Should I Buy A Vacation Rental?

Imagine owning a vacation rental? I have. Who wouldn’t want to wake up every day with great ocean views? The ocean could be your back yard! I doubt that would ever get boring, although I am concerned about the impact of rising sea levels on the coastal areas. In any case, I’ve determined that one of my goals in life is to have a beach house, right on the water!!! I blame HGTV for this. But, I can’t stop imaging one day having my own beach house. But, in all the areas I’m considering, having a beach house is VERY EXPENSIVE. So, it begs the question, should I buy a beachfront condo as a vacation rental? Let’s examine.

Second Home Or Vacation Rental?

I’m struggling with this decision. I currently live in the Sacramento area and it’s a very expensive market here in California. I’m renting at the moment. Based on my local real estate market and preferences, I could buy a decent single family home for around $400,000. Alternatively, I could buy a decent vacation rental beach condo for around the same price. In both scenarios, the price of the real estate could be a little higher or a little lower.

Trying to compare buying a second home to buying a vacation rental beach condo might be comparing apples to oranges. But, the following are significant considerations that I’m taking into account. First, let’s explore buying a second home.

1. Buying A Second Home

If I bought a second home, it would also be in the Sacramento area. This would be the easiest option. Because I’m living here, it would be easy to go look at houses with my real estate agent. Or I could just do it on my own whenever I’m free. So, the process of finding a second home to buy would be very straight forward.

Financing is a BIG part of my ultimate decision. I could purchase a second home with 3% down on a conventional loan or 3.5% down with an FHA loan. I would have to pay PMI as I’m not putting 20% down. So, I’m looking at around $15000 for a down payment plus closing costs.

My credit score is excellent and so I’m not worried about getting a good rate. But, I know interest rates have been rising and so I might be hard-pressed to find a low rate as I do on my current home (at 3.5%).

Buying a second home would also be an investment. I would get at least 3 bedrooms, live in one and rent the other two out to roommates. When I leave Sacramento, which is inevitable, I would keep the house by renting it out to long term tenants, just like I did my first house. So, I would have two houses in my portfolio, hopefully making me money every month.

2. Buying A Vacation Rental

The other option I’m considering is to buy a beachfront condo as a vacation rental. What do I mean?

Well, I would buy a condo on the beach (outside of California). I’m currently exploring Myrtle Beach in South Carolina, as well as the Destin area and Panama City Beach area, both in Florida. I would love to buy a Miami Beach condo, but I’m not considering South Florida at the moment. The very strong favorite is the Destin area, to include Fort Walton Beach, Miramar Beach, and Okaloosa Island.

If I bought a beach condo, it would mainly be as an investment property because, unlike a second home, I wouldn’t be living there. At best, I would use the condo for my own vacations during slow times, but that’s not the main reason to buy it. The main reason would be to make money. So, my tenants would be short term rentals. I would use a professional property management company to handle everything.

I’m actually heading to Destin with my mom in a few weeks. We are going to meet with a real estate agent to learn about the market. I’m just beginning my research. I’m not planning on making a rash decision, even if it is an emotional one.

Let’s Talk Money

Buying a beachfront condo is expensive! Because it would an investment property and not a second home, the minimum I can expect to put down is 20%. On a $400,000 condo, that’s $80,000! That does NOT include closing costs.

Additionally, the one thing I hate about condos is that they have condo fees! The problem is that fees can potentially rise, and can never be paid off. So, even when I pay off my mortgage, I still have to pay condo fees. The good thing is that the fees cover things outside your unit, as well as some utilities like water, trash and some even cover electricity. But somebody has to pay for that gym or that tennis court that I’ll likely never use.

I imagine that the interest rate on the condo would be higher because it’s viewed as more risky since it is strictly an investment home rather than a personal residence. I’m in the process of talking to a mortgage broker about this so I’ll get a better sense of the costs soon.

Since this would be a vacation rental, the income I can expect to make (if everything goes right) would be more than that of a second home. Of course, that comes with high turnover of tenants. And, because I would be using a property manager for everything, the profits initially would be lower.

What About My Dream Of Buying A Beach House?

Oh that dream is still there! Right now, looking at all the markets I’m considering, a decent beach house with beach views, which is a must for me, costs around $1 million dollars. To paraphrase Suze Orman, I CANNOT AFFORD IT!

But, buying either a second home or vacation rental would help me generate money faster which in turn will help me realize my dream one day.

Real Estate Investing

First, I must emphasize that I’m not a financial adviser, tax expert, real estate guru or anything of the sort. So, before you invest in real estate, I encourage you to consult the appropriate professionals.

Second, I do know that the way I’m investing in real estate is not the best. The better approach would be to find motivated sellers, buy property at a deep discount (perhaps at least 20% cheaper), maybe fix it up, and decide on an exit strategy (rent it out or flip it, etc). The approach I’m taking seems to be to buy properties at retail value and hope to still cash flow.

Even though I’ll be working with a real estate agent to buy a second house or vacation rental, I’m still going to try to find the best deal I can. But my main consideration would be to generate cash flow from renting the property. Much like dividend stocks, I’m a buy-and-hold investor. In either case, I would rent out the property to generate monthly income.

If I am able to retire 15 years from now, I hope to have a few properties completely paid for. That way, I can just live off the ‘passive’ rent checks, coupled with dividends from my dividend portfolio, and income from my retirement accounts.

Conclusion

What do you think I should do? Right now, my goal is to have a beach house and I realize dreams can change as I get older. Regardless, I am singularly focused on having a secure retirement. To that end, I hope to be getting money from a trifecta of income sources to include dividend stocks, income from retirement accounts, and rental income through real estate.

My brain tells me that it makes more sense to buy the second home, so I can save on paying rent, and probably live rent free. My heart is telling me to buy a vacation rental and get into the short term rental business.

And, my gut is telling me that I’m hungry and so I’m going to get something to eat right now. But, I’m really interested to know what you think.

Does anyone have any experience with either buying a second home or a vacation rental that you can share? Let me know your thoughts on this post by commenting below?