Vacation Home Investing Tips

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.