Five things to consider when purchasing a vacation home as an investment.

New Listing - 37 Beach Club Villa in Wild DunesFirst, let me get it out of the way.  I am not an attorney, CPA, or financial advisor.  My advice is coming from over 1o years experience representing buyers and sellers in resort markets and my observations over those years.

Let’s be honest, most people who purchase a vacation or beach home will only use their property a small portion of the year.  So that leaves weeks of a condo or home collecting dust and being lonely.  Meanwhile, you are still paying on your mortgage (if you have one), regime fees, taxes, insurance, and any other carrying cost associated with owning.  Those numbers can really add up over time and make owning a vacation home a thing to second guess.  The good news is the option to rent is almost always available (Sullivan’s Island folks you know what I mean) and rental income can help to off set much of the carrying cost involved.

Decisions have to be made as to what to buy and where, and for most people, there are several options.  Keeping in mind you want to generate as much rental income as possible, and will probably only be using the place for personal use a couple of weeks per year, here is my advice:

1) Stay within your comfort zone and remember income from rent is never guaranteed.  Yes,  the oceanfront house will generate ten times the rental income as a one bedroom condo, but your mortgage (again, assuming you have one), and insurance will be ten times as much.  If for some reason people stop renting, you could be left stuck with the entire amount.

2) Location. Location. Location.  Trust me, the two bedroom condo you purchase that seagroveis really not walking distance to the beach (especially with a cooler) will not rent as well as the one bedroom condo on the beach.  So if you are thinking about buying the condo with the extra bedroom just so your aunts, cousins, brother, can use it one week out the year, don’t.  Let them find somewhere else to stay.

3) Renovate, remodel, keep modern.  Again, the goal here is to drive rental numbers to help reduce some of your carrying cost.  When someone searches online (how most people search) and look for there summer beach rental, they want nice.  If the photos of your place look like Jack Trippers condo from Three’s Company,  you will get skipped, until that last minute straggler has no other options. Also, in January, when rental companies reduce their rates, and there is plenty of vacancy, the oceanfront or side property is almost always the choice.

One more thing.  Vacation rental companies typically charge between 15-40% to manage a property.  They, just like you, want that property to generate as much income as possible. Most, but not all rental companies, will charge you less to manage, the nicer your place is. So that in itself should be enough incentive to keep you place looking good and up with the times.

4) Purchase long-term and don’t expect to make money on your property.   I hear it all the time, if I buy an oceanfront condo, and put 20-30% down, can I make money on it.  And the answer is usually, no.   If you are buying in a resort, like Wild Dunes or Kiawah for example, you are going to have associated cost.  Not only will you have a mortgage payment, insurance cost (include flood), and taxes, you will also likely have a home owners association fee, regime fee (monthly or quarterly),  possible assessment fees,  transfer fees, maintenance cost, and your managing fee deducted from your gross income.  The idea here or frame of mind you should be in is you will own a beach place, that you can enjoy,  have a long-term investment or hard asset, that again, you can enjoy, and be able to offset much of what you would be paying from the money you generate through rentals.  And when you go to sell ten years from now, hopefully have a capital gain.

5)  Understand your tax incentives and what the IRS considers an investment property, versus a second  home.   This is where I tell you to get ADVICE from your tax attorney or your CPA, as I am NOT.  What I can tell you, and you would be surprised how many people don’t know, is there is a difference in the two.   The IRS considers an investment property one that is not your primary residence and is purchased or used to generate rental income, profit from appreciation, or to take advantage of certain tax benefits.  A second home is intended to be used by you and not for rental purposes.  So, if you want to be able to take advantage of the tax incentives given to owners of investment property, make sure to stay within your allowed weeks of use.

I hope that little bit helps.  I am sure I left some good pointers out, so feel free to comment on this blog with other advice and or contact me if you are looking to purchase in my neck of the woods.

*I am a Realtor and my advice is not to be taken as an attorney, CPA, or financial advisor.
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