Thread: Wanting to purchase a Vacation Rental

its great to purchase a vacation house

Second homes now require a 20% down payment. Be real careful about positive cash flow properties. There are always hidden expenses that you have to dig to discover. I sell vacation homes and I see a lot of people jump in without doing the proper research and end up in trouble.

expenses to look for; association fees, taxes, insurance (flood), rental agent commission and fees. These fees are usually not obvious and can eat up your cash flow. Maintainence expenses can be high when you are too far away to even check up on what work was done to your house. Salt air quickly destroys all metal including air conditioning units.

A vacation rental needs to be kept in good shape to keep the renters coming so you will need to repaint more often and replace things like furniture, carpet, kitchenware and decor more often than you do in your personal residence.

Some questions to ask yourself.

Why would property values fall by half on properties with positive cash flow?

Why would anyone ever sell a property that is generating positive income?

Friends and acquaintances like to brag and will seldom tell you about their mistakes.

If you find a property bragging about a positive cash flow ask to see the sellers federal tax return. This will show if they are declaring income.

Originally Posted by Greg

expenses to look for; association fees, taxes, insurance (flood), rental agent commission and fees. These fees are usually not obvious and can eat up your cash flow. Maintainence expenses can be high when you are too far away to even check up on what work was done to your house. Salt air quickly destroys all metal including air conditioning units.

I've nailed down all the hidden costs, and triple verified them against other owners, county records and other sources. From Transient Accomodation Taxes to Association fees, to cooling, to credit card transaction fees, to management costs, to electrical and internet....

I have it accurate to within a hundred bucks, dependent on utility usage and occupancy rates.

Originally Posted by Greg

Why would property values fall by half on properties with positive cash flow?

Originally Posted by Greg

Why would anyone ever sell a property that is generating positive income?

This would assume that positive cash flow is the primary rationale for ownership. Personally, I'm not looking for +CF, necessarily, and can't safely say that "as long as I'm making money on the property, I'll hold it".

Situations arise and circumstances change, and buying and selling aren't solely contingent upon the cash flow of the property. Friends of ours had a +CF property in the complex we're looking at, but they sold it because of the opportunity it's sale provided them. Real Estate prices have come down, but they still stood to profit from the sale of their property, even though it was a +CF scenario. They sold, took the profit and bought a bigger unit at these lower prices.

Others, according to our realtor, have been selling because circumstances on the mainland have changed and they are unable to continue owning the 2nd property. Job loss, stock market crash, etc, have all played a major role in the numbers of properties that have come onto the market.

Originally Posted by Greg

Friends and acquaintances like to brag and will seldom tell you about their mistakes.

If you find a property bragging about a positive cash flow ask to see the sellers federal tax return. This will show if they are declaring income.

Never said anyone was bragging, it's just a matter of utilizing public data to get a general idea of whether or not the property is making or losing money.

I see several posts saying - yeah go ahead and do it, do it. My advise is think twice. However, now is a great time to buy if you are going to do it, as the markets are depressed - especially vacation markets (take a look at Florida). There is a good reason for this: many vacation homes, or homes bought in vacation areas, are bought by investors as an investment. These houses are snatched up if there is speculation that the market will rise and dumped like a bad stock if the market looks bad. Vacations areas tend to be more volitle than primary home areas where folks live, work and have kids in school. They are managed more like a stock than a home.

Originally Posted by John_in_NY

I see several posts saying - yeah go ahead and do it, do it. My advise is think twice. However, now is a great time to buy if you are going to do it, as the markets are depressed - especially vacation markets (take a look at Florida). There is a good reason for this: many vacation homes, or homes bought in vacation areas, are bought by investors as an investment. These houses are snatched up if there is speculation that the market will rise and dumped like a bad stock if the market looks bad. Vacations areas tend to be more volitle than primary home areas where folks live, work and have kids in school. They are managed more like a stock than a home.

Good advice John. I figured that they were a lot like stocks, but it doesn't appear that the "buy low" philosophy has been employed yet

Draws me to 2 conclusions.

1. Market is still coming down and investors are waiting patiently for the best buying time.

2. Investors don't see these as valued stock. Perhaps, still "overpriced", either by some objective standard, or based on the depression seen in other markets.

The average time for these properties on the market is 100+ days. Some have been on an MLS site for 1000+ days. Nothing has hit the market and sold in fewer than 60 days. If they were a hot commodity, the list date to sold date ratio would be much lower.

I feel a bit pressured to buy, not as a reckless and thoughtless emotion, rather, because once they go up to a certain price, we don't see the value in buying into this market.

Something at $275k is a good investment. If it climbs back up to $350 and we haven't purchased, we lose out on $75k in appreciation (which is our hope in the first place), and we get into a situation where rental income makes it a guaranteed negative cash flow scenario (until rental rates can rise enough, or enough of the mortgage is paid down....).

Limited,

I live and work in Kihei/Wailea and can give you some insight. First, in today's marketplace, lenders are requiring larger down payments for properties that allow vacation rentals (35% +). Second, as a foreign national your options will be severely limited. There ARE lenders who will finance Canadian buyers, but your qualifications must be pretty outstanding (and again, down payments will have to be more substantial than 20%). Third, guaranteeing a 80% occupancy is not a safe starting point on which to base a major investment. Sure, there are some complexes (i.e. Kihei Akahi, Kaanapali Shores) where that level of occupancy is common, but overall that is not the norm. Fourth, by most measurable metrics, the Maui market is not 'severely depressed. Keep in mind that the Maui market is very segmented, with some properties seeing marked sales price improvements in the past couple of years while others are flat. And the downward pressure by the onslaught of foreclosures has been somewhat delayed due to Act 48 (Hawaii's new foreclosure law). Our market inventory is actually low when compared to similar time frames in past years, so it will be interesting to see how the influx of buyers (high season is about to start) will impact values.

Your Realtor can provide you with contact information for lenders who may be able to provide financing. I wrote a blog post regarding owning/operating a vacation rental in Hawaii, feel free to PM me for the link (don't want to seem overly spammy by posting here).

Originally Posted by limited60

The average time for these properties on the market is 100+ days. Some have been on an MLS site for 1000+ days. Nothing has hit the market and sold in fewer than 60 days. If they were a hot commodity, the list date to sold date ratio would be much lower.

A few observations based on statement above:

* Yes, there are properties that have been on the market for YEARS. This is due to simply being overpriced by any reasonable standard and are not reflective of overall market conditions (overpriced listings occur in every market, not just Maui).

* The Days On Market metric measures from the date that it was listed to the day the transaction closed. And with short sales having a high market share in sold transactions, that pushes the DOM indicator upward.

* "Nothing has hit the market and sold in fewer than 60 days" - Quite simply, this not an accurate statement and I would question the credibility of your source of information. Many properties go into contract within days (single digits) of coming on the market and this occurs along all price points (from a $100K condo to a $3M home).