Prices in resort areas may have hit their bottom, but getting the right investment property without getting hurt takes planning and savvy.
Q: I want to buy a vacation condo and rent it out as an investment. What are the pros and cons? I want to start small and buy with cash. Is this the time to do it?
— Judy B.
A: Dear Judy,
Rock-bottom pricing in many resort areas suggests that this is a pretty good time to buy vacation condos. Asking prices in some South Florida markets are 60% lower than they were in 2005 and 2006.
But — and yes, there’s always one of those in real-estate investment — many sellers are coming out of the woodwork now. Couple that with high unemployment rates, and it may suggest a stalled recovery, the much-feared double-dip recession or both.
An all-cash offer always wields more negotiating clout and allows you to forgo the iffy mortgage-approval process. But it also ties up your assets.
There are other drawbacks to an all-cash deal. In a worst-case scenario, you may be forced to sell at a big equity loss. In other words, if your “cash condo” were to lose significant value, you’d have no one with whom to share the risk.
What’s more, you can get a tax deduction on the mortgage interest on the condo. But there’s no deduction if you pay in cash and don’t have a mortgage.
If you do decide to pay in cash, take precautions. For example, you won’t need an appraisal if you buy in cash, but you should get one anyway to determine the unit’s current value.
Also, ask the condo association for proof of funds to see if there are adequate reserves to handle maintenance issues. Determine if many foreclosures in the community might further compromise operating funds.
You say you want to start out small, but you’ll probably want to buy a condo with at least two bedrooms to accommodate vacationing families. You should also determine if you want to rent out the place weekly or monthly. Some condo communities frown on transient visitors and may impose fees and restrictions on rental owners.
A good rule of thumb in destination areas is that you’ll need to rent out the place for four to five months annually to break even. That’s based on an assumption that one week’s rent in a modest condo during peak seasons will be roughly equivalent to a monthly mortgage payment. Even if you do pay cash, a little quick math should give you that sum.
Becoming a landlord is not the sort of thing you enter lightly. You must study how to manage, maintain, furnish, promote, lease, price and secure the place. Fortunately, plenty of resource material is available from folks who’ve learned the hard way.
Among the better books on the subject are “How to Make Your Vacation Property Work for You!” by Alfred and Emily Glossbrenner and “How to Rent Vacation Properties By Owner” by Christine Hrib Karpinski.
If you live close enough to your investment condo to look after it, you could do without a property manager, whose fees can cut into your income stream by anywhere from 15% to 50%. Interviewing and securing reliable and reasonably priced repair contractors well in advance will make that job easier for you when something goes wrong.
By Steve McLinden of Bankrate.com