Condo at the Beach - Do the numbers make sense?

[Z3Dreamer]

Before I begin, I think the answer is that people purchase beach condos for the status, as I don't see that the numbers make sense.

Today, I could rent a 2 BR, 2 BA Oceanfront condo for maybe $900 - $1,200 a week for the last week in August. This is in North Myrtle Beach. A condo that can yield this kind of rent is in the $225,000 range. Of course, you can get condos cheaper and more expensive. I am just trying to match a weekly rental and a purchase price. Condo fees are going to be in the $800 per month range. Management fees run 35% to 45%. Those are the big expenses. You can guess maintenance and repair and utilities.

Lets say that you will rent solid from mid May to mid September. Furthermore, you are going to stay in the unit for 4 weeks in the off season. That leaves 28 weeks. During those weeks, between decreased rates and vacancies, you will pull in an average of $500 a week. Using these numbers and some estimates of other expenses, I get a profit of $2,000. Plus, I get 4 weeks stay, FREE! I have left out appreciation because I don't see enough appreciation in 5 to 10 years to offset the expenses of selling.

OR, I could take the earnings (60/40 AA) on $225,000. Maybe $10,000. And I could rent 4 prime weeks in a similar condo and pocket $6,000.

Again, people must do it for the status of saying I own a condo or they plan on using it a whole lot more than my example. Do not want hate from those that own and use for extended periods. Just trying to understand those that think they are making a profit and getting their vacation for free.

 

[pb4uski]

Can you show your calculations how you get $2k profit?

 

[CaliKid]

It seems you are missing important things on both sides:
- I don't see vacancy and I don't see capital expenditures;
- On the other hand I don't see anything for tax benefits such as depreciation and tax deductible trips to visit your property.

Also, if I am buying a property for status I will not be renting it out. If I am buying for status it will sit empty 45 weeks a year except when my friends are using it for free. Lol.

 

[RunningBum]

Before I begin, I think the answer is that people purchase beach condos for the status, as I don't see that the numbers make sense.

...

Again, people must do it for the status of saying I own a condo or they plan on using it a whole lot more than my example. Do not want hate from those that own and use for extended periods. Just trying to understand those that think they are making a profit and getting their vacation for free.

So you want to criticize what people do but don't want any hate? Wow.

Are you sure you've done all the numbers right? What about inflation and the cost of your vacation in 5-10 years as a renter, whereas being an owner you'll be the one getting the inflated rental revenue?

I'm not a rental property owner but I don't get the point of starting a thread to call out people who are. If you don't understand why people do it, why don't you just ask without giving your judgemental and rather insulting conclusion?

 

[Z3Dreamer]

So you want to criticize what people do but don't want any hate? Wow.

Are you sure you've done all the numbers right? What about inflation and the cost of your vacation in 5-10 years as a renter, whereas being an owner you'll be the one getting the inflated rental revenue?

I'm not a rental property owner but I don't get the point of starting a thread to call out people who are. If you don't understand why people do it, why don't you just ask without giving your judgemental and rather insulting conclusion?

I apologize. I do things for status. Sometimes. If someone says I do something for status, I don't take it as a criticism. My wording was poor. I apologize, again.

Some more detail on the numbers. Total rental income is $32,000. Management fee is $12,800. HOA fee $9,600. Electricity $2,400. R&M $5,000. Profit $2,000.

Not seeing much inflation in cost to rent a unit. If I sell the unit in 5 to 10 years, I am going to have a 6% realtor fee plus maybe 4% of other stuff. So, I don't see a big profit at the end making the overall deal a winner.

Can't take certain expenses off on my tax return if I use it for more than 14 days.

 

[Bir48die]

I don't approach this from a financial standpoint. My issues are:

1) When you own recreational property you are beholding to it. I don't own a second place because at this juncture I don't want to feel the pressure to only go to my second house when I travel.

2) The pressure is not to use it for personal use during prime time. If that's the case then this is strictly a financial decision at least for the immediate future since you will feel pressure to rent it out on all of the key months.

3) If family and friends want to use it do you charge them market rates? Or, do you lower the cost or give it for free?

4) Not sure what HOA covers. Assume at that yearly cost they handle at least maintenance, roofing, siding? I have spent much of my life at the beach with our family owning property. Salt water/sand can be a killer so there will have to be sliding door replacement, possible rusting, etc.

Just a few thoughts.

 

[ivinsfan]

Don't do a thing until you get a detailed breakdown of the HOA and what it covers. Check for cash reserves if any.

Some HOAs cover cable TV, intenet, landscaping and give the rest of the money to themselves or relatives as management fees. If nothing is in reserve for major issues, upkeep and such, the downside is tremendous.

 

[Dash man]

We have a condo in SE Florida, and status never entered our minds. However you also need to consider assessments, especially if there are insufficient reserves.
Our ocean front condo only allows rentals after you’ve owned the condo for at least a year, and it has to be a minimum of a 90 rental with the lease requiring approval by the association. We have no intention of renting this and it is our winter home.

 

[sheehs1]

Some more detail on the numbers. Total rental income is $32,000. Management fee is $12,800. HOA fee $9,600. Electricity $2,400. R&M $5,000. Profit $2,000.

Rarely do I see a management fee this high. Typically I see 15% to 17%. What in the world are they managing other than renting it for you?

I purchased a bay front condo. It was not for status and is not for rent. If I rented, I could get a positive yearly profit return of minimally $13,000.

HOA Reserves are good. They set aside the recommended yearly amount cited in a Reserve/Replacement Study. We are in good shape.

 

[Bestwifeever]

There is an opportunity cost to any investment--money in property cannot be invested in the stock market. But, most people here probably don't buy vacation property as an investment to make money or worry that they might earn a few thousand more in the markets.

The best thing is having good friends who occasionally invite you to their vacation homes!

 

[Ginny]

I have been looking at buying one in MB and my realtor says the profits would be about $6,000 per year. I wanted to use the amenities, but I joined a club near me and that is much cheaper. I decided to leave my $$ in the stock market and get a better return.

 

[flintnational]

I get in trouble every time I try and mix my lifestyle choices with my investment decisions. I have found the process gets easier if I decide which to focus on. If this is a lifestyle choice, then you can determine what is an acceptable cost/return and does it meet your lifestyle objectives . If it is purely an investment, then you can compare the returns to other investments (not at the beach) and make a decision.

To answer your question, I think many buy using the justification that it is an "investment". I suggest they should view it as a lifestyle choice. Some would make a different decision if they took this approach. Others correctly see it as a lifestyle choice and are happy with the decision. If I ever purchase a second home, it will be a lifestyle choice and meet that criteria. Any up side potential would simply be a bonus.

 

[W2R]

It all sounds like so much work and hassle, no matter whether you rent or buy. (sigh). Who wants to do all that in retirement? You only have so much time and eventually we all croak like Kermit in the picture below. What do you truly want to get out of life before your time runs out? Surely life has more to offer than just more and more hassles.

I think the cheapest and most no-hassle solution is to choose where you want to live, in a location where you enjoy all four seasons, and then live there, stick with that choice, and stop fussing about multiple homes.

But then, I am unusually fortunate in that I like the (ungodly hot!) climate here in New Orleans, even in the summertime. By September I am definitely ready for winter, and later on (by sometime in the spring) I am ready for Mother Nature to turn on the heat again. I think it's fun living in this climate year 'round.

The best thing is having good friends who occasionally invite you to their vacation homes!

That's an even better solution! Didn't see your post until after I posted.

 

[Zona]

DH and I have toyed with the idea of purchasing a cabin, not a beach condo, for personal use and short-term rental, but this is the main reason we never pull the trigger:

1) When you own recreational property you are beholding to it. I don't own a second place because at this juncture I don't want to feel the pressure to only go to my second house when I travel.

DH has really fond memories of a cabin his parents used to own and go to every summer. Owning a 2nd place would be nice for making family memories, so I can see why this would be a good decision for some. I would feel obligated to vacation at the 2nd home thinking that "I've paid for it, now I've got to use it". It would mean we would have to skip all the other places on our travel bucket list, so it doesn't make sense for us.

Our travel style these days is to go to new places and only occasionally go back to the same location (but usually not the same lodging/hotel). We just returned from a 1-month rental in Santa Barbara, a five minute walk from the wharf. Cost to rent was less than $3k. The house where we stayed is currently on the market. Cost to own: $1.5 million+.

 

[audreyh1]

We don’t want to del with another property. We would rather rent. We rarely return to the same place anyway.

 

[joeea]

Again, people must do it for the status of saying I own a condo or they plan on using it a whole lot more than my example.

In our case, it's more about using it a lot more than your example.

We purchased a second home in a beach community six years ago. We don't rent it.

We spend every weekend there year round. And we babysit our grandchildren there every week. We will be moving there full time and selling our primary residence next year when my wife fully retires.

Do not want hate from those that own and use for extended periods. Just trying to understand those that think they are making a profit and getting their vacation for free.

Nothing free about our place. But it's been worth it!

 

[pb4uski]

I apologize. I do things for status. Sometimes. If someone says I do something for status, I don't take it as a criticism. My wording was poor. I apologize, again.

Some more detail on the numbers. Total rental income is $32,000. Management fee is $12,800. HOA fee $9,600. Electricity $2,400. R&M $5,000. Profit $2,000.

Not seeing much inflation in cost to rent a unit. If I sell the unit in 5 to 10 years, I am going to have a 6% realtor fee plus maybe 4% of other stuff. So, I don't see a big profit at the end making the overall deal a winner.

Can't take certain expenses off on my tax return if I use it for more than 14 days.

Having owned a condo for a couple years I can safely say that your repairs and maintenance numbers are way off of my experience.... mine are next to nil... let's say $1,000/year for discussion purposes and that includes a provision for periodic HVAC replacement... that increases your cash profit to $6,000... plus you get 4 weeks of use which probably has a value of at least $2,000... price appreciation which would be ~$7k/yr at a conservative 3% annually.... that is $15k in total.

The economics for our winter condo is pretty simple.... our annual operating costs are ~$8k a year and during prime season rents are ~$3.5k a month or $10.5k for 3 months. Since we now own, we find that we end up using it closer to 6 months than 3 months. The opportunity cost of having paid cash is partially offset by appreciation... it has been ~7% annually during the last couple years that we have owned but I don't expect that pace to continue forever.

 

[sheehs1]

I get in trouble every time I try and mix my lifestyle choices with my investment decisions. I have found the process gets easier if I decide which to focus on. If this is a lifestyle choice, then you can determine what is an acceptable cost/return and does it meet your lifestyle objectives . If it is purely an investment, then you can compare the returns to other investments (not at the beach) and make a decision.

To answer your question, I think many buy using the justification that it is an "investment". I suggest they should view it as a lifestyle choice. Some would make a different decision if they took this approach. Others correctly see it as a lifestyle choice and are happy with the decision. If I ever purchase a second home, it will be a lifestyle choice and meet that criteria. Any up side potential would simply be a bonus.

Definitely a lifestyle choice for me. That and not willing to sell my primary home yet. I did not even consider it as an investment... but it was somewhere to park "cash" that was not in the stock market anyway (nor was I putting it in) that has given me much enjoyment every week-end! I love it and the bay front water views.

And for those reading, a May or early June week for ONE Week renting an Ocean Front beach cottage large enough for "some" extended family on the Carolina coast (6 bedrooms), costs us $9,000/week. For ONE WEEK! That's about my yearly cost for this condo and I get to use it all the time! I suppose everything is relative.

 

[OldShooter]

Before I begin, I think the answer is that people purchase beach condos for the status, as I don't see that the numbers make sense. ...

Hmmm ... You don't think the numbers make sense so you conclude that that motivation is status? That's quite a leap. Why didn't you conclude that the owners weren't very good with numbers or maybe that the owners didn't care about the numbers?

In our case (lake home) we didn't care in the slightest what the numbers were, beyond being confident that we could afford them. We have a beautiful home that we enjoy visiting for lengthy periods, winter and summer. The kitchen is exactly what we want because we remodeled it to be that way. Ditto the master bedroom (with its lake view) has a nice half-bath because we added it. Our clothes are in the closets, our books are on the shelves, and our boat is at the dock. The ambiance is nothing at all like a rental, which we would hate. When we arrive we feel "at home" to exactly the same degree we do when we return to the city. (The dog, though, sees it a bit differently: the lake is clearly "heaven" and the city is "prison.")

It doesn't hurt, though, that the place is worth about 5x what we paid for it 25 years ago. That's a 6-7% annual rate of return if I consider the taxes and maintenance to be a cost of living there rather than an investment expense, which I do.

Status? I have no idea. Few of our friends have any idea of what our "cabin" really is, so I doubt that many are impressed Nor would we care one way or another. Certainly it has never crossed our mind as a reason for owning the place.

 

[kcowan]

I get in trouble every time I try and mix my lifestyle choices with my investment decisions. I have found the process gets easier if I decide which to focus on. If this is a lifestyle choice, then you can determine what is an acceptable cost/return and does it meet your lifestyle objectives . If it is purely an investment, then you can compare the returns to other investments (not at the beach) and make a decision.

To answer your question, I think many buy using the justification that it is an "investment". I suggest they should view it as a lifestyle choice. Some would make a different decision if they took this approach. Others correctly see it as a lifestyle choice and are happy with the decision. If I ever purchase a second home, it will be a lifestyle choice and meet that criteria. Any up side potential would simply be a bonus.

Yes! We consider all property ownership to be a lifestyles expense. With our snowbird condo, we found that 4 months usage justified ownership and we do not rent it. We find a lot of people buy with the view of renting it as an investment. Because we spend 6 months there, we do not need to bother. Plus HOAs are getting really sticky about rentals, and renters having guests.

But even our property up north is a lifestyle expense. We could live in something costing half what our place costs. But we don't because we don't have to. We have been in it 20 years and the last remodel (kitchen and bathrooms) was 10 years ago. We replaced wall-to-wall carpet with hardwood two years ago, and redid the patio floor 3 years ago. Good to go for now.

 

[athena53]

I used to watch a program on HGTV called "Vacation Home For Free". It wasn't free, of course; the assumption was that the owners would rent it out during prime season in addition to the small matter of a down payment.

Two things would make me nervous. One- I worked in property-casualty insurance for 38 years. Insurance is not going to go down on these properties. (Maybe that steep management fee% includes insurance premiums, at least on the building?) Every time there's a major hurricane the catastrophe modelers refine their data and premiums go up. (Mom and Dad lived in a modest house in NMB, NOT oceanfront but between the main drag and the ocean, and stopped buying windstorm coverage.)

Second- vacation rentals seem to be sensitive to the economy and to the price of gas. People tend to forego long road trips when gas prices skyrocket, and do "staycations" if worried about their finances. You cannot assume 100% occupancy every year.

OK, a third item- salt air is rough on everything. Plan on higher maintenance costs as a % of value that you would in a landlocked area.

Not my thing but certainly a lot of people decide to do this.

 

[Dash man]

In addition to our Florida condo, we have a Jersey Shore SFH that we do rent out about five weeks a year, at least for now. It’s another lifestyle choice that we use for getaways and family get togethers. Our net rental income is about $16,000 for those five weeks, which cover property taxes and utilities for the rest of the year. We don’t need to rent, and one bad tenant will probably end it.

 

[Charlotte]

Really look into those insurance costs... we have multiple kinds of policies for our beach house... flood, wind, regular homeowners-like insurance to protect against fire or theft, as well as a higher than normal umbrella liability policy (important if you think you are going to rent it out).

 

[Dash man]

Really look into those insurance costs... we have multiple kinds of policies for our beach house... flood, wind, regular homeowners-like insurance to protect against fire or theft, as well as a higher than normal umbrella liability policy (important if you think you are going to rent it out).

Got ‘em all covered. Our SFH is two blocks from the beach and not even in a flood zone. Property tax is by far our most significant expense.

 

[sheehs1]

Two things would make me nervous. One- I worked in property-casualty insurance for 38 years. Insurance is not going to go down on these properties. (Maybe that steep management fee% includes insurance premiums, at least on the building?) Every time there's a major hurricane the catastrophe modelers refine their data and premiums go up. (Mom and Dad lived in a modest house in NMB, NOT oceanfront but between the main drag and the ocean, and stopped buying windstorm coverage.)
.

For a condo, part of the HOA fee paid to the association is for the Master Insurance Policy for all building units and purchased by the Condo Association, so I am still unclear why the steep management fee. The Op hasn't responded to this point. The HOA fee listed in the numbers was pretty high too so I assume that included the units divided interests in the Master Insurance Policy.