By Jeff Moore
I recently had a conversation with a friend who was visiting the beach from Atlanta. I asked her why she hasn’t considered buying her own place down here. She just replied with, “(Sigh…) I wish I could.”
I know she can afford it, but I think a lot of people just assume that it is too expensive to own your own little slice of paradise. I don’t think they take the time to look at the numbers. If they did, they would see how affordable it is. And, what a great investment it can be.
As someone who personally got caught up in the excitement of the last real estate boom, and who lost a lot of money, I now look at cash flow when I am considering an investment.
I guess I should insert a disclaimer here. I know too many lawyers already. They are all great, wonderful people, but I don’t want to meet another one because of this article. So… I am not giving investment advice. You should consult your accountant on the tax implications of buying investment property. You should also see a doctor and make sure you heart is strong enough, and a marriage counselor to discuss the ramifications that investment property can have on a marriage.
Ok, now let’s look at some numbers.
Can I Buy a Beach House? Look at the Numbers.
While you are on vacation, you notice the condo you are staying in is for sale. They want $400,000.
Just for fun, call me (I’ve been called the hardest working Realtor® on the beach) and have me offer them $360,000. Let’s say they accept the offer. Now your heart stops and your stomach drops to your flip flops.
Things just got serious. (This is why I had you check with your doctor before you came down here.)
If you decide to go through with this crazy idea, what can you expect?
Well, expect to put 20 percent down, which is $60,000. Debt service on $300,000 is $18,240 per year. This is based on a 30-year loan at 4.5 percent interest. Your taxes will probably run about $3,300. If your HOA dues are $500 per month, that is another $6,000. Normally, HOA fees should cover cable, water, and trash. Let’s say you have to pay electric and you want WiFi. That is another $150 per month, or $1,800 per year.
That means your total annual expenses are $29,340.
A pretty good rule of thumb is that a beach rental will bring in around 10 percent of its value. According to this, your $360,000 property should bring in around $36,000 per year.
So after expenses, you should net around $6,000 on your investment.
This is pretty easy math. That is a 10 percent return on investment.
Now… If you really negotiated a great deal and the property is worth $400,000, you should gross about $40,000. That is a $10,000 yearly profit.
I do not know many investments that would pay you $10,000 on a $60,000 initial investment. The kicker is that you get a free beach house to stay in anytime you want. But don’t plan on staying in your fancy new beach house on any of the high-dollar holidays if you are counting that rental income.
This scenario doesn’t take into account tax savings or appreciation. Real estate definitely does not always increase in value. But based on current market conditions, I would say that the market is favorable to increase in the next couple of years.
What to Look for in a Beach House if You Want to Use it for Rental Income
Not all beach houses make great investments. If you play your cards right, you can get a great return on investment – but here’s what you need to look for if you’re interested in earning back your cash:
- Location, location, location
- Low maintenance
- Practical layout
- In-house amenities
As a general rule, the closer your investment property is to the beach, the more you can charge in rental fees. It’s also more likely to book in the off-season if you don’t intend to take up residence there during that time. You want to buy in a neighborhood that has access to plenty of amenities – think parks, playgrounds, and close proximity to dining and shopping – and you want the other homes in the area to be aesthetically pleasing, too; all those things make the rental more appealing.
Maintenance and repair costs eat into your profits, so you want to purchase a home that’s already in good shape. While there’s no guarantee a new air conditioner won’t give out in the middle of the summer or that a new refrigerator isn’t going to fizzle out, chances are that newer appliances and systems will last longer than old ones will.
Getting repeat renters can be a tremendous benefit to you, and the easier your home is to occupy, the more likely you are to find them. Buying a “normal” house – one that’s simple and not quirky – can make a huge difference in getting repeat renters who come back season after season. Another benefit: It’s easier for you to occupy while you’re in town, too.
Although it’s not always the best choice to buy the most “decked-out” home on the beach to use as a rental property, having in-house amenities can make it far more desirable than the other, more ordinary, homes on the beach. Things like a covered porch with ocean views, a large jacuzzi tub, a private swimming pool or a fabulously equipped kitchen can attract renters who are willing to pay more for those luxuries – and they’re also more likely to return next year.
For most people, the biggest benefit to owning a beach house is the fact that you get to visit it whenever you’d like. Think about what you enjoy when you’re in town. The house you’re renting for your visits may not be the best investment, even if it holds tremendous appeal for you – you want something that appeals to the widest range of renters possible, so make a quick mental list of what you wish the property you’re staying in had. Even if you don’t find a beach house that meets all your criteria, we may be able to find you one that comes close… and that you can modify to check all the “must-have” boxes.
Think You’d Like to Own a Beach House?
Have you ever thought you would like to own a house on the beach? I hope this has given you some insight and your wheels are turning. I also hope this article made you feel like owning a beach house is actually a viable option. Wouldn’t it be nice to look at your significant other and say, “Should we go to OUR beach house this weekend?”
You can. Just call your local at the beach.
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About 30A Local Properties:
30A Local Properties is located in Grayton Beach, FL and services the South Walton community. The team of locals confidently offers the experience of over six hundred South Walton real estate transactions, nearly three decades of banking experience in commercial and residential property holding positions, and over a decade of entrepreneurial real estate experience in property investments and management. Visit our website at www.30alocalproperties.com or stop by our office and meet the team:
30A Local Properties
35 Clayton Lane, Suite B
Grayton Beach, FL 32459
P: (850) 213 3048
F: (850) 213 0035