My husband and I stayed at a rural ranch vacation home that sleeps 18 over the weekend and paid $500/night. It is for sale for $380,000 and sits on an acre right on a 22 acre stocked lake. It is situated on a 122 acre land development site that has a total of seven ponds, and a 22 acre lake. The ponds and lake are stocked and maintained with bass, catfish, crappie. Currently there are only 6 houses in this development. Buying this home includes the use of a 6000 sq ft clubhouse (located next to the house) that has a pool table, shuffleboard, poker room, piano, living room, full gourmet kitchen, and 2 dining areas, 2 upstairs suites as well as an infinity pool, use of kayak and jon boats. The plans are to build a pavillion for weddings. The manager states that this house is currently booked to December 2010 and she is already booking for next summer. (We asked what the price for renting for 1 mo was, and found that it is $1900/mo - and a family has rented it at this price for the month of November) She states that the owner (76 yrs old) wants to sell because he went into this venture with two partners, got burned by one of them, and is left holding 2/3’s of this investment and doesn’t want to carry that much of the load. The closest town is 18 mi away and has a pop approx 15,000, and 35 mi away is a town of 75,000. This property is located near a pheasant hunting operation, and the manager says that she keeps it booked during the winter with hunters. The place is beautiful, and I would love to own it, but my gut says something isn’t right. My husband seems to be in fantasy land and doesn’t seem to hear me on this. We have a good credit score but no cash, so we would have to finance this. I think the risk is too big. We are both nurses and have no experience with anything like this and really no knowledge either. We live in Texas, and that is where the property is. Please share your thoughts openly. Thank you for your time.
I had resort investments in Colorado managed by local companies. Although the property was rented enough to make my cost's, it did not provide for any real positive cash flow and I will explain what I understand as to why.
First a conventional rental is rented monthly for a fixed rental or lease expense to a tenant and a property management company makes a fee to manage it normally anywhere from 8 to 10%. In a vacation rental or nightly or weekly rental there is good income when the unit is rented, but obviously no income if the property sits empty. Your example at $380k will require a debt payment of roughly $2220.00 per month PI (Principle & Interest).
Now when you add taxes and insurance to this number you probable need another $300 to $400 more per month, then when you add basic management of 10% to that you end up with an example of needing a minimum of $2900 a month just to own it and have a manager.
Now when you own resort property you have the following cost’s:
- Liability Insurance
Now on top of these fixed cost’s are additional resort cost’s:
- 1.5 TO 2.5% Credit Card Processing Fee’s
- Daily Maid Service (Cleaning, Washing Dishes, Making Beds)
- Snow Removal
- Summer Yard Maintence
- Laundry Fee’s
- Linen’s Replacements
- Dishes Replacement
- General Wear & Tear Replacement
- General Interior & Exterior Maintence
- Plugged Toilets & Backed Up Drains
- Light Bulbs
- Replacement Remotes
- Furniture Wear & Tear (Replacement)
- Interior Painting (I was doing it once a year as a requirement of the resort upkeep & presentation agreement
- Carpet replacement (About every 3 to 5 years)
- Long term replacement fund (Hot Water Heater, Furnace, roof, etc)
- Booking Commissions (Independant Sales & Marketing)
- Legal costs
- Advertising Fee’s
- Administrative, Bookeeping and Taxes
I owned properties in the 1990’s in Steamboat, Aspen & Vail Colorado and although I owned the properties and paid down the mortgage, they did not bring in huge amounts of money you might imagine for $500 per night. In fact in a bad year it may take money out of pocket to pay the cost’s!
I hope this gives you insight and a better understanding of what you would be facing.
This is a fact for all businesses. NOBODY EVER SELLS A BUSINESS THAT IS MAKING MONEY…PERIOD. They will lose their family and die holding on to a business that makes money. This resort house is a business you are buying. That means it is not making money. It looks like this 76 year old man now has 2/3 of the business that should mean that he is making more money than if he only has 1/3 o the business. I read this as the business is not making money and he is now taking 2/3 of the losses instead of 1/3.
People sell real estate all the time for various reasons. Although in real estate every deal is not a good deal, good deals do come up. When you buy real estate as a part of your business the real estate is not the business it is a part of your business enterprise. No matter if you were going to buy the whole resort as a business or even 1 house I would want to know different things than what you are describing in your post. I would be about actualized revenues and expenses. For example I would buy a shack down by a muddy river that people rented and grossed $12,000/year of which I kept $2,000 before I would buy a beautiful mansion on a pristine lake that grossed $1million/year but every year I broke even.
That is just my take on it.
The property management fee of 10% is unrealistic for a furnished vacation home.
There is a ski resort town near us, and property management firms there manage many rentals. They charge 30% of gross rent, plus they also charge for cleaning, trash removal, snow removal, hot tub maintenance, light bulb changing, etc. They charge even if the OWNER has spent the weekend in their own condo. Those condos are usually only rented weekends, Christmas and Thanksgiving vacations.
We have also leased homes and charged ± 40% although we did cleaning at our cost. There is a huge amount of maintenance and tenant TLC involved in vacation rentals. It is much better is you live nearby to handle things, and not give it over to property management.