Show me the Money! – Evaluating a Rental Property in Rehoboth Beach!

Vacation rentals in Rehoboth BeachThere are many investment properties at the Delaware Beaches.

Owners often ask questions about rentals. For example:

– How do they work?

– Is a property a good investment?

– Is one property a better investment than another.

The following are some of my thoughts regarding investment properties:

What is the Purpose of the Investment?

An investment property is often purchased to help diversify a families overall investments.  It might be purchased as an alternative to a stock or bond investment.  However very different from a stock or bond in that it is tangible.  You cannot go into the pool of a stock or bond 🙂  You cannot enjoy stock or bonds like you can with an investment property.  However from an investment perspective, real estate often performs in a very different fashion than a stock or bond.

How Much Time Will I Use it Personally?

  • This is a very important question to ask yourself regarding an investment property.  The proximity of the property to where an owner lives might limit the use. For example, an owner lives in Maryland but has a rental property in Palm Springs CA.  The amount of personal time used will impact the rental income that a property can generate and will also affect the tax treatment of the investment.  A CPA or Enrolled Agent can help you quantify the differences so that you can maximize the return of the investment.

How Much Rental Income Do I Need?

  • Often an owner will decide to rent a property to generate enough income to cover the expenses of the property, mortgage, HOA fees, utilities, etc.  Selection of an investment property generally includes looking to maximize rental income.  Gross income of the property minus the expenses of the property is the net income or loss of the property that may be subject to income taxes.

What Makes a Good Investment Property in Rehoboth Beach?

  • Closeness to the beach – How many blocks?  The closer to the beach, the more desirable.
  • East of Coastal Highway.
  • Sleeping capacity – eight to ten is excellent. Eight is the sweet spot. Demographic data shows that families with children are the most frequently booking guests. A sleep capacity of eight to ten allows two couples each with children to share the cost of one rental, or one multi-generational family. An occupancy more than ten gets to be an issue with parking capacity and sometimes noise.
  • Swimming Pool – increases income in a resort area.
  • Ratio of Income to the Cost of the property – Property is worth $1.5 million and generates net income of $50,000.  This would be like a 3.3% return on a stock or bond investment.
    • Often times a property may have achieved its maximum income potential.  If this happens, it might be time to evaluate a potential replacement property.  See Scenario Example below.
  • Appreciation potential – If this $1.5 million dollar property appreciated 2%, this would be an additional $30,000 of investment return.

Scenario Example of Real Estate Evaluation

I use an example in Country Club Estates as we believe that this neighborhood offers the best investment opportunity in Rehoboth Beach. This example ignores fees and taxes which are important considerations to any investment:

  • Owner has a $1.5 million dollar home in Country Club Estates (South Rehoboth Beach neighborhood).
    • Property currently generates $70k of gross income.
  • Owner sells property $1.5 million and uses the proceeds as follows:
    • Purchases a teardown house in country club estates for $800,000.
    • Builds a new house with a pool for $500,000.
    • This house is projected to produce $100,000 of gross income.

Mikey, Seachange Vacation Rentals*

Call us with questions or if you would like to investigate an investment rental at the Delaware Beaches.

We specialize in Buying/Sales of Investment Properties and Maximizing Rental Income

302-727-5566 (Downtown Rehoboth Beach Rentals and Sales Office)

* Seachange Vacation Rentals is associated with Keller Williams Realty, whose main office is located at: 18344 Coastal Highway, Lewes, DE 19958. Main Office Telephone: (302) 360-0300.