Alright, first post by a guy who is as green as it gets.
My wife and I own a townhouse in Toronto, we have 170,000 in equity with this property. We are just entering into year 3 of a 10 year mortgage that I have been paying down at just under twice the required rate. I was in Myrtle beach recently and the light kind of dawned on me that right now might be a really good time to pick up one of the ocean front condos I was staying in if I could manage to carry it. Upon investigating the prices of these condos I have discovered that I can in fact carry one and still pay down my townhouse at a slightly excellerated rate for the same monthly payment I am making now. So NOW I figure in the rental income from one of these places add in the fact I can deduct the interest payments as well as the POI fees that I will be making and this seems like something I must do. The reason for the post is that I am looking for someone to pour some cold water on this for me.
I have an agent lined up in Myrtle and I plan to be heading down ther in July with checkbook in hand. Can anybody give me a solid reason not to do this? I do realize the market might drop some more, but I am looking at this as being a 30 year investment so I kind of feel that while things might still get worse I am pretty comfortable that we are close enough to the bottom of the arc here. Any thoughts and / or advice would be welcome.
Without having all the numbers, and me being a fairly new investor, I would highly advise doing your due diligence before you jump into something an agent or anyone else would call a “can’t miss deal”.
You can post some numbers on here and many of the guys/gals will help you filter through all the numbers and consider the pros and cons.
Don’t forget that in South Carolina as well as many other places, the insurance for oceanfront properties has skyrocketed. Just another due diligence number for you.
Hi Dave. I am going under the assumption of a management fee of 50% as this is the higest management fee I have seen to date. I have spoke with the management offices of a couple of condos and have confirmed with them the income on a couple of places. The annual incomes range between 16,000 and 20,000 so I am counting on an income for us of 8,000. Based on that, my 100,000 mortgage that I have secured at 4.75 is more than taken care of. The mortgage is a secured line of credit at prime and I figure I am still o.k. if prime goes as high as 6% which I just can’t see happening. Also, based on what I have seen and what we have to put down in cash I do not think we are going to need the full 100,000 - probably closer to 85,000
Now all I have to concern myself with is the insurance and the POI fees that will range from 400 - 600 per month depending upon which building we decide to invest into. I am leaning towards one which has been resently refurbished to avoid the management group deciding the place needs a facelift right after I decide to buy.
Thanks for the Heads up on the insurance Darin. I had looked into it and found the insurance side of things to be really quite cheap actually. I think I will have another look at this and reconfirm the numbers there. We are pretty cautious people and when we bought our current townhouse made it a point to over estimate the costs to carry the place. As a result we have a much better cash flow that we expected. I put the extra cash towards the mortgage (much to my wife’s dismay) and if we stay the current course we will pay this mortgage off well before the remaining 8 years we have left on our mortgage. It seems to me though that now is really the right time to take a shot at owning somewhere that is not under 3 feet of snow for most of the winter and I am familiar with the Myrtle beach area since I go there to golf when the snow starts making me crazy.
On an annual rental income of $16K the 50% management fee leaves you just $8K.
Credit card merchant fees will cost around $350. Breakage and replacements will run between $500 and $1000 per year. Basic telephone service about $300 per year. Electric could average $75 to $100 per month depending upon use and the season.
Now you are down to $5150 average operating income per year. And you have not done any repairs. This is a rental, and short term renters are hard on everything. Expect to need repairs on appliances and to replace bedspreads at least once every four years. Let’s allocate just $250 per year for this, so now your average operating income is $4900 per year.
Property taxes and liability insurance will probably run around $1500 per year. At $600 per month, your association fees add another $7200 per year to your overhead.
By my guessstimation, you are out of pocket $3800 each year PLUS whatever you have to pay in debt service if you have any financing in place.
Using your numbers, I don’t quite see the profit in this investment.
Thanks for the input here guys. Lets get one thing straight right off the bat here - I am well aware that I do not really know just what I am doing entirely here and I do appreciate the help. Dave, if this place paid for itself I would be over the moon happy about it but I never really expected that to be the case. If this thing cost me 5 grand a year to carry - I am good. I hope to make my money when the US market rebounds say 8 years or so down the road. So having said that, do you think I am wiser to buy a beachfront unit which is 20 years old and refurbished 3 years ago OR a three bedroom two washroom unit that is three years old and about 5 miles from the beach? Both have property management groups, allow short term rentals and the POA fees (I have been calling the POI fees until now) on both are similar. It really does seem like a great time to buy - even to those of us who may not be as on the ball as you guys are. Thanks again.
The ocean front property has a $3800 out of pocket operating cost and you are planning to finance up to $100K at prime (5.25% last week). If you HEL is fully amortizing over 15 years, then your debt service takes another $9650 out of your pocket. Your negative for the year is $13450.
If the second property you are looking at is also a condohotel property, with the same overhead costs and income potential, then expect the same negative cash flow outcome.
There is a reason there are over 11000 condos on the market in Myrtle Beach right now. With the cost of gas so high, tourism is also down. You should probably expect the annual rental income for your target property to be closer to $12K per year at least for the next couple of years.
Interesting there is a difference with prime where you are and where I am because ours is in fact showing at 4.75 today. It appears I most certainly need to look at my numbers again eh?
Thanks Dave, it appears I have a lot to learn in a very short period of time here. I will continue to work on it and I do appreciate the help.
I guess I had not kept up with the US rate cuts. The Wall Street Journal prime rate has been 5.00% for at least the last month. You do have a slight edge if you are able to use financing indexed to the Canadian prime rate.
I don’t really mean to rain on your parade, but your analysis has not included the currency exchange rate
At the current exchange rate you come out a little ahead on the currency conversion when converting your US income into Canadian dollars. On the other hand, when you are buying the property it will cost you more. If you are paying $100K USD for the property today, it will cost you $101700 CAD.
If you go to Myrtle Beach every year and vacation, you have to figure that into the equation. Check with your tax advisor, but I believe you can write off your travel expenses, food, misc. while you are checking on your rental.
You may be able to deduct a lot of your annual vacation!
An owner use/tenant use property has a different yardstick. I like your idea a whole lot.
Not even 10 minutes ago I was watching a TV show where they said, “Myrtle Beach has the lowest price ocean frontage property on the East coast.” That is interesting; is it true?
I really do not know if it is true that it has the lowest price beach front condos. But we do know that for 125,000 we have seen enough really nice places on line to warrant a trip down there to check it out in person. I have been several times but only as a golfer. In fact the sentence “I would like to take some time to sight see” would without doubt result in a beating with the group of guys I travel with. So it will be a chance for me to see what else is available in the area. It really is a very nice place there and I have always enjoyed myself while there. I am going to have to really try hard to get the bottom line figured out here though as I really would like to do this - without shooting myself in the foot. Thanks for the advice I will look into the possibility of writing off my expenses for this.