Monday, June 22, 2015

All the Wrong Questions

The brutally cold winter of 2015 reignited a common dream for many, that of owning an income-generating vacation getaway in a warm oceanfront place. Cocoa Beach has made that dream a reality for many. Over the years I have gotten scores of requests for an ocean condo that would pay for itself while serving as a getaway for the owner. For most people, that condo does not and never has existed. Change "pay for itself" to "pay some of the costs" and units begin to materialize.

What questions should a prospective buyer of a rental ocean condo ask the seller? Some questions may have misleading answers. Let's look specifically at vacation rental condos, those with a minimum rental restriction of a week or less. In Cocoa Beach and Cape Canaveral there are less than 15 oceanfront complexes that allow weekly or shorter rentals. Because of the scarcity, high occupancy and income are possible in most of these units. For a buyer inexperienced with vacation rentals, these units can be difficult to evaluate. The previous years' income statements often won't accurately predict a new owner's likely performance. As mutual fund disclosures tell us, past performance is not an indicator of future returns. A buyer using previous years' statements to include or exclude properties for consideration may be making flawed decisions.

Imagine the owner of a nice weekly rental vacation condo in Cocoa Beach who stays in his unit several times every year. His annual income statement is going to show less income than the neighbor's identical unit that is available for rent during the entire year. The difference can be tens of thousands of dollars.

Imagine two identical units side by side each rented by different property managers. One manager charges 28% management fee and the other charges 20%. One manager, not necessarily the more expensive one, gets 20% higher occupancy. The net income difference can be significant.

A buyer who purchases a unit because it had a high net income may realize too late that he can't achieve that net because he can't manage as cheaply or as effectively as the previous manager. On the other hand, a smart buyer can buy a unit with a history of low net and turn it into a high net with higher occupancy and more efficient management.

Weekly rental vacation rental condos offer the greatest opportunity for a mix of personal use and income but prospective buyers need to be realistic with their expectations and know going in that very few units can pay all carrying costs from rental income if the owner is also occasionally using the unit. The timing and frequency of personal use can vary the net income drastically. An owner who uses his two bedroom oceanfront unit the month of March might lose $4500 in income but an owner who stays the month of October instead might lose nothing. A good buyer's agent will be able to guide buyers through the breakdown of seasons and strategies for maximizing income.

"I realized I might be lower on the social scale than I previously thought when the Real Housewives "Shabby chic" party looked exactly like my "dress nice" parties."  __Larry