I’ve written in the past about how I think you should own your investments and rent your fun. I mostly think about this when it comes to vacation properties, but it can be applied equally well to things like boats and other major “big boy toys.”
Over the weekend, we nailed down our Spring Break plans. We’re heading to the Gulf coast for a week of sand and sun. Whenever we’re down there (usually once a year, sometimes twice) we stay in the same beachfront condo complex.
When we’ve been there in the past, I’ve noticed that a handful of units are typically on the market at any one time. While the prices have fluctuated a bit over the past few years, it’s currently around $500k for a 2BR/2BA beachfront condo.
Now don’t get me wrong — these are really nice places with a beautiful view. But… Seriously? $500k? While some people buy these places as retirement homes, many others buy them as vacation homes.
So what do these places cost to rent during Spring Break? A little over $1500/week. Yes, the rent is higher during the peak of summer (albeit lower in the winter), and yes, if you owned it you could rent it out, but still…
Let’s assume that you bought one of these places with 20% down, and you borrowed the rest ($400k) using a 30 year fixed rate mortgage at 5%. Looking at principal and interest only, that’s around $2150/month.
Now add in condo association fees, property taxes, and insurance. I’m not sure how much these would total up to in this particular case, but it wouldn’t be cheap.
And don’t forget about all the risk that you’re taking on. How long, for example, until there is another major oil spill in the Gulf? Nobody knows, but do you want to be left holding the bag if the next one is worse than the last one?
And what about occupancy rates? Sure, these things rent out pretty well during the peak season, but there’s a lot less demand during other times of the year. In fact, here we are just a month out and we had no problem finding an opening for Spring Break.
Oh, and those brisk rental periods? Those tend to occur right when you’d most want to be using it yourself, so you’ll have a choice to make… Either: (a) go on vacation while foregoing rental income, or (b) rent it out and stay home.
As for us, we choose secret option (c): keep our business and pleasure separate. We’ve built a broadly diversified portfolio to cover our investment needs and we pay cash for our fun.
I live in NC and frequently vacation in the Outer Banks. When the market crashed, i looked into the cost/benefits of a ~1M USD second row home with a view.
Even assuming a generous full summer of rental income, and 50% of off season dates filled, it was a money loser to muni bonds assuming no financing costs. With those cost factored in, it wasn’t even worth considering.
Also looked at 200K condos in Myrtle beach. They made a little more sense, untilt he $400/mo condo fee is factored in.
In the end, it makes more sense to rent them when you need them. As someone above said, rentals make money when they are fully rented, and that’s unlikely for a vacation home.
I agree that vacation home that is a considerable distance from where you live could be a hassle. Of course, there are property managers for that. In order to make it worth it, you have to get a good purchase price. That way, even when it sits vacant in the off-season, your rental income during the peak season covers your expenses for the year.
One other thing to consider is that if you are renting it out full time, you can deduct the losses on your taxes, which you cannot do with your primary residence. Of course, if you use property management, this creates some issues too regarding writing off losses.
My sentiments exactly, PFM. My in-laws and sister-in-law/brother-in-law always seem to have the itch to look at properties when we go anywhere together on vacation (which has been once a year for many years). I say, enjoy the vacation you’re on and don’t spend a good part of it thinking about what could be–especially when you’ve realized time and again that you can’t really afford it and it would tie you down to one place. I’m all about “renting my fun”!
I have friends who own vacation homes and it becomes a chore, after the initial euphoria the house becomes a drain on resources and time. I think the biggest drawback though is you have to justify having it by using it for your own vacations. Owning it can limit your options to see other areas.
A pretty affluent guy I know used to rent out his condo in downtown Toronto with a nice view over Lake Ontario. After a couple of years he finally decided to not rent it out anymore and instead just use it whenever he’s downtown, e.g. the night before he flys out of country or watching a Bluejays game etc. I can’t see the advantage of actually holding the unit, but there must be something making it worthwhile to rather leave the appartment empty instead of making some money on the side with it. And it doesn’t seem like it’s a money question…
I think vacation homes require a little bit too much active management as opposed to a nice 2-3 unit apartment where you can still get a decent cash on cash return even with a management company.
You’re right that there would be plenty of drawbacks with trying to use a vacation home as a source of income. It is unlikely that you would keep it rented out all year long. You also have to consider all the maintenance costs involved. Then you get the short end of the stick by having to use it during off-peak months.