenses are 25% higher? Not an uncommon situation).
SPOT ON advice in every way, based on my personal experience.
Agreed, and one of my biggest financial mistakes as well. Got out by the skin of our teeth after having it deliver no joy, financial or otherwise. Suggest you run away from this .

ny_knicks
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Re: Buying a Vacation Rental Property as an Investment

Post by ny_knicks » Mon May 21, 2018 9:16 pm

Thanks for the info lot of good replies. Guess I should have provided additional context to my post.

1.) Area is a real estate market my parents have followed and owned in for over 20 years.
2.) It is a vacation destination (and has been for a long time). Basically the vast majority of homes are rented out strictly as weekly rentals over the course of a summer (May - September).
3.) Very high risk of hurricanes. If one does hit, it will likely knock back the real estate market for a long time.
4.) Yes I approached my parents. Maybe it would qualify as a comic strip. They are retired, bored and don't need my money to do it. I brought it up as a joke they didn't immediately say no and I looked into it more.

Was looking for replies (which many did provide) on people who have owned something like this and how it turned out. Much to the dismay of this board there are people who make money in real estate in the U.S. Perhaps not like this but it does happen. I am sure the road is littered with suckers but it does happen.

I truly believe that those who create real wealth for themselves either get lucky on the corporate ladder, start their own business or invest in real estate.

You're all right in that I/my parents likely don't need the headache or the risk. But someone out there is making money on these type of things.

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yukonjack
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Re: Buying a Vacation Rental Property as an Investment

Post by yukonjack » Mon May 21, 2018 9:27 pm

Regardless of whether you fully buy into global warming and the related issues I would highly recommend that you fully research how your beach front property has been affected over the last decade. As well as trying to ascertain how the area is projected to do in the next decade.

bayview
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Re: Buying a Vacation Rental Property as an Investment

Post by bayview » Mon May 21, 2018 9:33 pm

ny_knicks wrote:
Mon May 21, 2018 9:16 pm
Thanks for the info lot of good replies. Guess I should have provided additional context to my post.

1.) Area is a real estate market my parents have followed and owned in for over 20 years.
2.) It is a vacation destination (and has been for a long time). Basically the vast majority of homes are rented out strictly as weekly rentals over the course of a summer (May - September).
3.) Very high risk of hurricanes. If one does hit, it will likely knock back the real estate market for a long time.
4.) Yes I approached my parents. Maybe it would qualify as a comic strip. They are retired, bored and don't need my money to do it. I brought it up as a joke they didn't immediately say no and I looked into it more.

Was looking for replies (which many did provide) on people who have owned something like this and how it turned out. Much to the dismay of this board there are people who make money in real estate in the U.S. Perhaps not like this but it does happen. I am sure the road is littered with suckers but it does happen.

I truly believe that those who create real wealth for themselves either get lucky on the corporate ladder, start their own business or invest in real estate.

You're all right in that I/my parents likely don't need the headache or the risk. But someone out there is making money on these type of things.
I should add that we have a (non-vacation) year-round rental with a positive cash flow + the world’s best tenants. The rent (lower than market) pays more than the PITI and ongoing maintenance costs on a nearly 100-year-old house, and we count this as a third leg of our investments (equities, fixed, and real estate). In short, we are enthusiastic supporters of RE investing, but we also know that rental A isn’t necessarily anywhere near the same as rental B.

You seem (a bit defensively) convinced that this is a good investment for you and your family. Best wishes to the three of you and this exciting venture. :beer I love houses on the shore and could be pretty darned happy living there for the foreseeable future.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

bayview
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Re: Buying a Vacation Rental Property as an Investment

Post by bayview » Mon May 21, 2018 9:39 pm

yukonjack wrote:
Mon May 21, 2018 9:27 pm
Regardless of whether you fully buy into global warming and the related issues I would highly recommend that you fully research how your beach front property has been affected over the last decade. As well as trying to ascertain how the area is projected to do in the next decade.
One of the reasons that I get so twitchy about wanting to buy is because the prices are much lower than in the past, and the properties stay on the market much longer. There’s a reason for that.

If the prices got low enough, and we could make a cash purchase and wring it dry for rental income in the next 15-20 years, then wave goodbye as it settled under the sea (obviously an exaggeration, but what about the stores and restaurants and local residents who make everything “go”) then heck yeah. I’d roll up my pants and wade when necessary. That’s not yet the case, though.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

SQRT
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Re: Buying a Vacation Rental Property as an Investment

Post by SQRT » Tue May 22, 2018 8:31 am

I would only consider it if the cost/work required/risk were insignificant to you. We have several personal use vacation properties. Never rent them. Love them all but they are easily affordable for us. If you are doing this primarily to make money, I think there are much easier less risky alternatives.

Carefreeap
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Re: Buying a Vacation Rental Property as an Investment

Post by Carefreeap » Tue May 22, 2018 12:02 pm

ny_knicks wrote:
Mon May 21, 2018 9:16 pm
Thanks for the info lot of good replies.

You're all right in that I/my parents likely don't need the headache or the risk. But someone out there is making money on these type of things.
Well you could short the market in anticipation of the next Black Swan event. :wink: Forgive me, I'm reading Nassir Taleb's "Antifragile". I'm not sure that a hurricane is really a Black Swan event unless one is too young/new to the area as to not expect it.

In my market, the changing dynamic is that while the economy is robust (and more people willing to take more vacations) more people have placed their second homes into vacation rental service. This has caused a couple of results 1: More regulation from the county due to more complaints. This has driven up costs as more people are needed to physically manage/check on the rentals and 2: A lowering of prices with more competition. Our managers try to set themselves up by adding more amenities and extra TLC with personal follow up but that takes more time, effort and money. Frankly I'm a little worried that they are over-extended and may burn themselves out. We've had that before and it's not pretty when it happens.

not4me
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Re: Buying a Vacation Rental Property as an Investment

Post by not4me » Tue May 22, 2018 1:36 pm

ny_knicks wrote:
Mon May 21, 2018 9:16 pm

3.) Very high risk of hurricanes. If one does hit, it will likely knock back the real estate market for a long time.
I have not owned a property such as this, but know lots & lots of others who have. For this discussion, I'd say their collective experience & advise would not be surprising. Results rely on 2 things mainly: paying the right price & having the right financing. You'll never recover from overpaying even for a good house, etc. I noticed the sentence quoted above & wondered how your parents would navigate through the next hurricane. Assuming they stick it out, that is likely the time to buy. Take your time to find the candidates you'd like to buy & when the market tanks, buy in.

I didn't notice if you have siblings, but don't forget things can go awry when real estate is owned jointly....

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Pajamas
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Re: Buying a Vacation Rental Property as an Investment

Post by Pajamas » Tue May 22, 2018 1:45 pm

islandguy63 wrote:
Mon May 21, 2018 2:48 pm

It took us over 3 years of evaluating properties before we were able to find ones that offered decent returns. We did make a few offers along the way, but they were low offers based on what our analysis told us were supportable purchase prices.
This deserves real emphasis, especially coming from a broker. The price you pay is a very important determinator of your returns.

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