Simple Analysis – Vacation Property As An Investment
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 if a vacation property as an investment is 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 oceanfront and on a high floor which, for me, represents highly desirable factors. One of my friends also suggested that I look at websites like https://beachcoast.com/ or others to find great beachfront condos with inexpensive property taxes.
Financial Considerations
Buying a vacation home is no joke, of course. It can be a huge investment, which requires a lot of thinking and in-depth contemplation. There are people who can afford the full purchase, but for those who cannot, options like timeshare are available. This option can come with drawbacks though. After purchasing a timeshare property, people might face regularly increasing maintenance charges that they hadn’t anticipated earlier, and would also have to schedule their trips according to the convenience of the other owners. It can also be extremely difficult to get out of these agreements, which can cause owners to reach out to lawyers or timeshare exit companies for their professional expertise in the matter. So if you decide to go for a timeshare, make sure you are well researched.
As for those people who want to be sole owners of their vacation homes, 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, finding local movers); 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:
- 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?
- 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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It wouldn’t be for me either SMM. One single family residence is enough to deal with. And with the proliferation of quality rentals on the market, it’s fun to explore different areas and let the owner clean up after me. Tom
Tom recently posted…Let’s Put Medtronic on the Operating Table
I totally see your POV. There’s so much to explore and no time to maintain and deal with tenants. 🙂
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.
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.”
Vacation rentals can be a great success, but it depends a lot on location and how you market them.
Very true! It may be a lot of work though when you think about passive income outlets.
Great article with a great point of view I do however think there is opportunity for some great returns I think it comes down to location some markets are hotter and offer much higher Returns and the Airbnb market is only raising the Demand.
The specific location is definitely a big factor. And deals are bigger and better depending, mainly on location.
Loved this article. My husband and I always go back and forth on whether its “worth it” or not to invest in a vacation home. We too always seem to end up where you did. However, we visited Charleston, SC a few years ago and really loved it. From time to time we browse condo’s and homes that are for sale in the area. If the market ever crashes like it did back in 08 and 09 and we have some extra cash, then maybe we will reconsider then. Thanks for laying your thoughts and research out and keep up the great work!
Market crashing could be a big factor. And if you can find a steal that needs a bit of work that could be a great opportunity. I, too, like to keep my eyes open for such deals. 🙂
Glad to have seen that breakdown. My auntie’s considering investing in one of the provinces in the Philippines, but there seem to be no vacant lots since it’s a beach side. If there is any vacant lots, it would surely cost so much.
Classic case of supply and demand. It’s crazy how much more a direct beach-front property is compared to even a half block away. There are super-enticing factors such as an unobstructed view which people pay big bucks for. 🙂
This is a wonderful though out article and totally resonates with me, i personally believe that vacations homes are not worth it, as don’t want to be bond to a single place there is simply so many places to explore
Michael Evans recently posted…The Luxury Collection: Episode 3
Thank you, appreciate the kind words. Yes there is too much to see out there to be stuck in one property.