If you are reading this, you likely do not need a lot of persuasion about the benefits of real estate investment (build equity, control a tangible asset, tax benefits, etc.). However there are four key factors that indicate if you are ready to consider the investment of a vacation rental.
YOU CAN USE IT.
Finding a good deal is not so great if you cannot make use of the property. My wife and I traveled frequently and always researched the real estate market wherever we vacationed. So in 2011, just a couple of years after the housing meltdown, we went to Clearwater, Florida. There were numerous beachfront, short sales we could afford that only a few years previous had sold for four times their current list price. While intrigued, we knew we had children in our future and our primary residence was over 1000 miles away. The likelihood was that we would not be able to get down very much.
You simply have to be able to get to your property often, particularly upon initial startup. There will be repairs that you need to do…or at least verify are done or are necessary. Furniture to purchase and receive, and of course you want to be able to enjoy the place yourself from time to time. It just is not realistic to expect to be able to do manage EVERYTHING from afar.
YOU CAN AFFORD IT.
Real estate costs money. There is the down payment, whether it is 5, 10, 20 or 30%, I have yet to verify an individual who was able to purchase a second, investment property with zero money down. Then there is the cash on hand necessary to make initial repairs, purchase décor, list and market your rental, pay utilities and initial deposits, etc. Believe me these costs really add up as I will outline in detail elsewhere. You need to be in a strong financial position.
YOU HAVE DONE YOUR HOMEWORK.
Mine is a beach rental, maybe your preferred locale is a ski chalet, but either way you need to know the ins and outs of your location. Is the area you are considering in demand with renters? Does the investment property have the necessary amenities? Do you thoroughly understand the market, and is the current price justifiable? Have you run all the numbers for your situation? Do you understand local laws, property association rules, etc.? For example, in my analysis of Clearwater, Florida I discovered that most of the condo associations we looked at would not permit rentals of less than a month! That pretty much put a damper on my plans of running a weekly rental.
YOU ARE READY TO WORK.
Your guests expect near perfection for paying top rental rates. Garbage disposals must work, doors cannot stick, and the internet and cable cannot go out. When these things go wrong you will hear about it or plan to pay someone else (a management company) to…which of course will eat into your returns.
Getting the property initially furnished, managing inquiries and fielding calls when things break certainly requires effort and energy. A beach house is not a truly passive investment. However, unlike a 401K you can enjoy this investment and vacation there! Just expect to end your vacation storing personal effects, emptying drawers, locking up items you do not want renters to use, like bikes, sheets, etc.
Check, check, check, check? Then investing in a beach house for fun and profit is probably right for you.