Author: Bob M Dyer
Founder and CEO of Sunset Resort Rentals, Destin's premier property management agency.
If you have ever contemplated the purchase of an investment vacation rental property, then you have inevitably asked yourself "Will this property pay for itself?" Why wouldn't you ask that? Of course that is one of, if not the main concern, you should have. Here, we will discuss the factors that will determine whether your property will return a deficit or a profit.
As a property manager, I'm asked about this by potential buyers quite often. The answer is not cut and dry, and usually takes more evaluation than first realized. Your goals will really help steer the research in the right direction, so you will first need to be clear on what you are wanting out of your property. In this article, we will be focusing on long term ownership of a vacation condominium with an aggressive rental strategy.
As the housing market fluctuates, so do the purchase prices of vacation properties. The rental market and income thereof does not fluctuate quite as rapidly, however. Someone who bought a property in at a lower cost will certainly yield more than one who purchased at a higher price. That being said, it is the total carrying cost of owning a vacation rental property that needs to be considered, and not just the mortgage payment. Without this planning, you will be sadly surprised later on.
Along with mortgages, a vacation property owner will incur utilities similar to those in your personal home. Electricity, gas, phone, cable, and internet are some examples. Almost every vacation condominium complex will have a homeowner's association, which may cover some of these expenses in a package deal. This doesn't mean that you won't have to pay for them, as you will pay a monthly homeowner's association fee, otherwise known as monthly assessments. These fees can range from $100 to $1000 per month, and will cover a range of items such as building and grounds maintenance to security. Special assessments will occasionally be charges to owners for special circumstances such as parking lot resurfacing, storm damage, etc. You will want to evaluate the cost of these monthly and special assessments when making your final purchase decision. Don't forget to include annual property taxes in your figures. These vary according in each municipality.
Next, you will need to figure that in the average vacation rental property, a certain level of decor is expected by the renter. After your initial interior decor has been established, I figure that spending between $1000 and $3000 per year on upgrades and maintenance is about average on a typical 2 bedroom beachfront condominium. This number can vary depending on the type of property, where it is located, volume of renters, and who will be using it. However, the one fact that does not change is that this is an absolutely necessary step if you plan to have long term success. Do not allow your property to decline in respect to maintenance and amenities.
Now that you've added up the carrying costs, you will need to look at the potential income for the property. You can gather this information by contacting local property managers. A good property manager will spend quality time with you discussing these and other factors. Be sure to ask about management and maintenance fees, and any other hidden costs. Many property managers will pad the numbers, so you will want to get to the bottom line. What you are looking for is your Final Net Income after all fees, taxes, and expenses are deducted. You should have a good idea of the potential income for a property before you even make an offer on it.
You may find that the income will fall short of the monthly carrying costs combined. You still may break even or make a profit when you file your taxes. Itemizing all of your expenses, including monthly assessments, maintenance, management fees, taxes, and improvements will reduce the reported personal income reported for each year. This will reduce the amount that you pay Uncle Sam. If you have paid Income Tax throughout the year, you may be in for a substantial refund.
Will my vacation rental property pay for itself? As you can see, the answer to your question is very involved. By considering these factors, however, you will be closer to making a wise decision on your very important purchase. Remember to do your homework and give yourself a fighting chance.