Simple Analysis – Vacation Property As An Investment

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With two little kids, opportunities to binge watch a show on Netflix is rare. So an alternative I like is to sometimes watch an episode here and there on HGTV. And in particular, I like watching Lakefront Bargain Hunt and Beachfront Bargain Hunt.

 

Apart from owning a vacation property for their friends and family, prospective buyers on this show sometimes have another objective in that they’d like to use the property as an investment.

 

Every now and then, I’ll wonder to myself is a vacation property as an investment a good fit for me. But I never really dig into the numbers and the pros and cons of this idea. So I decided to do so here and document my results. And in the process, hopefully, get some insight from readers as well.

 

 

Found A Great Property, I Think

 

Ocean City Maryland is a popular beach destination and is about a 3-hour drive from my home. After a little bit of searching, I found a nice 2 bedroom 2 bath condo in Ocean City MD for under $300,000. It is directly on the ocean front and on a high floor which, for me, represent highly desirable factors:

Simple Analysis – Vacation Property As An Investment ocean city simple money man

 

Financial Considerations

 

So I put together a simple numbers analysis to see if this property acquisition would be a worthwhile endeavor.

 

My analysis is based on a few assumptions: (1) a 20% down payment, (2) a conservative estimate on utilities, property management, and maintenance expenses. The other inputs are either linked from sources or provied in the condo listing.

 

Please note that this may not have every single possible expense one may consider (e.g., taxes); it’s more so to get a rough idea as part of the overall evaluation process:

 

 

General Information
Price  $        292,000
Down Payment – 20%  $          58,400
Mortgage Amount  $        233,600
Closing Costs – 1% of Mortgage  $            2,336
Annual Maintenance Estimate  $            1,460
Annual Rental Income  $          25,000
Annual Property Manager Fee 10%  $            2,500
Breakdown
Monthly Revenue  
Rental Income  $            2,083
Monthly Cost  
Mortgage  $            1,181
Utilities Including TV & Internet  $                200
HOA  $                403
Monthly Property Manager Fee  $          208.33
Money Maintenance Estimate  $          121.67
Total Costs  $            2,114
Net Profit/(Loss)  $                (31)
Summary
Annualized Profit/(Loss)  $        (368.00)
Annual Yield -0.61%

 

 

As you can see, in this scenario the vacation rental property is generating a loss.

 

It’s true that the more you pay down, the more you can earn in monthly cash flow, but I would not want to tie up so much capital into real estate. Just for fun though, let’s check out the numbers if I were to put down a bit more – 25% of the price or $14,600 more. Here is the rerun of the numbers:

 

 

General Information
Price  $               292,000
Down Payment – 25%  $                 73,000
Mortgage Amount  $               219,000
Closing Costs – 1% of Mortgage  $                    2,190
Annual Maintenance Estimate  $                    1,460
Annual Rental Income  $                 25,000
Annual Property Manager Fee 10%  $                    2,500
Breakdown
Monthly Revenue  
Rental Income  $                    2,083
Monthly Cost  
Mortgage  $                    1,107
Utilities Including TV & Internet  $                       200
HOA  $                       403
Monthly Property Manager Fee  $                 208.33
Money Maintenance Estimate  $                 121.67
Total Costs  $                    2,040
Net Profit/(Loss)  $                          43
Summary
Annualized Profit/(Loss)  $                 520.00
Annual Yield 0.69%

 

With a downpayment of $73,000, I can make a monthly profit of $43, and an annual yield of 0.69%. This is not attractive as money market rates these days are close to 2% risk-free. So I could make more simply investing $73,000 in an MMF, risk-free with the added liquidity option.

 

 

Non-Financial Considerations

 

Apart from the financial considerations, there are other non-financial things to consider as well. Speaking with my wife, here are a few that we came up with:

 

Pros:

  • I would have a readily available vacation property to enjoy without having to research hotel deals, location, parking, and proximity to restaurants and activities.
  • I don’t have to pack every single thing because some of my stuff will already be at the property.
  • Friends and family come and visit and have a place to stay and we can share memories together.

 

Cons:

 

  • I would be limited to the same property. This may create boredom or a feeling of missing out on other vacation properties, other amenities and even similar or different beach towns nearby.
  • If I didn’t go to my vacation property often enough, I’d feel guilty about the investment. I earn a generous amount of vacation each year, but my wife doesn’t so we may not be able to go as often as we would like. And even if we were to go often, there are costs to consider such as gas for driving down there and back, eating out, and activities and entertainment.
  • The stress of wondering if, I’ll be able to earn enough rental income each year to pay for the vacation property.

 

It’s not exactly an apples to apples pros and cons in my mind. Some of the pros are stronger than some of the cons and vice versa.

 

After this exercise, I’ve concluded that a vacation home as an investment property may sound nice conceptually. However, I don’t think it would be a suitable option for me, from both a financial and non-financial perspective.

 

From a pure investment standpoint, if I take a step back and ask myself, what are my main objectives, I come to realize that I can achieve those objectives without a vacation property investment. For example, if the objective is to expand into real-estate as an asset-class, I’m already doing that through REITs. It’s the kind of passive investment style I’ve grown accustomed to enjoying. With REITs, I can invest as much or as little as I want, sit back and earn dividends and my capital is of a much more liquid nature.

 

 

 

Join The Discussion:

  1. Do you own a vacation home which you also use as a rental property? What are the benefits and downsides coming from an actual owner?
  2. Are you considering buying a vacation home and renting it out for parts of the year? What factors are important in your decision-making process?

 

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I use Personal Capital because (1) it’s free, (2) it tracks all of my accounts and overall net worth, (3) my account balances automatically update, (4) it shows how my investments are diversified and allocated in various sectors, and (5) can use built-in tools like “Investment Checkup” to get….wait for it…free personalized advice!

 

4 thoughts on “Simple Analysis – Vacation Property As An Investment

  1. Here in Colorado I have heard many successful stories of vacation rentals. The VRBO craze has helped to offset some of the very high costs to own mountain real estate when paying for those expensive HOA’s.

    Really though I think most of it comes down to luck. There are lots of great mountain towns in Colorado and those who have owned a little place in many of them have seen HUGE appreciation.

    My grandmother in law sold a place in Vail for a big profit because monthly they were losing money. The only problem is now we can’t use it anymore! For me that would be the issue. The family will start to build memories and then one day I would have to break the news that we are selling 🙁 .

    So for me I think long term renters in more traditional residential dwellings is the way to go. Use that cash flow to pay for the vacations, then one day if you really love a place you can buy a condo just to use vs. making it an investment.

    1. Location makes a big difference in appreciation (supply and demand), great point!

      I think along the way there are time and costs to consider in the maintenance and upkeep of owning a property and using rental income.

      We’ve had family vacations every year and we choose a different place on purpose. But at the same time, it’s great to have a place and come back and then the memory comes back that “hey this is where we shared XXX or ate YYY or talked and joked about ZZZ.”

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