Often times I have vacation home owners come into my office, and explain to me that their vacation home is causing their family to have financial hardship.
Often times these investors were sold a bill of goods at a trade show or by a realtor looking to make a quick commission check. Sometimes these realtors go through the numbers and show the investor how they are going to make money every month, and this is a very safe investment.
While I do agree, that buying a home in a popular vacation community is a safe investment it is far from being risk free. We only have to look back about 7 years to find proof why many vacation home investors should be weary. Here in Orlando, there are many vacation homes, town homes, and condos that were purchased 7 or 8 years ago for more money than they could be sold for today. Ouch, seven years of no appreciation.
4 questions every new vacation home investor should ask themselves:
Here are a few questions every new vacation home investor should ask themselves before purchasing a property:
1. Are you able to put down a large deposit?
If you are not able to put down a large deposit or pay for the property with cash, then you need to be cautious. Most lenders are really making it difficult on investors to buy a vacation home without having at least 30% or more down. If you elect to pay a higher interest rate, be very careful as this is how many vacation home owners get themselves into trouble.
2. Are you financially stable? Are you able to feed the vacation home every month?
A good property manager should be able to break you even on your monthly bills, your HOA payments, your property taxes, your insurance premiums, repairs and chip in every so often on the mortgage payments. However since every market has high and low booking months, I like to caution investors to look at their mortgage payment and feel comfortable that they could pay that amount every month without much hardship on their family finances. If you cannot do this then I would suggest looking for a less expensive investment or wait until you can put more money down.
3. Do you have extra time which you could devote to your vacation home?
A lot of investors I know come down to their house every year and do a lot of preventative maintenance and upgrades themselves. This saves them a lot of money. Another way investors can make their vacation homes more profitable is if they do majority of their own bookings. Marketing a vacation home is expensive, and this costs property management companies money so they pay the owner 65% to 75% of what the customer pays them. If an investor can book his own vacation home, then he can make this extra money on each and every booking going into his house.
4. Do you like the area where you are buying a vacation home?
You need to be present and active when you own a vacation home and you need to come by and check on it at least 2 or 3 times a year. This way you can make sure the property is being kept up to your standards. It sure makes these visits more enjoyable if you feel like you are going on vacation rather than look at it as a job.
The best advice I can give any new vacation home investor is to take your time and do your research. If someone tells you that you have to act now to get this great deal, slow down and do your due diligence. Not every vacation home makes money, if they did everyone would own one.
Be cautious when buying a vacation home, consider buying a condo or townhome first to see how you like owning such an investment. If you like it, you could always sell this unit a buy a bigger vacation home in the future. Remember, there are always more demand for investments that are less expensive. So if you started off with a condo and you did not like the return or the demand on your time that this investment is requiring from you, it is easier to sell a $100,000 condo than it is a $450,000 vacation home.
How do you feel about starting small like in a condo?
This article originally appeared on Bigger Pockets and is Copyright 2014 BiggerPockets,
More great income investments
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.