Shorefront Success: Mastering Vacation Rental Investments

Welcome back to the Running Real Estate Podcast with Ryan Haley.

Today, we are going to discuss a topic that comes up in a resort market, and that is, how can I have somebody else help to pay for the property I want to purchase from a second home/investment standpoint at the beach?

As you all know, the primary focus of my real estate career over the last 22 years has been pretty predominantly along the Maryland and Delaware coasts. We have lots of second homes, we have vacation homes, we have some folks that ultimately live here year-round, but a good portion of the properties that we see here on the Delmarva Coast are vacation rentals for a portion of the year.

I get a lot of potential clients who will reach out to me, and they will lead with the question, where can I buy that is going to return the greatest ROI? Where am I going to be able to get the greatest rental income when purchasing a second home? And I have to say that that is a very loaded question. And I can tell you that I personally own rental investments that are right on the beach in the beach town, and I also own rental investments that are inland, and some that are inland but still kind of provide that resort feel. So there are more than one way, and there's no one-size-fits-all location that you would turn to to ensure you have the greatest return when it comes to a rental investment.

But for purposes of today, what I'm going to focus on are actually the beach towns themselves and more of the weekly Airbnb style of rental.

The general rule of thumb is that if the closer you are to being right on the beach, the greatest and/or least amount of vacancy rates you will have.

So what does that mean?

That means that first and foremost when people are searching for rental properties to vacation in the beach towns, a lot of times the first thing they're thinking of is the Atlantic Ocean, they're thinking of the beach, and that's ultimately where they want to be first. But depending on their price point, the affordability, number of bedrooms, baths, amenities they're looking for, they will then come off of the ocean to help find the right fit that meets their needs.

Now I can tell you that any property just about in the greater Ocean City or on the Delaware beaches, if it's in the beach town itself, will have strong rentability. It will have the ability to be rented on a weekly basis. It just comes down to what do you want to do with it after you've taken ownership? I can tell you the general rule of thumb that I discussed with my clients for years was that when it comes to vacation rentals, what you can expect as an owner is the vacation rentals will generally help pay for the condo fees, the taxes, and a portion of the debt service.

And what do I mean by that? That's a portion of the mortgage on an annual basis. And if you approach the rental investment with that mindset, you will be successful. Now, in addition to the taxes, the condo fees, a portion of the debt service, the biggest benefit that I personally have found is the ability to depreciate and the tax benefits. And those are very hard to quantify. And that's where you need to have a conversation with your CPA or your accountant to determine how it could fit your needs and how it could benefit you with your current tax structure.

But those are some of the wild cards that don't necessarily come out from just the straight dollars and cents like this is what it's going to rent for, this is how many weeks it's going to cover. The depreciation aspect and the tax ability to deduct some expenses is truly where I have found the make-or-break point is. Now, with the last couple of years, we have certainly had greater demand, and we have seen our seasons increase.

And I will say that there are certain sections of Ocean City and/or certain homeowners who rent their properties out who've had greater success, and in some cases, they've been able to not just pay the taxes, the condo fees, and a portion of the debt service, but they've actually been able to get a lot of their debt service covered by increasing rates and making it more available throughout the year, taking advantage of every event we have in Ocean City, including the off-season to ensure that they have more nights rented.

So there are certainly ways to be able to cover a good portion of your expenses, and I feel that this is a great way to invest in a property. Number one, it's tangible. It's something you can see, feel, smell, use for yourself and your family to enjoy. But then number two, have somebody help pay those expenses that are ongoing with the condo itself, condo fees, taxes, as well as the debt service, and then the tax benefits on top of it.

Now, the piece that we have not discussed, and I find will continue on, and this is what we're always talking about if anybody who tunes into my podcast on a weekly basis or tunes into my market reports will know, is we're looking at appreciation. We're looking at what are home values doing? And if you go back all the way through the early '80s and even late '70s and you graph appreciation all the way to today in 2024, and you look at the line of appreciation, it is almost a guarantee that over enough time, the property is going to appreciate.

So we've had a few blips, and there's only been a very slight window going back to the Great Recession that we had in '08 where property values did not go up. All the other times, it's continued to go up. So when you really look at the big picture from an investment standpoint, the appreciation piece is a wild card. It's a bonus that you get on top of having somebody else help to pay the expense of owning the second home, which then gives you the ability to enjoy it for yourself for a week, maybe a couple of weeks throughout the year.

So I truly am very bullish on the fact that continuing to buy in a resort market is a great long-term investment. So there are obviously so many different things that go into the rental piece. You can do it yourself through Airbnb, there's VRBO, there are some really great innovative local rental real estate companies that can aid in this process. I'd be happy to have a conversation with you if you're considering buying a property that you do want to rent out and you want to maximize the rental income. I'd be happy to have that conversation with you to discuss the ins and outs, the pros and cons as to who to go with, how much of your time needs to be invested to have the greatest return versus turning it over into the hands of a rental management company.

I can tell you personally I have both long-term and short-term rentals that we manage personally ourselves, but then I've also turned over to third-party rental management companies, and it just depends on where that property is, how much we want to put into it from an energy standpoint, and I've had success with both. So like I said, be happy to discuss that further with you.

But there are ways if you have always dreamed of owning a beach property and you want to figure out a way to help cover those expenses and have somebody else pay for that, there are ways to do it and have your dreams come true when it comes to buying a second home at the beach. So if you like this information, please share it with a friend, like, subscribe. I'd be happy to answer any questions for you. And oh, by the way, interest rates have come down, they're at their lowest level in the last three weeks, we are now below 7% when it comes to the average 30-year fixed. So let's talk more about that and the increased inventory that we've seen here in the spring market.

Thanks again, I look forward to seeing you back here next week with another edition of the Running Real Estate Podcast.


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