Can I Really Make Money Renting Out My Beach House?

Ah, that feeling one gets when vacationing, “Wouldn’t it be nice to own a property here?” With limited inventory and high appeal, property prices in resort areas are a premium. “What if,” you say…? “What if, we rented out the property to cover the mortgage?” We’re in Second Home Buyer territory here – lifestyles of the rich and famous! There’s also another type of resort property buyer – the much maligned and misunderstood Investment Buyer. Two distinct types of clients for us Real Estate Professionals, but in actuality one type of client requirements set when it comes to maximizing rental income from the property purchase.

Your Second Home Buyer may be looking to generate enough rental income from rentals for part of the year so that they can, ‘live for free’ in the property the rest of the year. Another type of Second Home Buyer has numerous reasons why they may be looking to buy a second home for recreational use until ready to relocate and make the second home their primary residence. Typical reasons for this are a job in their area of primary residence, or dependents not yet out of that primary residence, or away at college not yet financially independent. This Buyer is looking either way, to at least cover the mortgage, taxes, and maintenance costs of the second home through rental income. Second Home Buyers have their own challenge to a Resort Real Estate Professional hired to find the property and then find ‘guests’ to rent the property. You see Second Home Buyers have the emphasis on the word, “Home.” This lens can be a tricky one to swap out for an ‘investment’ mindset when staging the property for maximum rental income. More of that later.

Your Investment Buyer is driven purely by a return on investment. This is not a Second Home Purchase. The lens is one of get in, get the best purchase deal done, and get it on the rental market quickly! And while we’re at it, “What’s the bare minimum cost investment I need to make in order to maximize my rental income?” This can be a tricky conversation when persuading said Investment Buyer that a bathroom and/or kitchen upgrade bundled with added amenities such as free parking passes, beach equipment, coffee makers, premium cable and so on will attract more guests quicker and encourage return guests that want to pre-book for the next season.

So, “Can I Really Make Money Renting Out My Beach House?” The short answer is an enthusiastic, “Yes!” I encourage my clients to follow the lead of the hospitality/hotel industry. With that in mind, here are the top ten factors affecting your vacation rental income:

  1. Location and recreation.
  2. Competitive rates.
  3. An engaged, knowledgeable reservations agent and property manager.
  4. Clean, comfortable bedding.
  5. Functioning plumbing & appliances.
  6. Dining, seating, bathrooms, and parking capacities to match the sleep capacity of the property.
  7. Nice ‘extras’ such as free Wi-Fi, bicycles, beach equipment, and local area information.
  8. Neutral, modern décor.
  9. Modern floor plan/layout.
  10. Minimal ornamentation and owner personal items.

Simply put, you gotta spend money to make it. That’s the law of attraction: like attracts like; money attracts money.

So, where do I sign? Hold that thought! Back it up there a little partner!

Motivation

First let’s seek to understand the why? Why are you considering renting out a beach property that you already own, or why are you looking to rent out a beach property that you’re buying?

My Mom always says, “The answer is in the question.” Ask the question and y’all are closer to knowing the answer. And y’all know there’s never a dumb question. Regardless of whether or not you’re going to be using the property yourself, or if it’s purely an investment, or ‘income’ property for you, the answer is still the same. You’re renting the property out because you want the income, right? Ain’t nothing wrong with that! Problems with local municipalities and neighbors regarding vacation rental properties do not stem from the fact that they’re rental properties, they stem from the fact that you have bad tenants, or, alternatively and simply put, too many tenants with accompanying vehicles for the size and character of the neighborhood. So, I shall repeat – ain’t nothing wrong with pulling income from a property that you own and invest in via upgrades and maintenance. Get over the ‘shame’ of making money from your property. Ain’t nothing wrong with it! That being said, “Can I Really Make Money Renting Out My Beach House?”

Setting Rates, or Income – Recreation and Location

How much money do you want/need to make? Do you want to cover the mortgage? Do you want to make enough to pay for a planned future upgrade to the property? Take an annual vacation of your own? How much income is ‘enough’?

How much income can your market support? Before you even make that purchase offer – is the property located in a resort area and/or part of town that attracts a good amount of visitors? Or is it a remote area that appeals specifically to your needs and those of a specific subset of the population? You see it’s as much about recreation as location.

Look at the macro level geographically speaking, the higher the demand for a resort location itself, the greater the opportunities for your rental income. So, consider the macro level – what is the catchment area for visitors to the beach areas?

Then consider the micro level – what’s the relative attraction of the specific location within the resort town itself? How far is the property from the attractions that likely tenants would want to visit? Can tenants/guests walk to the beach/shops/restaurants? Sometimes the answers will surprise you. In my professional experience, beach front properties are harder and slower to rent than those a block or two back from the ocean. Go figure! Who knew? This doesn’t mean that your beach front property will not rent – its beach front! What it does mean is that the subset of interested tenants might be a little smaller, or may need specific marketing to reach, hence driving up your operating costs, and consequently affecting your rates.

Operating Costs

These are the costs associated with managing the property as a resort rental property. In other words, your cost of home ownership plus the cost of being in the vacation rental business.

Naturally you have the regular costs associated with owning real estate such as the mortgage, property taxes, insurance, possibly HOA fees (check with the HOA that they allow short term rentals before you buy!), and ongoing maintenance. However, with managing a resort rental comes a host of specific costs. For example, marketing and advertising the property to secure tenants (guests); communicating with interested parties, building a website, setting and managing rental rates and calendar availability; replacing items when they “disappear,” drafting lodging agreements (leases), processing rent agreements, paying bills, paying for maintenance and cleaning, and many more! If you do not live very near to the property you will need to hire a local Property Manager. In fact municipalities often require a local contact that can respond to complaints from neighbors, police, local authorities, guests within 15 minutes. Some of these calls require an onsite visit, often at unsociable hours.

Zillow estimates that these combined operating costs can be as much as 70% of revenue. When you consider that, then the industry accepted service fee of 15% of rent that Resort Rental companies charge property owners for all of the above services is an absolute bargain – depending on how ‘good’ that agent is of course! If you’re negotiating with one such company and ask them to reduce their fee, it’s not a good sign if they agree to reduce their fee, in my opinion. It’s not possible to reduce the fee and meet service level commitments.

Rental History

Has the property a prior rental history? Are there online reviews from actual tenants (guests)? Does the Chamber of Commerce or (tread carefully here) your City legislators any input on the rental history and rental market? Call your local Board of Realtors. In a resort area there should be a Rental Affairs Committee or some such similar group of Real Estate professionals with knowledge of the local resort rental market. Do your research on the market.

Guest Perspective and Demographics

How does the property look through the eyes of a guest? If you can pull a family member/friend in to stay for a few days and get their input on the property and the resort. Our local market here at the Delaware Beaches pulls heavily from the metropolitan areas to our west and north: Baltimore/Washington DC and Philadelphia urban areas; Virginia, Maryland, Pennsylvania, New Jersey, and New York states. Do the household income levels of these ‘catchment areas’ support resort rentals? What features and services are vacationers looking for in a rental home?

When I consult with buyers I give them my experience from our Vacation Rental Division. Guests may still be looking for the charm of a beach cottage from years gone on the outside. On the interior of a property, tenants/guests are looking for a property layout and amenity experience close to that of the urban and suburban areas in which they live. Namely:

  • Open plan living;
  • A master bedroom on the first floor;
  • Preferably a bathroom in every bedroom;
  • An average of 4 or 5 bedrooms;
  • Plenty of closet and other storage space;
  • Upgraded kitchen and appliances;
  • Hardwood floors and enclosed outdoor showers (easier when dealing with sand from the beach);
  • Central air and heating;
  • Adequate parking with off-street options.
  • Sufficient seating and dining capacity for the entire group of guests;
  •  Wi-Fi internet;
  • TVs in all bedrooms and the family room.

When looking at the property you already own, or a property to buy – look at it from this perspective. If you don’t have all of these amenities, then cost it out – what can you afford to do now to maximize your rental income in the first season? What can you do in stages, using rental income from a prior season to improve the property to increase the rates for the next season? In other words, have a goal to what you’re intending to do.

Aesthetics, Comfort, and Practicality – Hospitality By Any Other Name

How does the property look? Huh? I’m not talking about amenities, or floor plan. Would you want to stay there if you didn’t own it?

Work with a Resort Rental Agency that has agents trained in the staging of properties for sale and rental in your local market. Staging is a fancy name for moving stuff around on its simplest level. At its more complicated it becomes akin to General Contracting and/or Interior Design Project Management. However, staging doesn’t necessarily have to cost a lot of money. It can be more about what to get rid of/pare back versus what to add (buy). It’s about the furniture and fixtures – even soft furnishings like bedding and upholstery. It’s about the amenities a vacationer will need for a week’s stay. When considering the furnishings for a resort rental, less is more. Again, I recommend that you take your lead from the hospitality/hotel industry. When you check into a hotel room these days, they’re more like mini suites complete with a seating area and sometimes even a small kitchen area. Common to all rooms however are: a small selection of basic, comfortable furniture; little if any ornaments; neutral, modern color schemes with a mixture of textures and simple patterns; comfortable coverlets on the beds that can be laundered and sanitized easily; comfortable pillows; good quality pillow and mattress covers. You get the point. Cluttered homes with old, stained, furniture; furnishings with clashing or bold fabrics – these do not work well if you want to appeal to the maximum amount of guests and secure repeat visitors and great reviews.

Maintenance

Tied in with Operating Costs for sure, but worthy of a special mention. How much maintenance will a property require? This is ongoing maintenance that coastal salt air necessitates in higher frequency than in land. It is also routing landscaping, repairs, and property upgrades.

I advise my Vacation Rental Property Owners to set aside and re-invest at least 10% of their annual rental income to put back into the property in ongoing maintenance and upgrades. You have to spend money to make money. Yes, minimize the amount you have to spend by finding a property in the best possible condition, but also minimize the replacement costs down the road by putting good quality furnishings and fixtures in the property at the outset. The better maintained the property, then the better respect a potential guest will have for the property.

Consider Less Than Optimal Properties To Gain An Entry Level Into the Resort Rental Market

Could you buy a, ‘less desirable’ property that may need a little TLC for rental readiness? Sure! It’s a good way of getting that all important first step on the ladder of vacation property ownership. Determine, however, the basic cost post-purchase to get the property in a reasonable enough condition for guests. You may not have to make all the improvements the first season of rentals. Consider spreading property improvements over multiple seasons, using income from a prior season to make an upgrade for the next. The tradeoff with this approach is that you may have to reduce your rental rates to factor in a property that does not compare well to the neighborhood competition. Additionally in these days of social media, you may not get the guest reviews that you’d like if the property does not compare well to the competition.

In closing, “Yes, you can make money by renting out your beach house. Enough to cover the mortgage? To answer that, you need to do your homework:

  • Determine your motivation. Set a goal for the why and for the level of income you want to pull out of the property. Resist the temptation to cram a bed into every available space. Occupancy limits and comfort considerations are as important will reach a tipping point at certain locations.
  • Do your research on the local market, catchment area for visitors, and if applicable the prior rental history and reviews.
  • Look at the property from the perspective of your guests. Simplify the staging and furnishings. Put your money where you’ll see the best return – comfort over complicated aesthetics; floor plans and amenities that match the contemporary lifestyles of your guests. Stay out of your guests’ lives while at the property – minimize personal ornamentations and photographs.
  • Minimize your maintenance costs by not only buying well to begin with, but by setting aside a portion of your rental income to re-invest each year in upgrading furnishings and fixtures.
  • If all else fails, don’t get discouraged, consider buying lower on the property ladder and improve over time to incrementally increase rental income.

The rest of course, as always, “Depends!” Call a local Resort Real Estate Professional with vacation rental experience. Get their input on the local property market and get them to work on your behalf to find the best property for your goals. This professional will work with your chosen Financial Professionals to help you with sample numbers relative to mortgage payments and rental rates.

All things being equal, people are, depending on their goals, not only covering their beach property mortgage payments, but securing investment income also.

The Author, Andy Meddick is a REALTOR® with Keller Williams Realty At The Beach, Rehoboth Beach, Delaware. Andy is also President of Resort Rentals and Vacation Property Services for the Keller Williams Vacation Rental Division at the Delaware Beaches.

Andy may be reached through his cell on (302) 381-6182, and the main Keller Williams Rehoboth Beach office at (302) 360-0300. Email andymeddick@kw.com

 

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Rental Office: 20 Baltimore Avenue, Unit 1
Rehoboth Beach, DE 19971, USA
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