Investment Properties - Singer Island Florida
Vacation Home Investing Tips
As printed in EscapeHomes.com by James Boykin
Two Fundamental Rules of Sound Real Estate Investing
There are two fundamental rules for any type of successful real estate investing.
The FIRST rule is "Don't lose money," and the SECOND rule is "Don't forget the first rule."
If you lose money on your first investment, you may not have the appetite for a second venture, you have wasted hard-earned capital, and probably ruined your credit standing so that you may not be able to obtain a mortgage from a bank for several years. Remember too, if you buy real estate wrong, you can't sell it right. Any successful sale of a property depends largely on buying it at a good price. This initial step is essential to your realizing a sizable profit later when you sell the property.
Set Clear and Achievable Investment Goals
As you consider the various options for owning a vacation property, ask yourself "Will owning this home contribute to my overall investment goals?" Set down on paper in a clear, straight-forward manner your overall investment goals, and then create a time line toward achieving them. Note where you stand along this continuum now, where you expect to be next year, in five years, etc. As part of this planning process, determine how and if owning a vacation property will positively impact your goals.
Simply stating a goal does not begin to make it happen. Ask yourself, "Is this an achievable goal? Can we reasonably achieve the desired outcome? Are we willing to take on the accompanying risk and personal sacrifices necessary for its financial success? Will we enjoy ourselves during the building, remodeling, leasing, and management stages?"
Refine the investment goals for your prospective vacation property investment. If you cannot clearly and succinctly express your goals, you certainly won't understand them, and as a result, will never achieve them. Looking back, you will realize that your first attempts probably were crude and not achievable. Any of these earlier half-baked plans could have produced dire financial results.
Never allow your ego to outweigh an objective analysis concerning a potential real estate investment. Although you may "fall in love" with a particular vacation property, the purchase must be sensible or all too quickly, you will regret your new acquisition. Rely on others who are experts in their respective fields to temper your first impression. Once having contacted them, ask for and check on references from their prior clients.
There is a natural tendency to be overly optimistic in estimating rent and occupancy levels, and to underestimate expenditures. Remember, paper profits cannot be deposited at your bank. "Wishing your way to success" doesn't work. Moreover, this illusion of success likely will lead to disappointment later. If you err in your forecasts, it is far better to be conservative in order to allow sufficient time for repairs and leasing, downturns in local real estate sales and rental activity, periods of over building, and weakness in the economy. By being conservative rather than overly optimistic in setting your goals, you will more likely set aside sufficient reserves to improve the property to achieve your pleasure and profit goals.
Identify Ownership Risks
Some of the risks inherent in owning real estate are:
§ Renovation and refurbishing expenditures. It generally is more difficult to accurately estimate renovation costs than it is to gauge new construction costs. This is especially true for termite and other wood boring insect damage, and upgrading electrical and plumbing within the interior walls. Of course you will want to include a provision for termite inspection if termite activity is prevalent in your area, as well as inspections of electrical and plumbing systems, HVAC, roofing, asbestos, and to determine the dwelling's structural soundness. Obtain cost estimates from qualified contractors to make the necessary repairs and upgrades.
§ Market timing. Many people have delayed the purchase of a vacation home either to await for a downturn or until they have saved enough money to buy a cottage. When later they return to their favorite resort, they are shocked at how high the prices have soared. The message is: "Waiting won't make a property cheaper." In fact, vacation home prices may rise faster than your savings.
§ Rent risk. This risk is of greatest concern for buyers who already have sizeable mortgage payments on their primary home and other consumer bills. They may have purchased a vacation home anticipating rental income sufficient to offset much of their mortgage payments, insurance, real estate taxes, repairs, and replacements. This can be risky and is best overcome by using the existing rental list to contact past renters, using the same rental company if its fees and performance are acceptable, and setting aside enough money to cover at least six to eight months operating expenses. By then, the property should produce substantial income, but seldom enough to offset all of the housing expenses.
§ Property use risk. Check to determine if there are any zoning violations or rental restrictions. Are there may building height violations, such as blocking a scenic view from other nearby properties. Another potential violation is when electrical or plumbing work has been done without the required municipal permits and inspections. Once discovered, place the burden on the seller to rectify these problems before closing on the purchase. In low-lying areas without public sewer systems, septic drain field failure during rainy seasons can be a major problem. Have the local health department check out the system and well water quality for compliance. Find out if there are any environmental issues affecting the property. These could come from hazardous waste migrating from another property via an underground stream onto your prospective vacation property. Finally, check to determine whether you can obtain flood insurance at an affordable rate and legally enlarge the house.
§ Overpaying for the property. This particular risk can be managed. You might begin your property search by going to an Internet search engine. Enter the query "outer banks real estate." This should display several real estate brokerage firms, some of which also manage rental properties. Next, set the parameters of your property search. For example, you may give the price range from $300,000 to $500,000; minimum number of bedrooms at 3; minimum number of baths at 3. Next, identify communities of interest and enter water front or other choices. This search will help acquaint you with properties in your price range and begin to familiarize you with asking prices of similar homes. This knowledge will allow your real estate agent to be more effective in narrowing the search for your future vacation home. Once you find a property that you like, make a reasonable offer. Finally, make the purchase contingent on the loan appraisal being at least as high as the contract price.
About the author:
Jack Boykin, Ph.D., MAI, SRA, CRE, is Professor Emeritus at Virginia Commonwealth University and past National Chairman of the Real Estate Center Directors and Chairholders Association. In addition to myriad reports, studies, and articles, he is the author or editor of 17 real estate books and monographs.