Investment Property 101: Investment vacation rental
Anna Maria Island -Bradenton: An investment vacation property can range from a small condo on the mainland all the way up to a Beachfront House on Anna Maria Island – and everything in between. So how do you know the best kind of investment property for you? Furthermore, how do you get involved in this game that has made so many people wealthy and gave enjoyment?
This article is going to give you a crash course in choosing the best investment properties, financing that purchase, and ultimately building serious wealth through real estate investing in Florida.
What classifies a Good Investment Florida Vacation Property?
Before getting into the specifics of how to find and fund your investment property, I want to first take a step back and look at exactly what defines a good investment property? Sure, you could go and purchase any piece of real estate, but a true investment property is one that helps you build wealth, often through multiple streams.
A single investment property typically offers several different avenues to build wealth:
Appreciation: When property values rise, the difference between what you owe and what it’s worth will increase.
Cash Flow: When a property is rented for income, and there is more income coming in each month than expenses going out.
Tax Benefits: Owning investment properties can help offset income from other areas of your life.
Principle Reduction: If you carry a loan on the investment property, each month your amount owed decreases slightly. For example, if you buy a single family home with a thirty year mortgage, after thirty years the loan would be paid off (with the help of the tenants’ monthly rent payments) and you’ll own the property free-and-clear.
Investment properties can utilize any of the above four avenues, but an ideal investment property will utilize all available to you. Also, different investment types will focus more or less on different avenues.
Choosing Your Ideal Vacation Investment Property
There are literally dozens of ways to make money in real estate but as a property investor, you don’t need to do every one. In fact, it’s often best to focus on just one property type and become a professional in that niche before trying something new. A few of the more common investment types are:
- Single Family Homes
- Small Multifamily Properties (2-4 units)
- Mobile Homes
Once you’ve decided on the property type you want to invest in, the next step is finding the right property. There are numerous ways to find investment property, but the most common methods are:
Get a market overview first
The MLS, or Multiple Listing Service, is a database of the local Realtor Board that include all the homes currently for sale in that area. Today you can search the MLS online on many Realtor websites. Be aware though the big “aggregation websites” like Realtor.com, RedFin.com, Zillow.com, or Trulia.com also show listings, but many of these listings are outdated / already sold or just carry incorrect information. The Realtor rankings and referrals on these websites are just paid advertising so probably not a good reference point either. Although they look convenient, they rarely do really good. Especially in a fast market, they create a lot of confusion.
Suggestion: Find a MLS Search which delivers most reliable data, not the one looking nicest.
Finding the right Real Estate Agent
A personal referral is usually a good start. Be aware just because somebody knows somebody who might “also do” real estate is usually not the #1 choice. Make sure to check the credentials of the referral. As nice as that person may be, professionalism is the key (see our credentials here). Remember, you are going to spend a lot of money – maybe the most you ever spent in your life. So you should find a full time professional, not someone who sees Real Estate as a side job for residual income.
The listing agent knows the home best?
There are hundreds if not thousands of Real Estate professionals out there, so why call the only one who definitely knows the seller better than you? Maybe he/she is a buddy or at least business partner with the seller? Do you still think this is a good idea?
And he or she might have a special interest in selling just a specific home. Better get somebody unbiased to represent just your interest.
In Florida like in most places in the US, you as a buyer have the choice to select your own representative free of charge.
Is a Commercial Broker the right choice?
Typically, if you are looking to buy pure commercial real estate, a commercial real estate broker will be the one to use. However for investment vacation rentals, you need somebody familiar with both worlds, the residential and the investment market. You need somebody knowing numbers, properties and the vacation rental market. There are regulations when it comes to vacation renting and these need to be considered as well. A property does not make sense as a vacation investment property if you are only allowed to rent for periods of more than 1 month or just 3 times a year. Especially condo associations tend to regulate other people’s property.
Analyse the rental competition
Somebody who just pulls up competition rents on the internet (because he / she doesn’t have numbers from competition) without knowing the real utilization (rented days / annual revenue) might throw unrealistic numbers into the game. Also rents on the Island significantly differ from rents on the mainland. But costs differ as well.
In fact, you can’t pull numbers from actual rented periods on many websites, only the “official” rents for periods currently unrented. You got the difference? Renting vs. not renting. In addition there might be special deals / coupons / monthly rates around, so even that daily / weekly rent shown on a website is often not charged in reality.
Somebody using just the advertised information might say the competition is renting for $X daily in order to get you interested in a specific property. Well in the real world he / she should better say, the competition has NOT rented the days he / she found online for $X daily.
That said, only consider numbers you have gotten from sources you personally rely upon. That’s why it’s important to find the right agent in the first place. As soon as we realize somebody is playing that game, we’d never rely on any of that information and know this is the wrong person for the job. That can be a contractor, seller or a real estate adviser a/k/a the agent. Realtors are not allowed to give false information by the Code of Ethics but in reality we have seen it happen more than once.
This is the best advice we can give. It’s a big investment and you should only deal with the most professional people. That’s your due diligence.
Funding Your Purchase
You can easily fund your real estate purchases if you have the cash – but not everyone can simply do that. Additionally, those who can pay with all cash often choose not to, because they’d rather utilize the concept of “leverage” to control more property than an all-cash purchase would allow. This section is going to look at a few of the more common methods used to finance real estate.
Bank Loans: If your credit and income are good, you can often fund your purchase through a bank, credit union, or mortgage broker. These rates are typically the lowest and are generally spread out over 15 to 30 years. This is the standard way to go.
Hard Money Lenders: If you only need the money for a short time (and plan to refinance or sell quickly,) hard money lenders can be a tool to use. Hard Money Lenders are short term lenders who look primarily at the deal, rather than the credit/income of the borrower. There are many risks and benefits to using hard money lenders, so be sure to research carefully. If you are looking for a hard money lender, we can advise further, since they come and go. But be prepared this is usually too expensive for long term financing.
Private Money: With the low rates currently offered by most bank savings accounts and CDs, many wealthy individuals are turning to private lending to earn a higher rate. As an investor, you can often offer an individual a solid return, secured by real estate, to the individual and use the money to fund your deals. Private lenders are typically known to the borrower (perhaps a family member or friend.)
Syndication: As you progress in your real estate investing, you may find the need for larger sums of money than you could hope to generate alone. In these cases, real estate syndications are often formed to pool the money from multiple investors into a fund to invest in real estate. There are many laws concerning the forming of a syndication, so be sure to check with both your state and federal laws and consult with an attorney before forming a syndication. This is not common for vacation rentals, more for commercial projects.
Do the math!
Like with every business idea, get a business plan together. A good agent knowledgeable to vacation rentals can provide the correct and reliable numbers. Or he / she can get you a template so you can do the math. Be assured, with incorrect numbers your plan will likely fail in real life. That’s why it is so important to have a partner on your side during the purchase with the same goals as yours and not his closing check in first place.
Our main business is sales, but we want happy customers. Since we also do vacation rentals, we are able to pull real numbers from our database and adjust adequately to your property so the business plan is put on a solid foundation.
Managing Your Purchase
After purchasing your property, the fun is not over. In fact, the decisions you make and the steps you take after your purchase can make your investment a solid one or a dud. Typically, there are two main choices when it comes to managing your property:
Self-Managed: As a landlord, it is your responsibility to advertise, repair, collect rent, enforce the lease and sign with new tenants, prepare or arrange maintenance, do the bookwork, tax filings and perform any and all other tasks as they occur. Especially with vacation rentals, be prepared that something is wrong in the middle of the night or on the weekend – never during the week. Just kidding, but yes sometimes you feel that’s the case. It’s Murphy’s Law. You need to be accessible if you want to take this route.
Property Management: For vacation rental we strongly suggest using our vacation rental division. They don’t do anything else, so professionalism is a must. Usually the owners are encouraged to get furniture for the home so the place can become their vacation home with their touch and feeling. We guide what is needed and what makes sense. A nicely furnished and well maintained home attracts good guests and good guests treat a rental well.
Even though problems always occur at some point and usually they don’t cost you a fortune, you want to have all guests feel homey at your sunshine place. With today’s reviews systems any negative (which you never can avoid 100%) can cost you in the long run. So the goal is to maximize the fun and satisfaction for the guests and minimize any problems and consequently any negative reviews.
Buying an investment property is not a hobby – so don’t treat it like one. Real estate investing is a business like any other, in need of systems, plans, and effective handling to be successful. But it returns more than just money, since it helps you pay for your place in paradise. At some point in future you might want to retire there, so this is one of the best ways to live a debt free retirement in the Sunshine State.
Now it’s your turn! What have we left out? What advice could you add? What questions do you have? Leave your comments (contact us), share this article on your favorite social media channel, and let’s chat!
Sea to Sky Realty
The Florida Real Estate Company with the GERMAN Twist!
Axel and Bea Weiss
Bradenton, Florida 34205
(941) 866 1666