Buying a beach house can bring an excellent return on investment (ROI), a reliable income stream and access to a delightful vacation spot. Many beach house investors purchase homes which they subsequently rent out during peak tourism times. A beach house owner in Florida might avail his house for rent from October through March, when residents of colder states crave sunshine. Many beach house investors claim that their rental income for this period covers their expenses for the entire year--effectively letting them live in the house for free, during the non-peak season.
But before taking the beach house plunge, it is important to understand the underlying economics involved, including high borrowing costs, exorbitant insurance rates, copious bills, plus the general headaches of property management.
Real Estate Costs & Borrowing Costs
Beach house properties are substantially pricier than similar homes located inland. In Delray Beach, Florida--a popular beach town in Palm Beach County, the median house price in 2017 was $254,000, according to Zillow. And typically speaking, mortgage interest rate for vacation properties are higher than those for primary homes. This can make a huge difference to your 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.
The homeowners insurance on your beach house is likely to be several times more expensive than that of your primary home, mainly due to the often mandatory flood insurance, which has spiked in cost over recent years--particularly on the East Coast, which has increasingly suffered widespread hurricane damage.
A yearly premium of $10,000 or more for flood insurance is not uncommon for Florida beach homes. East Coast states like North Carolina command more reasonably-priced premiums. And while insurance costs in California are typically lower than East Coast prices, the savings are generally offset by higher real estate prices.
Renting a beach house involved bill-paying above and beyond the mortgage, utility and cable. For one thing, your tax bill is likely to be hefty, given the high values of beach houses. And if your beach house is an income property, you typically must pay for marketing and advertising, and you often must shell out money to hire people to show off your property. And if you are super unlucky, you might 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, you are 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.
Unless you are a full-time real estate investor, you likely won't have the bandwidth to juggle these responsibilities. Therefore, you'll want to employ a full-time property manager to handle daily tasks, market your beach house during tourist season, execute lease agreements, and evict derelict tenants. But a good property manager isn't cheap. Depending on the extent of services, most property managers charge 6% to 12% of collected rent, which can quickly eat into your profit margin.