Rental Investment Questions

[SHELLY]

I don't think you will ever see that. I'm not in the rental business, but I understand that WaterColor management charges 40% (not close to the 25% mentioned in the scenario above), and in my opinion, your place will be rented far more often if you use WC management than another. On top of that, the purchase price in the example above is for the properties located in Phase IV, and I don't think those will come close to renting 20 weeks per year. Also, that same scenario is very giving, and while it might work like that for one year, chances are, it won't be that good every year averaged together.

Cash flow break even point is when your expenses equal your income. It will vary from property to property, and is dependent on things such as which rental company you may use, the frequency of rents, the rental rates (which will vary), etc. In general, even at today's prices, we aren't seeing properties with positive cash flow. There are some properties which should cash flow in the long term rentals, but I don't see them in the short term, beach properties.

Very good points SJ. What some "investors" fail to recognize is that vacation rentals (especially at these nose-bleed prices in a non-yearround resort area) are poor real estate "investments."

If one wants to cashflow an investment property, it's best to look at long-term rentals in areas around schools, military bases and such. I have a friend who owns several rental properties around a state university and has been doing very well indeed cashflowing his properties over the years. Of course he bought most of the properties well before the RE frenzy, bought fixer-uppers, did the refurbishing himself and manages and does maintenance on them himself. He loves what he's doing and has stacks (STACKS!!) of money to show for his efforts; unfortunately he doesn't take the time off to spend it (but his wife sure does) and he may very likely become the richest person in his city's cemetery.

 

[Smiling JOe]

I meant in the sense that my aggressive price drops would only be a little less to attract renters. Im just trying to figure out buying a 500k condo putting 100k down and not expecting a return on that down money and trying to come as close to cash flowing the rest as possible....worst case I would pay for it myself but like to try to figure out everything and scenarios before pulling the trigger. In the scenario someone presented above I would be out @ 12k a year...even $15k a year and I would still have 32 weeks to relax....not bad in my book.....the only real concern I have is how the HOA fees work....building upkeep and so forth..can you get screwed with condo in WC with the HOA fees? Whats the pros and cons of condos in WC?

($400,000 note at 6% interest (30 years))
principle and interest = $2,400 per month (or $28,800 per year)
property taxes = guestimate - $5,000 per year
HOA dues - $12,000 per year (includes accounting, legal, recreational facilities, trash pickup, cable tv)
contents insurance - (extra)

$45,800 annual expenses
Keep in mind that unforeseen assessments WILL come up.
Also, you need to calculate the rental management expenses and take away from your rental income.

This is just some basic real life expenses you will need to calculate in your cash flow study. You need to know the rental history. If it has no rental history, you will not rent it as often. Many renters will rent the same place each year, so rents may repeat and grow with time.





Owning a condo could set you back big time, if the worst happens. For example, there were condos on Panama City Beach which had major erosion under the building in the 2005 storms. The units on the bottom floor were destroyed. All of the condo owners were assessed huge amounts of $$$ in order to repair the building. If you cannot pay, you need to ask, "what happens?" What happens (who pays) in your condo if the association wants to pay big money to add more sand to the dunes they are destroyed by a storm? Your HOA fees typically pay for common elements and building maintenance. They can vary from building to building, even within one particular development.

 

[Smiling JOe]

Very good points SJ. What some "investors" fail to recognize is that vacation rentals (especially at these nose-bleed prices in a non-yearround resort area) are poor real estate "investments."

If one wants to cashflow an investment property, it's best to look at long-term rentals in areas around schools, military bases and such. I have a friend who owns several rental properties around a state university and has been doing very well indeed cashflowing his properties over the years. Of course he bought most of the properties well before the RE frenzy, bought fixer-uppers, did the refurbishing himself and manages and does maintenance on them himself. He loves what he's doing and has stacks (STACKS!!) of money to show for his efforts; unfortunately he doesn't take the time off to spend it (but his wife sure does) and he may very likely become the richest person in his city's cemetery.

I guess I should slightly correct my previous statement. I said that most properties around the beach here won't cash flow. There may be plenty of those properties which are currently cash flowing currently, because they were purchased long ago. What I should have stated is that at today's prices, a new buyer will not likely spin positive cash flow.

Shelly, I'm beginning to wonder if we know the same people. Your description above sounds identical to a guy I know from Athens GA. He paid almost nothing for a bunch of crack houses just west of downtown, where no one wanted to live, and added alarms, and very cheap rents, paid the houses off very quickly with the rents, and college students moved in, and basically changed the makeup of the neighborhood. Now, everyone wants to live in his houses, and he owns premium real estate, which he can sell one day. Right now, he just runs around town collecting cash from his 100+ rental homes.

 

[SHELLY]

Owning a condo could set you back big time, if the worst happens. For example, there were condos on Panama City Beach which had major erosion under the building in the 2005 storms. The units on the bottom floor were destroyed. All of the condo owners were assessed huge amounts of $$$ in order to repair the building. If you cannot pay, you need to ask, "what happens?" What happens (who pays) in your condo if the association wants to pay big money to add more sand to the dunes they are destroyed by a storm? Your HOA fees typically pay for common elements and building maintenance. They can vary from building to building, even within one particular development.

There were some articles in the Pensacola paper about the 5th anniversary of Hurricane Ivan--this jumped out at me:

Louise Johnson, 84, of Birmingham, Ala., owns one of the Regency Cabana units that have not been rebuilt.

"I'm real bitter about the whole thing," she said. "We've been waiting for five years to build back. It's the biggest headache. I'm never going back."

She was one of the first people to buy a condo in Regency Cabanas in 1970. But she said the red tape to rebuild is more than she can bear at her age.

"I'm still paying thousands of dollars on lease fees, insurance, taxes, homeowners fees -- all for a piece of sand," she said.

She rebuilt after Hurricane Frederic in 1979 and Hurricane Opal in 1995.

"Ivan was the worst," she said. "It left my house a skeleton."

 

[Smiling JOe]

"I'm still paying thousands of dollars on lease fees, insurance, taxes, homeowners fees -- all for a piece of sand," she said.

Actually, she is wrong. If you own a condo, you do not own the sand, just the air space. So, she is paying thousands of dollars for a piece of air with no walls to define the space. Ouch!

 

[SHELLY]

Actually, she is wrong. If you own a condo, you do not own the sand, just the air space. So, she is paying thousands of dollars for a piece of air with no walls to define the space. Ouch!

...well, they aren't making anymore air space--now's a great time to buy

.

 

[melscuba]

I don't think you will ever see that. I'm not in the rental business, but I understand that WaterColor management charges 40% (not close to the 25% mentioned in the scenario above), and in my opinion, your place will be rented far more often if you use WC management than another. On top of that, the purchase price in the example above is for the properties located in Phase IV, and I don't think those will come close to renting 20 weeks per year. Also, that same scenario is very giving, and while it might work like that for one year, chances are, it won't be that good every year averaged together.

Cash flow break even point is when your expenses equal your income. It will vary from property to property, and is dependent on things such as which rental company you may use, the frequency of rents, the rental rates (which will vary), etc. In general, even at today's prices, we aren't seeing properties with positive cash flow. There are some properties which should cash flow in the long term rentals, but I don't see them in the short term, beach properties.

You're right Smiling Joe, that scenario was what I thought to be a BEST case. Meaning cash flow would likely never be BETTER than that. Just to clarify, I was speaking of WC condos north of 30-A. I used the least expensive 2 bed/2 bath currently on the market and took 25% off the asking price which would be one heck of a deal (in relation to current asking prices). I also gave baky the best rental management cost scenario I am aware of at 25%. If putting everything in the favor of the buyer, one would still be out a little over $12,000 a year.... for that one scenario year. One's interpretation of those numbers is up to them. On a side note, as a repeat renter in WC, I find the homes that are managed by WC to be one step above in cleanliness, etc.. I know it costs more as the owner up front, but I'm curious as to overall cost once you factor in wear and tear.

 

[gmarc]

yes there are some very good long term deals but one must want to buy because they want to be here and not because of an investment. If you can get a steal now i';d safely say that renting for 10-12 weeks and putting 30% down you can pay for 50-65% of your yearly expenses.so instead of costing you 40-45k a year for a 450k home or condo it would set you back 20-25k if you rented for 10 weeks or so. if you want an investment only hunt for some of the lots that topped at 400k that can be had for 50-100k. carrying cost on many are low and if you hold 5-10 years could provide a nice return

 

[Paula]

You also need to consider the time that you are staying in your own place at the beach rather than renting it to someone else. For us, we only spend a few weeks there every year right now, but at some point we'll be spending a lot more time there. Frankly, even staying there in the winter months wouldn't make up for the $10,000 that I pay out of my own pocket right now because winter monthly rental rates are during low season when you make less money on rentals anyway. And that's for one cottage; the other is $20,000 out of my pocket. But for me it sure feels great to stay at my own place and not pay to stay at someone else's.

You also want to keep in mind what else you'd spend the money (e.g., the $10-25,000 that goes into the place each year) on. Some people like new cars every few years, top notch appliances and counters, eating out a lot, clothes, jewelry, and other things/toys that cost money. It's all trade-offs. And how well rounded your financial portfolio is/job security/savings for tougher times/upkeep/etc..

 

[Smiling JOe]

On that subject, Paula, I believe there are limitations on the number of days one can stay in his/her own unit, and still be able to claim it as an "investment property." Perhaps an accountant can chime in on that. It should be something to consider when talking real dollars going to Uncle Sam.