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The dream of renters paying the mortgage and expenses while you build equity and have unexpected weekends at the beach lures a lot of people into doing what the OP is considering. It must work for some of them or else why would people keep doing it?
Some people do it to help pay the mortgage, others because they've moved and for one reason or another didn't or couldn't sell the house.
In the case beside me the owner way overpaid for it not thinking that market rent wouldn't cover the payment. This is her way to try to pay it.
It all depends on what deal you are getting. If you are getting a bargain, which as a realtor, you should probably know what a deal is, then I would go for it! Real estate, almost anywhere, appreciates in value; some more than others. I used to have a property like this myself. The trick, at least for me was, to hire a property management company. Check the Yelp reviews when shopping for one. Fees charged by management companies may seem to be set in stone, but, they can typically be negotiated.
A good property management company will keep good quality tenants in your rental and keep records of everything. The tax write off's add up rapidly. The right property will pay for itself. Giving the info provided by you, I would say go for it!
We have been looking into doing the same thing (different location) and what we've found is that, while rental income from "vacation renters" can offset some of the costs, it creates some other expenses of its own and doesn't really come close to covering the expenses of a mortgage, insurance, HOA, maintenance/repairs, and taxes.
Now, shrink the mortgage (or eliminate it altogether) by putting more cash into the place up front and we figure we can cover insurance (we want to be as close to the beach as possible if not on the beach), HOA (unless it rises precipitously!! It happens!) and taxes. We are still left with the headaches and expenses of maintaining the place in the face of the wear-and-tear from frequent turnover as well as the rental business itself. Either we pay for it with our time and effort or we pay for someone else to handle the actual business of renting the place out. Ideally we'd like to break even or come out just a little behind, no need to create taxable income here if we don't have to. So for each property we consider we have to figure the expenses fairly precisely in order to know how much we'd want to put down.
At that point we will have still invested a much larger chunk of cash under the presumption that the RE prices will continue to rise. I believe they will, and that's part of what makes me feel a little rushed to get "my piece" of shoreline real estate in one of the few places where it's still affordable to us. That also assumes that the condo or home we would buy wouldn't be destroyed by a natural disaster. There's insurance for that, of course....
From what we have seen, we would need to be prepared to pay the mortgage every month (worst case scenario) and consider any vacation rental income as gravy. Renting year round comes closer to covering costs--but then we can't use our property at all for a vacation....We have found it is insurance that is the major variable. There are places pretty close to the water that are out of the flood zone and in other areas whole swaths of homes well inland are still in high-risk zones. You really do have to investigate every particular address. It helps to have a patient and willing insurance agent to check for you!
We had almost the identical thought that you had, to have someone else paying off the mortgage even as the home's value rises, and have found it's probably not realistic to cover all our costs. Do we want the dream badly enough to flush money down the drain every year? Haven't decided yet. Probably.
Finding an undervalued property--distressed, foreclosure, fixer, etc.--and putting in the sweat equity to make repairs or updates either all at once or between long-term renters is the one strategy that we think would make the whole thing workable, but since we are not at all close to or familiar with the areas we've targeted, that's not realistic for us. It might well be realistic for you, though, especially as you are a real estate agent yourself.
The nicer rental unit you have, the better quality renters you will get, and the more you can ask for rent, obviously. Also, a higher quality renter will typically create less wear-and-tear on the home. Typically, lol. So (like everyone else) we are looking for the worst (most dated and unappealing) unit in the best complex/neighborhood in order to gain the sweat equity and capitalize on location location location. We're also looking for the elusive 3 bedroom unit or 4 bedroom home in a sea of 2 bedroom condos. Yes, it means more people using the unit but it also means much higher rent and lower vacancy rates without a huge increase in monthly carrying costs.
Where we are, the market is all single family homes, so we'd be responsible for all interior and exterior maintenance, as well as the lawn, etc.
I have noticed that owners seem to get away with finishes being somewhat dated here, as long as everything remains clean.
I know one of the areas I need to do more investigating is set up cost. Places here wouldn't resell as furnished, so I would need to supply everything to get it up and running.
For the 15% management fee, do they find all of the tenants and also handle/manage all interior maintenance for you?
How have you found the renters treat the place? How often have you seen folks damage your space? Has their security deposit covered it?
Thanks again for your insights.
Most rental properties in the area are sold furnished. But ours was new construction, and so we had to start from scratch. The big pieces of furniture for LR, DR, and 4BRs, we bought at local furniture stores and had delivered. But it's amazing how much other "stuff" is required to furnish a place nicely. We rented a storage unit near the condo and filled it up during the two months between contract and settlement. I used to go to Kohl's with my mom on the senior discount day and we'd get things like dishes, pots and pans, etc. These days you could probably do most of it on Amazon and save a lot!
This is the second beach rental property we've owned. The first was much smaller, but we've always believed that if the place is furnished nicely AND has some reminders that it's someone's "home," renters take better care of it. Not too personal -- e.g., we have a series of photos taken during a rare major snow storm at the beach. Mostly just snow and ocean, but our young nephew and his dog are in one. We have a lot of art on the walls, and not just posters. Much of it is signed/numbered prints or even some originals by local artists. The kitchen is extremely well outfitted, so that if people want to make muffins or steam crabs or throw something in the crockpot -- the equipment is there.
We also have a guestbook that we ask people to sign. I write a note at the beginning of every season that talks about new restaurants, shops, experiences that tenants might want to explore.
In nearly 20 years, we've had only one instance where something was broken beyond normal wear and tear and the rental agent had to collect for it. I think it's because we make it clear we really want our tenants to be comfortable and have an enjoyable time. From the notes in our guest book we can tell that for some of them it's the BIG VACATION of the year; it's not a five-star hotel, but we want it to feel special for them.
One of the costs that most annoys me is the cable & phone & internet. I think we'll be able to drop the landline in a few more years, but people definitely expect a TV package that includes a gazillion channels, and they want high-speed wireless internet. All that is well over $100/month. There is a "snowbird" plan for cable that saves us about $40/mo. for five months, but then we have only the most basic TV when we're there off-season.
And here's the type of expense we never thought of till after a few years: changing out the locks every once in a while. After a few years, the number of people who've had your keys in hand for a week is pretty significant. So we just decided it wouldn't hurt to start fresh every two or three years. That's a couple hundred dollars.
The rental agent earns their 15% by finding tenants and handling the transaction from start to finish; we never have any contact with the renters except via the guestbook. We get two checks for each rental: one is the deposit less 15% when the reservation is made and the other is the balance when the tenants check in.
The agent does property management only as it's related to keeping tenants happy; e.g., they'll call for a repair if the oven or the dishwasher or the dryer stops working, and then let us know. Sometimes we'll be billed direct for the service call; occasionally the agent pays and then deducts that bill from the next check we receive.
Otherwise, when we see something that needs to be fixed, we find the provider. We do often rely on our agent for recommendations of service people, and some have turned out to be our "go-to guy" for years.
We also rely on our rental agent to provide keys to contractors when they need access to our place for repairs or maintenance. I'm not sure how we'd manage to get things done long-distance if we didn't rent and therefore have an agent willing to hand out the keys. Maybe we could pay them a small monthly fee just for that!??
Pocopsonite, do you schedule the cleaning service or does the property management firm do that? We have seen some VRBO type properties where you actually buy a linens package. I'm not sure what that's all about or if it's specific to places with bedbug issues or something? That was confusing to me.
Nevermind any of the other stuff you just said and concentrate on the fact that you want to become a landlord for the next 15 years with weekly rentals. Your going to hate that house. LOL.
We own a 4BR/4BA condo in the ocean block of a beach on the mid-Atlantic coast. Rental season is basically mid-June to end of August. The price varies by week, but our highest weeks in July and August are $3500. We use a rental agent who charges 15% commission. Other units in the condo complex are listed on homeaway, for more than ours, but we don't want to deal with the renters.
The mortgage is paid off. It still costs us about $13,000 a year out-of-pocket to keep the place.
If you'll have a mortgage, it's even harder to come close to breaking even. There is always unexpected maintenance in addition to what you've anticipated and budgeted for. We live two hours away. When we were younger, we did some of the upkeep -- repainting rooms, e.g. -- ourselves. Now that we're retired, we're just not up for it. So now we pay for that kind of maintenance, along with stuff we could never do ourselves like a new roof.
We never intended to retire to this place, so we'll probably just keep it forever. In terms of an investment, it has appreciated 227% since 1995. I think the S&P 500 has had a better return, and it sure would have been a lot less work to own an Index 500 mutual fund.
No mortgage and they still spend 13K a year.......
Part two- investment value. It is up 227% in 20 years, awesome but does that include the 13K a year loss? Did you ever figure the opportunity cost? The OC is what that money would have done if you didn't tie it up in this investment.
Willow Wind- we're really only considering Niantic, and public water and sewers is a big driver of that. I want nothing to do with well and septic. We would also make sure it was an all year house, as I've noticed some don't have basements or heating systems. Not that a heating system couldn't be added after the fact.
The area where I'm considering does not have HOA fees, or they would be really minimal if there are (think a maximum of a couple hundred dollars for the year). Everything is single family, so interior and exterior maintenance would be on us.
I'm wondering if my connections as a real estate agent would help me find good peak season renters. We have a lot of previous clients and friends who I would think might rent from us. They would be less likely to destroy things (hopefully). That being said, I really think we would hire a management company to deal with things for us. Previously we owned an investment property and tenant management wasn't our favorite.
I do understand that we will most likely have to do a total interior renovation when we're ready to live there.
As for the folks who say move out of CT, my retirement will happen somewhere in the Northeast and I find that anywhere I want to live in the Northeast is equally expensive, so CT will be fine. I have no interest in living anywhere else in the country. Visiting other places is fine, but I've been a New Englander for my entire life and I don't plan on changing that for retirement. I enjoy the four seasons and living here.
I had an opportunity to buy a villa in the Bahamas for about 265K. I love the place (from a been there a few times for a weekend point of view). No property or income taxes in the Bahamas and the unit could be rented out by the association. The HOA fee was $500 month, utilities could hit $300, satellite/internet $200......easily 1K a month commitment. To get there would be $300 flight from US per person. In 10 years the property has actually dropped in value (boom time it was probably 350K+).
Figure this place would cost me 12k a year minimum to own.....assuming nothing broke (a/c lasts less than 5 years due to salt corrosion). Then if I visited 4 times a year it would cost another 5K (assuming group of 4) plus related costs (food, transportation, etc). I'm getting a "time share" commitment type feeling at this point so I came to my senses.....DON'T BUY ANYTHING! RENT IT!
I can rent the place for $300 a night on VRBO anytime I want. Hurricanes coming, watch it on the news with no personal costs. Get tired of the place, visit somewhere else! Roof leak, call the management company!
I think the fantasy is better than the reality on 2nd homes (having done this in the past myself) and VRBO has taken the hassle out of renting one!
Yes, I want to retire in CT. If not, at least somewhere in New England. Again, this is a research project at this point. I'm not going to be doing this if it doesn't make sense financially. There is risk and reward in any financial investment, so I'm trying to weigh the risks of this versus other investment avenues.
I would look into hiring a management company because I think handling the weekly rentals and all that it entails would be a headache. I'm sure that is a major expense though, so something I will definitely be exploring further. We're also wondering if we don't do a seasonal rental, but just find someone who would live there year round. Sign on for a lower rent during the summer months, but have 12 months of rental income with a stable tenant. That would probably also be less wear and tear on the house.
Given the down payment we'd make, I don't think carrying the property would be a problem if it wasn't meeting full rental potential.
I think this is a great idea. Even if it doesn't cover the cost of the house entirely, if it is paying a large percentage and you can cover the rest, you are still paying off your retirement home at a fraction of the cost. If you aren't able to use it much now anyway, renting it out by the year is a great idea.
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Yes, it means more people using the unit but it also means much higher rent and lower vacancy rates without a huge increase in monthly carrying costs.
