Economics of Buying a Beach House: Read Before You Buy
Buying a beach house can deliver an excellent return on investment (ROI), provide you a reliable income stream and give you a place on the beach to vacation free of charge when you desire.
The method followed by many beach house investors is to purchase the house and then rent it out during peak tourism times. For example, a beach house owner in Florida would ensure his house is available for rent during the snowbird season of October to March, when residents of Midwestern and New England states descend on the Sunshine State to escape the cold.
Many real estate investors who find a beach house in an area with high rental demand and keep it occupied throughout the busy season claim to make enough money during those months to cover expenses for the entire year, effectively allowing them to live in the house for free during nonpeak season. The concept is remarkably alluring Owning a vacation home on the beach is something many Americans aspire to, while owning such a home for free is even better.
Before taking the plunge, however, understand the economics of owning a beach house and the challenges you face to join their ranks. Expensive real estate, high borrowing costs, exorbitant insurance rates, bills, and the ins and outs of property management represent some of the difficulties you can expect to face as a beach house owner.
Real Estate Costs
Nothing adds a premium to the price of a house like a beachfront location. Even a house situated merely within walking distance of the beach costs substantially more than a comparable house 10 miles inland.
For example, in Delray Beach, Florida, a popular beach town in Palm Beach County, the median house price in 2017 was $254,000, according to Zillow. However, rew beachfront homes are available for under $1 million.
The fact that real estate near the beach typically costs a lot is not groundbreaking information, but it cannot be overemphasized what a big investment you are making when you decide to buy a beach house. This makes it all the more vital to understand the economics of the investment, especially the costs you are likely to face.
The mortgage interest rate for an investment or vacation property is almost always higher than for an owner-occupied property. Beach houses are especially challenging since, due to their high prices, it is likely your mortgage will be a jumbo loan, which tends to be costlier than a conforming loan.
On a loan amount of $1 million, a single percentage point added to your interest rate can hike up your monthly payment substantially. The principal and interest payment on a $1 million mortgage, at a rate of 4% and a term of 30 years, is $4,774. The same mortgage but at 5% interest costs $5,368 per month in principal and interest. A $600 per month difference may not sound like a lot, particularly when dealing with investment sums in the millions, but on a budget statement, it could be the difference between landing in the black and in the red.
The homeowners insurance on your beach house is likely to be several times more expensive than for your primary home. Almost all coastal states require beach homeowners to purchase flood insurance. Particularly on the East Coast, the premiums for this coverage have skyrocketed during the 21st Century, due in large part to several hurricanes pounding the region and causing widespread, costly damage.
A yearly premium of $10,000 or more for flood insurance is not uncommon for a Florida beach home. Other states on the East Coast, such as North Carolina, are more reasonable, but it is doubtful you will make as much in rental income there without the 12 months of warm weather. Insurance costs in California are typically lower than on the East Coast, but the state more than makes up for it with exorbitant real estate prices.
The monthly bills for a beach house extend beyond your mortgage, utility and cable bills. For one thing, your tax bill is likely to be hefty on account of your beach house's value. Moreover, if your beach house is an income property, that means you must also pay for things such as marketing, advertising, hiring people to show your property, processing rent payments, and if you are unlucky, legal costs that stem from tenant disputes. This money adds up. Operating costs that do not include your mortgage, taxes and insurance can easily eat up half the revenue from your beach house.
Property management involves a lot more than signing lease agreements and collecting rent checks. When something breaks in the house, such as an HVAC unit or refrigerator, it is your responsibility as the property owner to have it fixed. Grounds keeping, painting, roof maintenance and pest control represent just a few other things you must stay on top of as a responsible beach house owner.
Unless you are a full-time real estate investor without another job, it is doubtful you have the time or the desire to juggle these responsibilities on your own. Even full-time real estate investors generally do not manage their own properties because they have too many to track.
This means you probably want to hire a property manager to coordinate jobs such as landscaping, maintenance and repair. In addition, a good property manager can market your beach house during tourist season, execute lease agreements, handle evictions and late payments, show your property to interested renters and handle rent payments. Having a property manager you can trust is invaluable, particularly if you do not live within driving distance of your beach house.
That said, good property managers are not cheap. Depending on the extent of services, most property managers charge 6 to 12% of collected rent. This can eat into your margin quickly.