Buying a beach house can bring an excellent return on investment, a reliable income stream, and access to a delightful vacation spot. Many beach house investors purchase homes that they subsequently rent out during peak tourism times. A beach house owner in Florida might make the house available to rent from November through April when residents of colder states crave sunshine.
Many beach house investors claim that their rental income for the colder half of the year covers their expenses for the entire year. That effectively lets them live in the house for free during the non-peak season.
Market timing is crucial because of the high amounts of leverage often used in the real estate market.
Expect to pay more for both the house and the insurance (including flood insurance).
Many beach towns have high taxes.
Advertising for and managing a rental house means extra bills–and owners will probably need a pricey property manager.
Before taking the beach house plunge, it is essential to understand the underlying economics involved. Drawbacks include high borrowing costs, exorbitant insurance rates, and copious bills, plus the general headaches of property management.
How to Buy a Beach House
Market timing is a crucial consideration when buying any piece of real estate. Most mortgages require down payments of 20% or less, so investors often use a substantial amount of leverage. When leverage is high, price movements usually have a far greater impact on returns than income from an asset.
Investors can lose substantial amounts of money by getting a mortgage on a beach house at the wrong time.
There is no need to own a beach house, so prices are even more procyclical than for other homes. If the economy has been good the last few years and real estate prices are rising, then the market is probably overdue for a correction. Similarly, lower prices and a depressed economy indicate that it is a good time to buy. The Case-Shiller Indexes provide investors with a way to determine the overall state of the real estate market.
Buying a beach house involves the same considerations as purchasing a home. However, first-time rental property owners need to be careful. Always inspect the house, preferably with the assistance of professionals, and talk with the owners. Look into the property deed, determine the level of crime in the neighborhood, and consider the area’s history during hurricanes and floods.
Real Estate Costs and Borrowing Costs
Beach house properties are substantially pricier than similar homes located inland. In Delray Beach, a popular beach town in Florida, the median house price as of January 2022 is $312,890, according to Zillow. Home values in this area have increased by over 24% since January 2021. Mortgage interest rates for vacation properties are also usually higher than those for primary homes.
Interest charges can make a huge difference to an investor’s bottom line. For example, the principal and interest payment on a 30-year, $1 million mortgage, with an interest rate of 4%, comes to $4,774 per month. The same mortgage at a 5% interest rate, costs $5,368 per month in principal and interest. This $600 per month difference can quickly add up.
How Much Is Beachfront Insurance?
The homeowner’s insurance on a beach house is likely to be several times more expensive than the coverage for a primary home. This cost difference is mainly due to often mandatory flood insurance. Insurance charges spiked early in the 21st century, particularly on the East Coast, which suffered widespread hurricane damage.
A yearly premium of $10,000 or more for flood insurance is increasingly common for Florida beach homes. Other East Coast states, such as North Carolina, command more reasonably priced premiums. While insurance costs in California are typically lower than East Coast rates, the savings are generally offset by higher real estate prices.
Other Beach House Bills
Renting a beach house involves costs above and beyond the mortgage, utility, and cable. For one thing, the tax bill is likely to be hefty, given the high value of many beach houses. And if the beach house is an income property, homeowners must typically pay for marketing and advertising. Shelling out money to hire people to show off the property is only one part of these expenses. Super unlucky beach house owners might also have to foot the legal costs associated with litigating tenant disputes.
Property management involves a lot more than signing lease agreements and collecting rent checks. When something breaks, such as an HVAC unit or a refrigerator, the beach house owner is wholly responsible for the repairs. Landscaping, painting, roof maintenance, and pest control represent just a few other tasks that fall under a beach house owner’s purview.
Air conditioning is considered an essential service in many parts of the country, and states impose specific requirements on landlords. That means beach house owners must fix the air conditioning in a reasonable time frame. If they do not, renters may have the right to exit a lease or arrange repairs themselves and subtract the costs from the rent.
Most beach house owners don’t have the bandwidth to juggle these responsibilities without turning into full-time real estate investors. Therefore, most investors employ a full-time property manager. The manager handles daily tasks, markets the beach house during tourist season, executes lease agreements, and evicts non-paying tenants. Unfortunately, a good property manager isn’t cheap. Depending on the extent of services, most property managers charge 8% to 12% of the collected rent, which can quickly eat into profit margins.