Possible RE investment

[brewer12345]

I am starting to think about buying a property in an area I would vacation in and eventually either spend a few months year or entirely relocate to. In the meantime, this would mostly be a rental property aimed at vacation rentals and managed by a professional property manager. I don't live in the area, so it would be an absentee thing. The area under consideration is Taos, NM. Before I would do this, I would do a lot of spreadsheeting to make sure the numbers work, and I would shop pretty hard for a good (not necessarily cheap) property manager. Vacation rentals are likely to be more sensitive to economic conditions than long-term rentals, but would not have to deal with foreclosures.

Any obvious gotchas? I know JohnGalt has done something similar, so I'd appreciate any words of experience.

 

[BUM]

We have a townhouse by the sea in NC. Half the island is residential and half vacation rentals. We can see the rental activity first hand and think about renting our place constantly. Here are some of the ins and outs.

Pinnacles: Good steady income during "the season".
Excellent appreciating asset barring any bubbles or natural disasters


Pitfalls: Like the stock market, the guys doing well seem to have been in it for
years. New money needs to brew.

Economy sensitive - Sometimes the vacancy signs are everywhere.

The manager can be key. Monster operations do lots of advertising,
have loyal customers, several handy offices, ergo lots of foot traffic.
The smaller guys have to try harder but because they have fewer
properties, everything always seems rented. Thats a good thing.

Crime - The place can be easily identified as a rental to the bad guys.

Wear and Tear - Beware of the 3 Bears syndrome. (Whos been
sleeping in my bed?) Don't get emotionally attached. Regardless
of what the property mgr. says he will pimp your place out to
anyone with a valid credit card.

Lastly - If you are planning to retire to the place. Don't rent it 1 year prior.
Figure on a big bucks remodelling job. Remove all traces of rent-ilk.
Make it ER-worthy!

 

[Mr._johngalt]

We have a townhouse by the sea in NC. Half the island is residential and half  vacation rentals. We can see the rental activity first hand and think about renting our place constantly. Here are some of the ins and outs.

Pinnacles: Good steady income during "the season".
                 Excellent appreciating asset barring any bubbles or natural disasters
                 

Pitfalls: Like the stock market, the guys doing well seem to have been in it for                       
           years.   New money needs to brew.

Economy sensitive - Sometimes the vacancy signs are everywhere.

The manager can be key. Monster operations do lots of advertising,
              have loyal customers, several handy offices, ergo lots of foot traffic.
               The smaller guys have to try harder but because they  have fewer
               properties, everything always seems rented. Thats a good thing.
         
Crime - The place can be easily identified as a rental to the bad guys.

Wear and Tear - Beware of the 3 Bears syndrome.  (Whos been
              sleeping  in my bed?) Don't get emotionally attached. Regardless
               of what the property mgr. says he will pimp your place out to
               anyone with a valid credit card.

Lastly - If you are planning to retire to the place. Don't rent it 1 year prior.
             Figure on a big bucks remodelling job. Remove all traces of rent-ilk.
             Make it ER-worthy!



             

I pretty much agree with all of this.

JG

 

[brewer12345]

Thanks for the excellent tips thus far. Any more would be appreciated.

I would probably be renting this property out for 5+ years, maybe using it a week or two a year. I also won't do it unless I believe that the rents have a reasonable chance of covering the cash monthly outlays (economic recessions, etc. aside) and that the local market won't be prone to ridiculous overbuilding and sprawl (like Santa Fe).

 

[Mr._johngalt]

I am starting to think about buying a property in an area I would vacation in and eventually either spend a few months year or entirely relocate to.  In the meantime, this would mostly be a rental property aimed at vacation rentals and managed by a professional property manager.  I don't live in the area, so it would be an absentee thing.  The area under consideration is Taos, NM.  Before I would do this, I would do a lot of spreadsheeting to make sure the numbers work, and I would shop pretty hard for a good (not necessarily cheap) property manager.  Vacation rentals are likely to be more sensitive to economic conditions than long-term rentals, but would not have to deal with foreclosures.

Any obvious gotchas?  I know JohnGalt has done something similar, so I'd appreciate any words of experience.

I did something very similar and it's workin' so far. In my case, I saw
an ad, looked at about 6 or 7 similar properties and wrote up an
offer, all within about 2 days (I did know the area pretty well).

Someone posted earlier that you have to tolerate the wear and tear.
Also, no matter how good the manager is there be the urge just to
"get someone in there" and move on. Our manager charges one
month's rent per year, prorated for the time the place is actually rented.
Worth every penny.

JG

 

[unclemick]

Hmmmm

Good to see RE getting some posts. I remember my comment on the 'old forum' about RE being more difficult - 'ie not getting any respect.'

Still a stock cat - but many an ER has been 'made' with RE - either partially or totally.

Caution - I noticed in my 'retirement functions' that 'stock talk' peaked before 2000 and has died pretty much with the bubble pop.

Just an observation.

Heh, heh, heh.

 

[tryan]

I am building waterfront in ski country for exactly the same purpose. Shooting for rental income in Jan 2006.

Been interviewing property managers. Commisions are not cheap. One place wanted 40% !?!?! Settling on 20%, no exclusive listing, I pay cleaning and maintenance on TOP of the 20%.

I'll only accept 1/2 season contracts with this guy (at 20%). Biggest problem I foresee is a manager accepting weekend bookings months in advance when - in time - weekly could be had. Figure I'll hold-out for weekly rentals then "work" there myself if it's empty.

Distance from home is crutical IMO. Especially with the harsh winters we have. I limited my search to 120 miles from home. 2 reasons for this: 1) wanted to be able to commute to work Monday am (thought I'ld be working) 2) need the ability to get there quickly if the temperature alarm triggers.

Having dual "prime" seasons is also important. Being 7 miles from a ski resort makes winter prime .... water front opens the possibility of summer rentals.

Will use 3 or 4 on-line retal websites to advertise. And use the managers cleaning and maintenance.

Read a great book "How to Rent Vacation Rentals by Owner" by Christine Karpinski. She also has an organizer to help manage the day to day shuffle. It's an easy read and has checklists for how to furnish the place.

Also nice to be able to barter. Traded my brother a week rental for a set of golf clubs. Giving my sister a week in exchange for a storage locker full of furniture.

The thought of buying EVERYTHING again to furnish the places is a little hard. But the DW loves the idea.

A word of caution buying in this market .... vacation property prices have out paced SFH IMHO. How long it can continue is anyones guess.

 

[Nords]

Monster operations do lots of advertising, have loyal customers, several handy offices, ergo lots of foot traffic.  The smaller guys have to try harder but because they have fewer properties, everything always seems rented. Thats a good thing.

Speaking as a nasty paranoid cynical landlord who's always managed his own properties, how do you know when the manager has rented out the property and how much he's really getting for it? The heck with 20% mgt fees when you can get away with charging $95 for a $10 credit check.

I can't believe that fraud & kickbacks aren't widespread, especially when blissful homeowners are absentee to the point of apathy.

I wonder if the numbers will ever work out, or if it's just better to rent a different place each year and let the market set the prices.

 

[brewer12345]

That's a good question Nords. In the case of the property manager I have rub across thus far, availability is shown for each property on-line, rates are pretty transparently disclosed, and ultimately I would check references, do what I could to audit them, and rely on a modicum of good faith. After all, do we as equity investors do anything different?

 

[wildcat]

My older brother has some rental properties he kept after moving far away for a new job. He met some good people while he was there and asked one of the couples to manage the properties. So he was friends with the people first and trusted them over a property management firm. They worked out a system and most of the incentive/compensation was built into how fast they could fill vacancies and other occupancy measures. He has the equity but it has been a pain in the butt and hasn't made much in the way of income. However, the area you are considering is much more popular with tourists and appreciation is likely to be much higher.

 

[tryan]

I can't believe that fraud & kickbacks aren't widespread, especially when blissful homeowners are absentee to the point of apathy.  

I wonder if the numbers will ever work out, or if it's just better to rent a different place each year and let the market set the prices.

Yup fraud is a problem .... a friend in the business was surprized when his unit was vacant for a second straight week in peak season.  So he left work and drove to the  unit - skis in tow - only to find the unit was actually rented.  Canned the manager but never re-cooped the lost rents.  The good ol'boys love out-of-staters.

I wouldn't touch vacation rentals if real estate was not in my blood .... told my DW we could put the same $$ in GNMAs and travel world-wide 5-6 times per year on the interest dividends.  Never depleting the principal.  DW says she's not interested in seeing the world.

 

[Arif]

I don't own any vacation rentals but I do have rentals in TX. I went there last year with all my records that the PM sent me. I looked for the big ticket items (i.e. Stove replaced on Dec 04) and verified that they were indeed bought. I think that is the best way to treat this as a business and not get too lazy about checking behind the PMs. I did go to one of my sfhs and noticed that a tenant had 8 cats! I just made her increase her pet deposit and moved on.

 

[Mr._johngalt]

I don't own any vacation rentals but I do have rentals in TX. I went there last year with all my records that the PM sent me. I looked for the big ticket items (i.e. Stove replaced on Dec 04) and verified that they were indeed bought. I think that is the best way to treat this as a business and not get too lazy about checking behind the PMs. I did go to one of my sfhs and noticed that a tenant had 8 cats! I just made her increase her pet deposit and moved on.

Found out today that our condo tenant is long gone (owing back rent)
and the condo is filthy. Dirt I can handle, but PM says some personal property may be missing. Will find out tomorrow. Landlords and
wannabees...............this biz is not for the faint of heart.

JG

 

[Eagle43]

Found out today that our condo tenant is long gone (owing back rent)
and the condo is filthy. Dirt I can handle, but PM says some personal property may be missing. Will find out tomorrow. Landlords and
wannabees...............this biz is not for the faint of heart.

JG

A perfect example why I want no part of landlording. Had a friend here in Texas who did it, with nothing but problems. And the law makes it difficult to evict. Too much like real work!

I like REITS; like the Vanguard REIT Index. That's my RE allocation.

 

[Nords]

Found out today that our condo tenant is long gone (owing back rent)
and the condo is filthy.  Dirt I can handle, but PM says some personal property may be missing.  Will find out tomorrow.  Landlords and
wannabees...............this biz is not for the faint of heart. JG

And tenants complain about having to come up with first/last month's rent plus a security/cleaning deposit.

How much are you paying this alleged "manager" and what financial pain is inflicted upon them for not keeping better track of the tenants?

 

[Arif]

I pay 8% but normally it's 10%. RE is just like any other business. You wouldn't start a business then turn it over to someone and never check up on them would you? It's a lot more than picking up rents on the 1st of the month but it is also VERY profitable if done right. Not bragging but here is an example of the benefits of landlording/ RE investing....Found a guy who was selling 13 units for $325k. Once the appraisals came in I had about 100k in equity AND 3k in income per month (Like JG said you make money when you buy). I figured out a long time a ago that you can make some serious money buying a dollar for 75 cents. It's not free money by no means I have 6 vacancies and spending my time advertising and fixing defered maintenance. Definately not a passive investment. If you want passive buy REITs. There is no free lunch.

 

[Brat]

Husband and I purchased a condo in Sun River Oregon years back and rented it to vacationers, in the good old days.  On a cash flow basis it was a push, we sold it for a significant profit.

The furnishings were very sturdy, the dishware restraunt quality (used the pattern recommended by the property management group).  The property managers and their staff honest.  

Were I you I would try to find a property that has an existing clientele.  Look at it just as you would purchase a business (ask to see the schedule C), review the management company records.  If the property has repeat clients you will have a base to start with.  Ask property managers if there are types of properties with a waiting list.  The properties in demand may be large enough to accomodate 2 or 3 families.  However, if you intend to retire to the residence it is more likely to meet your needs.  The other advantage of a large unit is that they are expensive enough that the riff-raff rarely can aford the deposit.  Find out where the margins are best by talking to management companies. 

 

[Mr._johngalt]

I pay 8% but normally it's 10%. RE is just like any other business. You wouldn't start a business then turn it over to someone and never check up on them would you? It's a lot more than picking up rents on the 1st of the month but it is also VERY profitable if done right. Not bragging but here is an example of the benefits of landlording/ RE investing....Found a guy who was selling 13 units for $325k. Once the appraisals came in I had about 100k in equity AND 3k in income per month (Like JG said you make money when you buy). I figured out a long time a ago that you can make some serious money buying a dollar for 75 cents. It's not free money by no means I have 6 vacancies and spending my time advertising and fixing defered maintenance. Definately not a passive investment. If you want passive buy REITs. There is no free lunch.

Good post! "Buying a dollar for 75 cents." I like that.

JG

 

[Mr._johngalt]

And tenants complain about having to come up with first/last month's rent plus a security/cleaning deposit.

How much are you paying this alleged "manager" and what financial pain is inflicted upon them for not keeping better track of the tenants?

I intend to inflict no "pain". I am 925 miles away. I don't think I could find a better manager. And..........I am not too sure I wouldn't have made
the same mistakes. This last guy had me fooled. I thought he was a real
"winner". And, the manager checked him out carefully. The lease is written
heavily in my favor. Still, they find a way to beat you.

JG

 

[Mr._johngalt]

A perfect example why I want no part of landlording.  Had a friend here in Texas who did it, with nothing but problems.  And the law makes it difficult to evict. Too much like real work!

I like REITS; like the Vanguard REIT Index.  That's my RE allocation.

I like landlording, problems and all. No free lunch though. IN all my years
I never had to evict anyone. More typical is they trash the place, steal your
stuff and disappear.

JG

 

[Arif]

JG,
You might like this one.
The same investor I bought the 13 units from is selling out. Everything must go. Him and his dad are selling 101 apartment units in town that gross about 40k per month. He wants 2.9 million for everything and is unwilling to split it up. I think they expanded way too fast as they just bought 50 of those units a few months ago on a 1031. That is WAY too much work for me. I only want 17 of them so we'll see if they'll change their minds (they do every other month it seems) about splitting them up.
Just goes to show there is a such thing as growing too fast especially without the infrastructure (i.e. personnel) in place. I'm going through that now. We bought 29 of our units in the last 2.5 years although we've been doing RE for 7 years. The larger you get the more exposed your weaknesses become. For me I need to farm out more of the day to day stuff and focusing on the big picture investing where the real money is at. Education never stops.

 

[Mr._johngalt]

JG,
You might like this one.
The same investor I bought the 13 units from is selling out. Everything must go. Him and his dad are selling 101 apartment units in town that gross about 40k per month. He wants 2.9 million for everything and is unwilling to split it up. I think they expanded way too fast as they just bought 50 of those units a few months ago on a 1031. That is WAY too much work for me. I only want 17 of them so we'll see if they'll change their minds (they do every other month it seems) about splitting them up.
Just goes to show there is a such thing as growing too fast especially without the infrastructure (i.e. personnel) in place. I'm going through that now. We bought 29 of our units in the last 2.5 years although we've been doing RE for 7 years. The larger you get the more exposed your weaknesses become. For me I need to farm out more of the day to day stuff and focusing on the big picture investing where the real money is at. Education never stops.

IMHO, too rapid expansion is a primary killer of all kinds of businesses.
However, there are opportunities in the situation you describe.
I guarantee it!

JG

 

[Arif]

Yeah I know I thought about going in with other investors and splitting up the pieces (different parcels) then get the 17 unit that way. I have never done the partnership thing and heard way too many horror stories. The only partner I have is my wife and she lets me do all the work and just asks how much are we worth
Did you have another idea?

 

[BUM]

Thanks for the excellent tips thus far. Any more would be appreciated.

I would probably be renting this property out for 5+ years, maybe using it a week or two a year.

Another "don't"... Most of my neighbors also use their properties a week or 2 during the year. They all have "safe areas" under lock and key to hold personal belongings and to protect utilities from being tampered with. Forget about it. Those areas always get penetrated.

 

[Mr._johngalt]

Good post!  "Buying a dollar for 75 cents."  I like that.

JG

And another thing....................

Local farmer is standing in front of the small town bank selling dollar bills for .75 each. Someone asks "Why?" He says, "Sure beats farming!"

JG