Are Beach Rental Properties A Good Investment?
Beautiful coastal sunsets. Waking up with the sound of waves crashing gently into the shore and the smell of the sea in the air. Sitting outside on the patio, with a drink, good friends, and the sound of laughter in the air while the kids play on the beach below. Sounds idyllic. These are just some of the experiences that come with owning beach property.
Beach houses and condos offer the property investor a potentially lucrative return and some added benefits to boot. But, as with any investment – property or otherwise- there are always pros and cons to these decisions.
If you’ve been seriously considering a beach property as a rental property and an investment, here is everything you need to know about it first before jumping in. Let’s start with the good stuff first!
Beach House V Condo
In general, condos are cheaper than free-standing homes along the beachfront. Condos can be between $300 000 and $700 000 depending on the area, while beach homes in the same area could be three times the price!
Beach houses offer bigger rooms and more space and often are just a few minutes from the ocean, while condos are generally a bit further away.
Your choice here depends greatly on two factors.
- Is this solely an income-generating property or financial nest egg?
- Are you planning to use it as a retirement property, or do you plan to stay in it for a few weeks a year?
If this is solely for income generation or a financial nest egg, you need to consider the revenue level and the resale value with depreciation.
If you want to use this as a retirement property and use it a few weeks a year to spend time with friends and family relaxing, then the considerations are different.
One of the best ways to make your decision is to reach out to people you know that have already done this.
Invite them for dinner and get to know more about the choices they made and why.
First-hand information from people you know and trust is the first choice as there is no vested interest.
They can also advise you on property agents they have used, marketing, maintenance, taxes, and other aspects of this journey to give you a far better and clearer picture.
Income Generation and an Expanding Market
According to the stats from Statists below, the vacation market is expected to grow over the next four years, with most revenue generated in the US – so now could be a perfect time to look at investing.
- Revenue in the Vacation Rentals segment is projected to reach US$71,170m in 2021.
- Revenue is expected to show an annual growth rate (CAGR 2021-2025) of 9.87%, resulting in a projected market volume of US$103,727m by 2025.
- In the Vacation Rentals segment, the number of users is expected to amount to 879.5m users by 2025.
- User penetration is 8.3% in 2021 and is expected to hit 11.3% by 2025.
- The average revenue per user (ARPU) is expected to amount to US$113.33.
- In the Vacation Rentals segment, 72% of total revenue will be generated through online sales by 2025.
- In global comparison, most revenue will be generated in the United States (US$15,338m in 2021).
The bottom line here is that you CAN MAKE MONEY from your vacation rental!
With a growing demand for many people looking to escape the cold and snow, the beach vacation offers the perfect retreat when the winter sets in.
The growth of companies like Airbnb, Kid, and Coe, Housetrip.com, and VRBO (to mention a few) means that you would get steady revenue throughout the year, and your holiday could be paid for from your rental income!
Workationers are Your Best Friend
With the pandemic affecting travel with lockdowns, many people are now looking to combine vacation with work.
These ‘workationers’ look for scenery changes throughout the year, preferring to have their families with them.
Because they are not required to be office-bound,workationers tend to prefer beach properties that deliver a lifestyle
This, in turn, means that beach houses are being booked year-round and the rules and trends Pre-Covid no longer apply.
TIP- Use the #workationer in your marketing on social media!
A Holiday Home for You and Your Family
Owning a beach house offers you a coastal getaway when the stress of the concrete jungle and pace of the rat race gets too much.
Taking a week to rest, recharge and recover with your friends or family can be a lifesaver in the modern, fast-paced world.
Buying a property in an area you like and would want to visit more than once is a GOOD idea!
Retirement Nest Egg or Home
It’s also a great way to build long-term wealth and ensure a secure retirement whether you sell the property and use the revenue to fund travel, healthcare, and lifestyle to keep it and enjoy the perfect setting for the rest of your life.
Either way, it’s a win-win scenario.
You Can Write Off A Lot of Expenses
If you rent out your home for more than 14 days, the taxman considers this a business, and thus associated costs can be deducted.
After all, who DOESN’T want to reduce tax payments?
Costs to maintain and repair or upgrade the property are deductible as business expenses, and even hosting fees charged by Airbnb can be added to that.
Here’s a list of expenses that could be deducted, but talking to your financial advisors would also be recommended as this list is not exhaustive.
- Hosting fees.
- Cleaning costs.
- Supplies (toilet paper, K-cups, and so on).
- Occupancy taxes.
- Insurance premiums.
- Utility costs.
- Lawn maintenance.
- Property management fees.
- Mortgage interest.
Marketing Your Property Is Easy and Fun!
Beautiful, picturesque views of the ocean from your beach house patio are ideally suited for Instagram, Twitter, and Facebook. Spending time taking great pictures to market your property can be a neat way to take some time off.
Promoting an ocean rental is much easier with those views, and add some stories about those magical nights by the sea will go a long way to securing visitors.
Location, Location, Location!
The old adage in the property game still applies to your beach property.
There are some fundamental aspects to consider regarding your choice of location.
Is there an airport close by, and is the property accessible by public transport?
What is the weather like year-round, and is there a risk of severe storms?
Does the are offer a good variety of activities for guests? The more options guests have, the more likely your property will achieve consistent year-round bookings.
Plus, having activities is a great marketing tool. If your area is a popular tourist destination, that’s already a massive bonus as existing demand reduces the risk of non-occupancy.
As an investment, a beach property certainly has significant advantages and benefits; now, we need to consider the other side.
There are a few ‘cons’ to consider before making a decision so let’s explore those.
The Weather – Your Best Friend and Worst Enemy
With some coats more exposed and prone to severe weather events such as tropical storms and hurricanes, careful consideration of proximity to the coastline and the associated insurance costs must be carefully considered.
Buying a property potentially at risk from weather damage could increase your insurance costs, while a property with less or no risk will have lower insurance costs.
Mandatory flood damage is mandatory with beach properties due to their higher risk and can be as high as $10 000 on the Florida coast.
But in areas that are less at risk from severe storms like California and South Carolina.
Plus, having your dream holiday home and asset wiped out during a severe storm may not be the kind of stress you want, so pick your location carefully.
A perfect way to find out more about the weather conditions could be to spend some time chatting with the locals and doing some research about weather conditions around the year.
Pricing Strategy For Peak and Off-Peak Season
Your income may depend on how well you set your prices for the property through the seasons.
Make sure you have a strategy in place to prepare for the high and low demand seasons.
Failing to do so may result in a loss of revenue during the winter seasons.
The good news is that most beach property owners can cover their expenses over the off-peak months from the peak revenue.
Property Management – a necessary expense
Beach property is not simply lock-up-and-go like urban properties could be.
It’s a very hands-on type of investment.
With sand and sea constantly active, the property would need to be maintained, cleaned, and repaired as and when necessary.
You’d need to clean, re-stock and prepare it before each guest arrives.
Hiring a professional property management property is an option, but it doesn’t come for free.
Depending on who you appoint, fees could range between 15% and 40% of your income!
That’s a hefty price to pay for management, but it may be a necessary evil if you don’t have the time.
Should you need to engage the services of a property management company, make sure you do your due diligence beforehand.
Mortgage Costs, Down Payments & Property Taxes
Unless you have the financial capacity to purchase the property outright, you will need to borrow money to do so.
Leverage is usually a good option, but you need to be aware of the costs of borrowing money to fund your investment.
If you have a good credit rating, you should secure lower interest rates, making the investment highly favorable.
Beach properties usually incur higher taxes due to their value.
Property taxes tend to be higher on the East Coast than on the West Coast, but property costs in California are higher than those on the West coast.
In general, investment properties are prone to higher interest rates than other mortgages, which could mean a higher deposit.
If your property is $300 000 with a required 25% deposit= $75 000!
That’s quite a chunk of cash to lay out.
Depending on your existing financial situation, you may need to look at a value property or save until you can safely make the deposit.
Something else to keep in mind is the impact a vacation property could have on your cash flow.
If you decide to buy one, there is now an extra monthly payment you need to cover. This may cause some financial stress on your income, and you’d need to calculate whether the risk and stress are worth it.
It’s essential to take all of this into consideration before buying your property.
As with your regular home, gas, electricity, water, internet, and cable costs will follow you to your beach home.
Of course, you can request your guests to be mindful, but realistically, you have no control over their behavior and could find yourself landed with unexpectedly high bills come the end of the month.
One method to combat this is a ‘fair usage policy’ included in your rental contract.
This can protect you and give you some recourse for visitors that abuse the utilities while on your property.
Consulting an attorney or property management company would be a constructive option.
Repairs & Maintenance
To be a desired property for guests, you need to keep up the quality of the property. At the same time, this may involve general maintenance of the décor, amenities with more modern properties.
With older properties, you may need to upgrade elements of the property while keeping the appeal of the history and style.
Budgeting $2000 – $5000 per year for maintenance would be advisable, so when these expenses do crop up, you’re not scrambling for funds.
Proper Marketing is Essential
To find exemplary visitors for your property, you need to do few things to market it correctly.
- List your property with the top rental list platforms
- Optimize your listings to attract your perfect client
- Upgrade your home with trendy furniture and appliances
- Price the property correctly for the market
Another option is to run seasonal promotions or discounts to attract business in slow or off-peak seasons.
Vacation rental software like Lodgify.com means you can create your property booking website.
These systems can sync with other online booking channels like Airbnb and deliver a seamless and easy booking experience and eliminate the risk of overbooking.
Also, you can build up your reputation with online reviews with automated customer communication.
Having said all of this, and unless you’re a marketing fundi in your own right, you would need to invest in marketing and advertising to ensure year-round occupancy.
While you could conceivably do this yourself, you may need to look at spending some money here.
The good news is that because it’s a business expense, it would be deductible.
Another great way to save money is to get your family involved, especially if you have tech and social media-savvy kids!
Involving the younger generations in your retirement property could pay big dividends for family unity and cutting your costs!
It May Not Be Allowed in Some Areas
Many homeowners associations (HOA’s), cities, and municipalities have strict laws and regulations around rentals, specifically short-term rentals.
Some simply don’t allow short-term rentals, and others have specific rules about rental terms that need to be adhered to.
Consulting with HOA’s in the area or the city building committee would be wise, so you have all the facts before jumping in.
To Beach or Not to Beach
It is clear that there is money to be made in beach or vacation rental investments and adequately managed. With a carefully executed strategy around the purchase, location, target market, and marketing, you will succeed regardless of why you want this property.
However, lack of preparation may see your retirement dreams swept away in a storm of costs and poor choices.
The good news is that there is a depth of free resources available to make sure your vision of the perfect vacation home becomes a beautiful reality!