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Buying a Vacation Property


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In an earlier thread, several people mentioned owning a vacation property. Renting it out helped cover the mortgage and upkeep.

 

Well.....a vacation condo we've rented in the past has come up for sale. It's on the west end of Galveston Island...about 5 hours from us.

I'd have to have a property manager for sure because the goal would be for it to pay for itself each year.

 

Tell me the pros and cons of owning a beach place. I have beach condo FEVER today. ;)

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Where ours is, the vacation rental market is pretty saturated, so you can't really count on renting to own very well.

We looked at one place where the 'prime season' is defined as about 10 weeks of summer, Christmas and New Year's weeks, President's Day week, and I think maybe Thanksgiving week, and in order for the local manager to accept it you had to preplan all of your usage during those weeks, limit it to no more than a week or two (I forget which), and pay the manager to clean up after you.

 

And you couldn't tell her to rent it only a week in advance or more so that you could run up there if it wasn't rented--she reserved the right to rent it out from under you while you were driving up, LOL.

 

So unless you were willing to pretty much sacrifice all your summer and holiday usage, it was a pretty bad deal.  

 

Plus rents are fairly low, and occupancy is around a quarter of the year.  

 

It's very important, if you're counting on rent to help your cost picture, to get accurate information like this.

Edited by Carol in Cal.
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My cousin has a beach rental house in Galveston that she is seriously considering selling.  She says that for the most part the property management company she uses is OK--I think they take 1/3 for the rental fee.  The property management company does take care of cleaning after guests leave, but she hires her own cleaning person to go in once a month and do an additional cleaning to her specifications and to check up on things (she has learned about breakage and damage through this person that the property management company had not reported.)  The major expense she said is the property tax on the place; she says she can't make it work financially to cover the high property taxes.  

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Where ours is, the vacation rental market is pretty saturated, so you can't really count on renting to own very well.

We looked at one place where the 'prime season' is defined as about 10 weeks of summer, Christmas and New Year's weeks, President's Day week, and I think maybe Thanksgiving week, and in order for the local manager to accept it you had to preplan all of your usage during those weeks, limit it to no more than a week or two (I forget which), and pay the manager to clean up after you.

 

And you couldn't tell her to rent it only a week in advance or more so that you could run up there if it wasn't rented--she reserved the right to rent it out from under you while you were driving up, LOL.

 

So unless you were willing to pretty much sacrifice all your summer and holiday usage, it was a pretty bad deal.  

 

Plus rents are fairly low, and occupancy is around a quarter of the year.  

 

It's very important, if you're counting on rent to help your cost picture, to get accurate information like this.

 

I know there are strict tax rules about how much you can use a rental property--something like 14 days a year. Note to self--find that book I read last winter about having a vacation rental. There are some tax advantages to owning a rental if you play by the rules.

 

Knowing when the peak times are and how to maximize the income potential--that's important! I was hoping for 180 days a year of occupancy so the place pays for itself . Any extra would go toward paying off the mortgage early...any less--yikes that would be not fun.

 

Very good info! Thank you!

 

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My cousin has a beach rental house in Galveston that she is seriously considering selling.  She says that for the most part the property management company she uses is OK--I think they take 1/3 for the rental fee.  The property management company does take care of cleaning after guests leave, but she hires her own cleaning person to go in once a month and do an additional cleaning to her specifications and to check up on things (she has learned about breakage and damage through this person that the property management company had not reported.)  The major expense she said is the property tax on the place; she says she can't make it work financially to cover the high property taxes.  

 

Very good information--hiring a once a month cleaner to check up on the condition of the house. I've heard that property management companies charge about 30%. That's a big chunk o' change.

 

Much to chew on--thank you! If she doesn't mind sharing the name of her property management people AND her cleaner, you can PM me. ;)

 

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If you're seriously considering buying, there's no harm/foul in contacting the selling agent - or seller - and asking to see the rental numbers (occupancy rate, income) for the past couple of years.  I'd be doing that before trying to figure out other pros and cons so you know you're working with accurate numbers.

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Don't forget to look at the cost of insurance! I would think hurricane insurance in that location would be significant.

Apparently insuring a rental is more expensive than normal homeowner's insurance, too.

 

Emily

(who started looking at vacation houses when you posted this!)

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Look at forecasts if the doomsayers are right about global warming and rising seas. I'm not saying that I agree with them, but due to the uncertainty I would NOT purchase anything coastal. My aunt has a friend who lost her vacation house in Chatham on Cape Cod to erosion a while ago, and that was just normal storm damage, not anything climate change-related.

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If you're seriously considering buying, there's no harm/foul in contacting the selling agent - or seller - and asking to see the rental numbers (occupancy rate, income) for the past couple of years.  I'd be doing that before trying to figure out other pros and cons so you know you're working with accurate numbers.

 

The agent is sending me the rental history as I type. ;) It helps a little that we have rented this place twice.

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Insurance is part of the HOA....that's good...pricey, but already done.

 

We own a beach house and love it.  It's paying for itself but there are expenses that are different at the beach than at our home.   Be warned there's lots of insurance talk below :-)  

 

As pp said, be certain what the  flood insurance covers.  The rules for flood insurance on condos can get complicated.   Don't trust the realtors knowledge of the flood insurance needed.  Check with the HOA, the bank or mortgage company, and with an agent in that area.   If you're purchasing as an investment property instead of as a second home, the norm is that you'll need to have six months of expenses in cash assets.  Also be certain to check  the HOA fees and declarations ( I think that's what the rules are called ).   Know that if you're in a designated coastal resources area, that there are rules about your NFIP availability.  Your rental management company may also have insurance requirements for your hazard/homeowner's insurance.    Do this at the very beginning so that you know you can afford the payment each month and that your income to debt ratios are in line.    Finally, think about purchasing a $1million umbrella policy.  These are usually less than $200 and protect your assets once your other liability insurance is depleted.  

 

I hope I don't come across as a Debbie Downer.   We had a terrible time with our lender because they misclassified our flood zone, and I don't want anyone else to have the troubles and delays that we did.   Our angel of an insurance broker went to battle for us and walked us through the entire process while educating the lender.   

 

Best wishes as you reach for your dream!

 

ETA:  Closings cost will usually include a year's flood insurance paid upfront ( not sure how this'll work with your condo HOA policy )  and three months  escrow cushion.  Federal regs require flood insurance to be escrowed.  

Edited by Artichoke
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I know there are strict tax rules about how much you can use a rental property--something like 14 days a year. Note to self--find that book I read last winter about having a vacation rental. There are some tax advantages to owning a rental if you play by the rules.

 

Knowing when the peak times are and how to maximize the income potential--that's important! I was hoping for 180 days a year of occupancy so the place pays for itself . Any extra would go toward paying off the mortgage early...any less--yikes that would be not fun.

 

Very good info! Thank you!

 

 

I'm not a tax person, but my understanding is that anytime you're using a rental property as an owner during which you're doing repairs doesn't count toward the total.  So there is a lot of repainting that goes on, LOL.

 

I think talking with a CPA about the rules would be good about now.

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We had a place for 15 years, in Cannon Beach. We sold it a year ago. We looked at renting it and at Airbnb-ing it and decided to sell. One year later we feel like we made the right decision. We COULD have made money on the place but decided to take the cash out instead.

 

The drive was 4 hours. At first we went at least 2x a month. Then 1x a month. As our son got older, once in 6 weeks. It was lovely to have a HOME to go to but 4 hours was a long drive for regular use

 

To make the most money, we really couldn't use it in July or August.

 

And we did the math and even if we never used it at all, it cost $600 a month to pay the property taxes, insurance, utilities, cable, and lawn service. And we still had to do a lot of other work. We decided we'd rather AT THIS POINT get to some other places.

 

So....it was lovely for a time. And now we are glad we are doing something else. :0)

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Beyond what everyone has said, determine what property management does during a hurricane. Some do nothing which means I personally wouldn't buy. Others have window covers to protect the facilities and install them for you.

 

If it's near the beach, check to see if they've added natural features as a wind and storm surge break. It's common on the mid-south Atlantic coast to have homes and buildings protected by a mound of dirt covered by trees and brush. I've noticed a few places in Galveston are starting to do the same.

 

Does the property have other attractive features? My family goes to Galveston often and they stay in properties with a pool, for days when they don't want to lug everything and everyone to the beach.

 

How close is it to the beach or the Strand? The further you are away from either, the less likely it will be rented.

 

The people I know who purchased condos were going to Galveston at least once a quarter, if not once a month, so they were incurring the expense anyways. Their goal is to just break even on the rental, not necessarily make money.

Edited by ErinE
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We own a beach house and love it.  It's paying for itself but there are expenses that are different at the beach than at our home.   Be warned there's lots of insurance talk below :-)  

 

As pp said, be certain what the  flood insurance covers.  The rules for flood insurance on condos can get complicated.   Don't trust the realtors knowledge of the flood insurance needed.  Check with the HOA, the bank or mortgage company, and with an agent in that area.   If you're purchasing as an investment property instead of as a second home, the norm is that you'll need to have six months of expenses in cash assets.  Also be certain to check  the HOA fees and declarations ( I think that's what the rules are called ).   Know that if you're in a designated coastal resources area, that there are rules about your NFIP availability.  Your rental management company may also have insurance requirements for your hazard/homeowner's insurance.    Do this at the very beginning so that you know you can afford the payment each month and that your income to debt ratios are in line.    Finally, think about purchasing a $1million umbrella policy.  These are usually less than $200 and protect your assets once your other liability insurance is depleted.  

 

I hope I don't come across as a Debbie Downer.   We had a terrible time with our lender because they misclassified our flood zone, and I don't want anyone else to have the troubles and delays that we did.   Our angel of an insurance broker went to battle for us and walked us through the entire process while educating the lender.   

 

Best wishes as you reach for your dream!

 

ETA:  Closings cost will usually include a year's flood insurance paid upfront ( not sure how this'll work with your condo HOA policy )  and three months  escrow cushion.  Federal regs require flood insurance to be escrowed.  

 

This is very helpful! I've done some dealing with flood insurance for my regular clients, but a beach property is way different.

 

Love the idea of a 1M umbrella policy.

 

I like information, so I consider your post to be encouraging ;)

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I'm not a tax person, but my understanding is that anytime you're using a rental property as an owner during which you're doing repairs doesn't count toward the total.  So there is a lot of repainting that goes on, LOL.

 

I think talking with a CPA about the rules would be good about now.

 

I was already thinking that way! :lol:

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Beyond what everyone has said, determine what property management does during a hurricane. Some do nothing which means I personally wouldn't buy. Others have window covers to protect the facilities and install them for you.

 

If it's near the beach, check to see if they've added natural features as a wind and storm surge break. It's common on the mid-south Atlantic coast to have homes and buildings protected by a mound of dirt covered by trees and brush. I've noticed a few places in Galveston are starting to do the same.

 

Does the property have other attractive features? My family goes to Galveston often and they stay in properties with a pool, for days when they don't want to lug everything and everyone to the beach.

 

How close is it to the beach or the Strand? The further you are away from either, the less likely it will be rented.

 

The people I know who purchased condos were going to Galveston at least once a quarter, if not once a month, so they were incurring the expense anyways. Their goal is to just break even on the rental, not necessarily make money.

 

Good questions about what they do during a hurricane.

 

This place is at Pointe West--far west end of the island. A couple of gorgeous pools, club house, etc. Plus some private beach areas. We enjoy going there, but the location does limit rental income.

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