Interest rates are still at historic lows. Real estate prices remain depressed in many areas. As you look forward to summer, you may be wondering whether this would be an opportune time to get a bargain on a vacation property that you could enjoy with your family while earning some rental income.
To answer that question, we looked at popular vacation destinations within a reasonable drive of Washington, D.C., to see what kind of escape from the Beltway you could purchase for $300,000. In some areas, sellers are stubbornly hoping that the market will rebound enough to reap the high prices they’ve set for their beach and mountain homes. In others, lower rental volumes and the tough economy have left property owners with limited resources for fixing up properties enough to make them irresistible to prospective buyers.
But we did find three appealing properties well located for a getaway from Washington that also hold the potential for cash from rentals. In North Carolina’s Outer Banks, we found a wood-shake beach cottage on Hatteras Island listed at $295,000 with four bedrooms, three bathrooms, a screened porch and an open air hot tub. On a peninsula jutting out into Deep Creek Lake, Md., we found a $269,000 three-bedroom log cabin minutes from the state park and a short drive to skiing and golf at Wisp Resort. If you’ve always wanted to swim with Virginia’s wild ponies, we found a charming beach house on Chincoteague Island with a water view, just blocks from Oyster Bay and listed at $339,000.
“A lot of people are not getting a great return on their money, whether it’s sitting in banks or the stock market, and are investing in real estate again,” said Chris Jett, a sales agent with Vantage Resort Realty in Ocean City.
Before jumping into a vacation investment, you should research the area and the rental history of the property itself or comparable properties. Just as with your primary residence, location is key. The closer the home is to the beach or other vacation attraction, the easier it will be to keep it full for the whole rental season. The view and ambience are also important.
Informed buyers wait for the perfect property to come on the market, sometimes taking a year or two to find the right opportunity, said Michael Davenport, a senior associate broker with Sun Realty, and president of the Outer Banks Association of Realtors. If your price target is around $300,000, you’ll need to make some compromises in location or size; you’re unlikely to get a big beachfront home in a prime vacation destination for that amount.
Look at how much you’ll spend on mortgage interest, maintenance and management fees, and calculate how much rental income you might receive to offset those costs. Be sure to consider the worst-case scenario: those recession years when people cut back on vacationing and your dream getaway sits empty for any part of those prime summer weeks from Memorial Day to Labor Day.
“The worst thing an investor has is a rental property that nobody wants to rent,” said Jonathan Hill, president of RealEstate Business Intelligence.
If you’ve got good credit and sufficient income, you shouldn’t have trouble finding a lender to finance your vacation purchase. You might need to pony up a higher down payment than on your primary residence, however, perhaps 20 percent or 25 percent. It’s usually better to take out a loan than to buy a vacation home in cash, because you can deduct the mortgage interest on your income taxes.
Another important factor to consider is management and maintenance. If you live in the Washington, D.C., area, you can’t drive to your vacation home to repair the air conditioner or plumbing every time it breaks down. Moreover, a rental property will experience more wear and tear than your primary residence, and thus requires a higher budget for maintenance and replacing furniture and bedding.
You can either hire a local handy man to make repairs, or choose a company that specializes in managing vacation rentals as well as maintenance. Those firms aren’t cheap, charging from 15 percent to 22 percent of the gross rental income before you even talk about the cost of repairs, regular cleaning, landscaping or maintaining pools and hot tubs.
“A common misconception going in might be that these houses will pay for themselves in the rent,” said Billy Casper, vice president of property management at Corolla Classic Vacations in the Outer Banks.
Typically, you’ll spend more money on the mortgage payment and maintenance than you make from rentals, according to Casper and other experts, but you could stand to make a profit when you sell the property. “Rent will carry some of the mortgage, a good part of it, and you’ll get the appreciation,” Casper said.
If you decide to hire a management company, find out what’s included in the commission, because each firm or region may define it differently. In particular, ask about whether you pay extra for once-a-season cleaning, credit card fees, visits to inspect cleaners’ work or to reset the circuit breaker, linen service and the like. Understand whether any repairs are included in the property management fee, or whether you’ll be inundated with work orders — more bills to pay — at the end of every month.
“Underestimating all those extra costs is a big issue and overestimating all the weeks or weekends you can rent it for is a problem,” said Harvey S. Jacobs, a real estate attorney in Rockville, Md.
Some vacation spots will require additional trash hauling expenses, water and sewer costs, homeowner or condo association fees, golf or tennis costs and other activity fees. You may also be restricted by the neighborhood or resort association as to how often you can rent out a property — and you’ll most likely pay a lot more in flood, hurricane and other insurance premiums than in an urban environment. “There’s a whole bunch of additional costs in these resort areas that when you live in Bethesda or Arlington you don’t have to consider,” Jacobs said.
Another important aspect to understand is the difference between buying a second home and an investment property, for the purposes of tax and financing. If you use the property personally for more than 14 days a year, it’s considered a second home and you’re limited in how much of your rental expenses you can deduct on your taxes. Specifically, you can only deduct mortgage interest costs up to $1.1 million on the combined principal of the loans for your primary home and the second home, and you can deduct rental expenses only up to the amount of income you receive.
“Almost always, people’s rental expenses exceed their income, so a lot of people try to stay under that 14-day rule,” said Melissa Labant, a director with the American Institute of CPAs. If you stay under the 14-day threshold, you can also depreciate the value of the home every year to save even more on your taxes — but check with a CPA about the consequences when you sell.
“When you go to sell it, that depreciation gets recaptured and it surprises you,” said Labant, noting that the difference between the lower depreciated value and the sale price can often be taxed as ordinary income. “If you owned that rental property for a while and stayed there for two weeks a year, you’re going to be in a world of shock.”
Bottom line: Crunch all the numbers before you fall in love with a gorgeous ocean view and the dream of owning a vacation home.
“You really want to count on some degree of personal enjoyment in the property, and to consider the rental income as supplemental,” said Ruth Seib, a broker and co-owner of Coldwell Banker Deep Creek Realty.
Katherine Reynolds Lewis is a freelance writer.