Advice on buying a vacation rental - Posted by Marc

Posted by Wayne-NC on May 20, 2006 at 09:09:15:

You have just described how NOT to buy a timeshare. I was at the other end, buying at 10 cents on the dollar when its true value is around 20 cents on the dollar like you said. This is the same strategy as buying houses from motivated sellers but due to the increased marketability, its more like 80 cents on the dollar and flipping at 90 cents on the dollar. The same concepts apply, just different kinds of property. Too late, you could have bought my timeshare last night and sold it today to your friend for $4K for a nice payday. Literally. All would have been happy except me as I would have been caught in a weak moment. Naa, I like the vacation flexibility. I own timeshares for all the reasons you clearly pointed out that started this thread on vacation homes. BTW, it may seem that I am trying to sell you on timeshares, I am not. However, there may be other readers or investors that may pass on an idea or opportunity in this field. I am just trying to show another way of looking at the subject. Again, I feel that its all a function of price and underlying value, no matter what it is. Want to buy some really cheap widgets? (smile)

Advice on buying a vacation rental - Posted by Marc

Posted by Marc on May 19, 2006 at 12:21:35:

Anyone have experience in owning and renting out a vacation rental (i.e. condo, SFH)?

I’m looking at a few condos in a well-known vacation area. I know it would be much more of a headache than my typical year-lease SFH rentals, but I simply haven’t found much literature or testimonials on the drawbacks, pitfalls and positives in this niche. Anyone have any experience they’d like to share?

Re: Advice on buying a vacation rental - Posted by Suz

Posted by Suz on May 20, 2006 at 08:12:14:

Marc,

My parents have had a vacation rental at the Jersey Shore for about 15 years. Now, I have to preface this by telling you that they bought it for their own enjoyment, not to make money or even have it pay for itself. They always have rented during the season and used it themselves during the off season.

That said, they have been very fortunate over the years, but they have also been somewhat choosy with who they rent to:

  1. NO one under 25 years old is allowed to lease.
  2. NO season rentals (people tend to get a little too comfy there and you never know how many people are coming and going)
  3. No pets (they actually have caught one person trying to smuggle their dog in)
  4. The condo is nice and small (about 1000 Sq feet) so if anyone does any damage or leaves the place at all trashy they aren’t allowed to rent again. They have only needed to do this twice.

They will tell you that they have been very fortunate. The owner of the unit next to theirs lost his for two seasons because a season rental trashed it so badly. All told, that meager security deposit isn’t going to get you anything.

One thing for you to keep in mind, usually year round rentals are at a premium in these towns. Do you think you could do just as well using your unit for that? All of these towns still need teachers, nurses and police who’s jobs don’t end because the season ends.

Just my 2c.

Good luck to you.

Suz

Re: Advice on buying a vacation rental - Posted by David Krulac

Posted by David Krulac on May 19, 2006 at 15:57:52:

It all depends on where the vacation rental is. I’m familar with the ocean here in the mid Atlantic area.

  1. The season is short. Here the season is 12 weeks from Memorial Day to Labor Day. Owner that I have talked to have seldom IF EVER had all 12 weeks rented. That’s just the way it is. 10 weeks is considered very good. That means that the proerty is vacant for mayber 42 weeks every year. You have to make in those 12 weeks the same as renting for 12 months, because that’s your whole yearly income.

  2. The expenses are high for weekly rentals including the management fee which can be as high as 24% of gross rents. The unit needs to be professionally cleaned weekly. You need to provide furniture and everything else for the unit. Breakage is high and wear and tear is high. Figure on replacing furniture more frequently than you would expect and things just break. People renting for a week generally do not take as well care as you would your home.

  3. When you sit down and figure out the increased costs, the bottom line could be better with a 12 month rental even in a resort area. The management fee could be lower, the cleaning fees will be much much lower, furniture and dishes etc. are not necessary.

  4. There are areas that have longer seasons, but everywhere has an off season. Even in the Carribean where the temperatures are pretty consistant year round there is an off season. (High season is December January February when the NE is frigid and the summer is the off season. in the off season its lucky to have 10-20% occupancy even in the Carribean.) And during the off season your place will be empty and generating NO RENT.

  5. Insurance is another factor. Insurance companies don’t like vacation rentals. They don’t like properties that are vacant. And they don’t like a vacant proeprty where the owner is out of state and a minor problem can turn into a big problem for them due to inattention. Friends have a place at Miami Beach on the 6th floor and are required to carry flood insurance, not because the water will ever rise that high, but because a storm damage to the glass window walls can cause water damage even 6 floors up.

  6. Vacation rentals are not essential, they are luxuries. In one resort area that I’m very familar with prices were plateaued from 1987 to 1997. You could buy a place keep it for 10 years and sell for the same price you paid. Then prices quadrupled. What’s going to happen next year or the year after? The economy, the gas prices, the war, terrorists, interest rates, tax law, and a bunch of other factors beyond your control and mine can drastically affect your investment in a resort area out of state.

  7. Most people think that vacation rentals are great investments and great money producers. Most people are wrong. Been there done that.

Re: Advice on buying a vacation rental - Posted by John Corey

Posted by John Corey on May 19, 2006 at 15:04:26:

Marc,

A Vacation Rental (VR) is a completely different business. It works for a lot of people. There are many issues (legal, insurance, financing, etc) that you would not expect as a more traditional RE investor.

There is a VR group on Yahoo. The URL is:
http://groups.yahoo.com/group/vacation_rentals

Almost everyone on the list is an active manager of their own VR (sometimes multiple properties). They are a very experienced bunch with one person being a successful author on the VR topic (many recommend her book).

Head on over there for lots of great info. Understand that they know next to nothing about creative RE, investing returns and other things. Hence you need to focus here for creative deal structures and there for the VR management information.

John Corey

PS. Yes, I own a VR property but my wife deals with the logistics.

Re: Advice on buying a vacation rental - Posted by Mark (SDCA)

Posted by Mark (SDCA) on May 19, 2006 at 13:15:48:

I had a realtor friend who did this. He made very good money. But it is VERY management intensive since the units are rented by the week or maybe by the month.

So you have frequent turnover issues (cleaning, re-renting, advertising etc.) Also, they are typically rented furnished and often include kitchen supplies as well. So that would be an additional startup cost.

GL,

Mark

Re: Advice on buying a vacation rental - Posted by Marc

Posted by Marc on May 19, 2006 at 18:48:26:

Thank you David. This is the kind of advice and guidance I need.

The numbers I have are based on 67% occupancy for the year, with misc. expenses, mgmt fees, cleaning, and insurance costs included. The price on the time I’ll spend worrying about it and managing it is still unknown.

On a personal level, this is a property I can use with my family as well, when it is vacant. So bottom-line numbers aren’t the whole story.

But, I really appreciate your post. It’s exactly what I was looking for.

Re: Advice on buying a vacation rental - Posted by Wayne-NC

Posted by Wayne-NC on May 19, 2006 at 17:27:00:

This is probably the best accessment of such that I have ever seen. All you said is true as I have lived in vacation capitals all my life meaning Fl, NJ and currently NC. On the positive note, some people buy these properties and just use the rents to subsidize their purchase with the future intention of moving in or to own their vacation. It can be an expensive “timeshare” that will appreciate. I have never seen beach resort properties go down in value. Even after disasterous storms. I have been through many of those too. Now condos may be a different story. I would then rather own a timeshare.

Re: Advice on buying a vacation rental - Posted by Marc

Posted by Marc on May 19, 2006 at 15:44:11:

Thanks John, that Yahoo group (hopefully) appears to be the type of forum I was looking for.

Re: Advice on buying a vacation rental - Posted by Marc

Posted by Marc on May 19, 2006 at 15:09:34:

From the research I’ve done, in a typical month I’d have about 4 turnovers. It’s an out of state property, so a property manager would deal with that. I know it will still be more mgmt intensive due to the turnover (cleaning, more misc. repairs, etc.) The units I’m looking at will come furnished.

Even factoring in all of that, the profit per month (even at 67% vacancy) will be very nice. I guess I’m looking for the hidden, unexpected costs/issues I may encounter that aren’t readily apparent.

Re: Advice on buying a vacation rental - Posted by John Corey

Posted by John Corey on May 19, 2006 at 19:48:13:

Marc,

Picking up on one statement you made (somewhat similar to David’s point). You wrote…

“On a personal level, this is a property I can use with my family as well, when it is vacant. So bottom-line numbers aren’t the whole story.”

This is one of the largest issues with vacation rentals in my mind. Too many of the ‘competing’ rentals are not run as if the income really matters. There is that personal justification that if the rents are lower or the costs are higher it still benefits the family. You will see excess inventory, prices that are below what they need to be and other such behavior as the ‘landlords’ do not fully care. I am partially guilty of this as I like the place, it is for the family, etc.

John Corey

for me… - Posted by David Krulac

Posted by David Krulac on May 19, 2006 at 22:26:50:

I’d rather NOT own a timeshare. It is NOT a real estate investment in my mind, and truthfully I would rather rent than buy a timeshare. To me there is much more flexability to renting and cheaper costs.

The NC coast is some of the most beutiful anywhere. I started going to Nags Head, Kitty Hawk, Kill Devil Hills and Corolla in 1974. Back then there was no road to the lighthouse at Coralla.

Re: Advice on buying a vacation rental - Posted by David Krulac

Posted by David Krulac on May 19, 2006 at 22:22:32:

agreed, on the weeks that aren’t rented out the family and firends use the resort property and justify the negative cash flow by saying that the personal use makes up for it. Many times it would be cheaper to rent a place than to carry the negative of an underperforing resort rental. And with the sharp increase in prices, rents have not kept pace so it is much more difficult to break even on the cash flow.

Re: for me… - Posted by Killer Joe

Posted by Killer Joe on May 19, 2006 at 23:19:58:

DK,

I’m guessing you go along with the old saying that if it flies, floats, or frolics…rent it. The numbers sure seem to justify it. lol

KJ

Lets discuss this first - Posted by Wayne-NC

Posted by Wayne-NC on May 19, 2006 at 23:02:40:

David, yes we have had this conversation before and I remember it well concerning the Outer Banks. E-mail me if you come back. I am sure we have lots to talk about. As far as timeshares go, that and anything else with value can be an investment. It is just a function of purchase price. First of all for example, I bought a unit at Barrier Island Station and as you may know, is in Duck,NC. I paid $1,700 including closing costs for it. The trading power of that resort gets me to Hawaii! That unit will get $4,000 tomorrow. Would you commit to pay $2,500 for it right now? It’s not for sale but I think you got the point. Secondly, this is extremely valuable Duck oceanfront property and a lot of it. If a fire destroyed all the buildings, just the land will pay each owner/investor off many times over. Then there is the insurance payments. I also got a really good deal in Kauai, so I trade the Duck unit and use the other and travel for 2 weeks to Hawaii. I have a flexible week which to choose and a Thursday-Sunday checkin. Cheaper costs? My maintenance fee is $508 a year and sure it will go up but at a luxurious resort, that is inexpensive when they can get $250/night. I’ve never had so much fun in an “investment.”

Give me the DIRT… - Posted by David Krulac

Posted by David Krulac on May 20, 2006 at 06:26:08:

if it has dirt, its for me. I’ve owned condos but there not me first choice. Just give me the dirt. Around here the increase in lot and land prices has been greater, on a percentage basis than the the increase in house prices.

I’ve read several places that the actual costs of materials adjusted for inflation is the same or less than it was in the past. The increase in new home prices is due to the increased cost of the land and the developmental & infrastuctural costs.

Re: Lets discuss this first - Posted by Natalie-VA

Posted by Natalie-VA on May 20, 2006 at 09:21:36:

Wayne,

Have you ever looked into buying timeshare units that are being foreclosed on?

–Natalie

Re: Lets discuss this first - Posted by David Krulac

Posted by David Krulac on May 20, 2006 at 06:20:18:

That is great, congrats. But its still not for me. And honestly I wouldn’t pay you $2,500 for the timeshare though I know lots will.

But I’ve seen so many situations, friends who I specifically advised NOT to buy timeshares, do anyway, often due to high pressure salesmen and women. Then “own” an investment that they can’t sell for 10-20 cents on the dollar. One friend paid $16,000 for a place that his wife won’t go to. This year it sat empty for a month. He offered it to me to stay free for a month, but I declined. In ihis particular case he has owned it 15 years and the developer is still building and selling more timeshares. They market is flooded with new units and the developer is creating more every day holding the price of used units way down.

I would like to be on the other end of a timeshare, as the developer. By selling 52 week increments the developer sells for way more than a fee simple would sell for. Which means very big profits. Now we’re talking real money.

Re: Give me the DIRT… - Posted by Wayne-NC

Posted by Wayne-NC on May 20, 2006 at 08:45:46:

Another great analogy. Structures depreciate. Land does not. The only thing the structure does is allow me the cash flow to keep the lot. I can own 1,000 houses but I can’t support 10 lots.

Yes and No - Posted by Wayne-NC

Posted by Wayne-NC on May 20, 2006 at 09:44:27:

I have inquired about them at the Kauai resort but nothing was available. Usually the developer at most resorts will resell them at retail and as David said, the profit margin is wide. Also, the Kauai resort has been sold out years ago, so all that is available is resales and nobody is giving them away. I just got lucky and most importantly, acted! Foreclosers would seem like a way to get experience flipping without the high risk dollars at stake. I bought for 2 reasons, to invest and to use. Either way I got my bases covered with a no lose situation. The property in Kauai is all oceanfront with new million dollar homes being build behind it. Maybe someday we will be bought out by a developer for the land value. That will make for some huge payday, but not until I can buy one of those homes to live in!