03 May How to Develop a Vacation Property Strategy
The isolation and travel bans during much of the COVID-19 pandemic have increased people’s urge to escape to serene, relaxing destinations. More people are working from home. That means there is an increasing demand from people who want to rent and work at a destination location. It is a great time to purchase vacation properties, whether for your own enjoyment or investment purposes! Interest rates are historically low at the moment, and 79 million+ baby boomers have locked up home equity and are looking for retirement homes. If that’s not enough evidence, there’s high European demand for vacation properties in the U.S. right now as well.
Vacation Property Facts
- On average, vacation properties appreciate faster than other single-family homes.
- According to hotelcondo.com, there are 5.1 million second homes in the United States.
- Approximately 60% of all second homes purchased are for recreational use. The other 40% are primarily investment properties.
- Many second-home buyers will pay more for their second home than they did for their primary residence.
- Most vacation properties are located less than 200 miles from the owner’s residence.
How to Develop a Vacation Property Formula
The goal is to purchase a property that you can rent out during the peak vacation season. Let’s say that your property is beachfront, and the peak vacation season lasts for 12 weeks from Memorial to Labor Day. Ideally, you want to rent out that property every week during that season. Remember, if you rent it for more than 14 days, it must be classified as an investment property! Be sure to keep track of any travel expenses you make to visit your property. Those are tax-deductible with the investment property classification.
Those 12 weeks in the peak season should pay for the entire year. To keep the math simple, say your monthly mortgage and expenses for a beachfront condo are $2,000. That means that each week should bring in $2,000 of rental income in order to meet your financial needs for the year. This is extremely doable! A good rule of thumb is to purchase properties in an area where you can charge rent 1-1.5% of the home’s purchase price.
With your rent, you want to cover what I call PITIM, which is principal, interest, taxes, insurance, and management. You should allow a total cost of roughly 10% for management and other costs if you rent your property through popular internet sites like VRBO and Airbnb.
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