Owning An Investment Rental Home on The Outer Banks

Here are some questions you should ask yourself when considering investing in the Outer Banks rental housing market.

Is this going to be an investment property exclusively or is it going to be an investment plus a fun beach house making forever memories? A home rented out to someone living in it full time will offer a lower upfront expenditure, steady cash flow and tax advatages but you will have no opportunity to use it personally. A home rented out weekly to vacationers will have increased upfront costs, a cah flow for only part of the year, tax advantages and the ability to personally use the house throughout the year.

Real estate has always been a good way to diversify your investment portfolio. Typically, an investor would buy an apartment building, shopping center or rental home based on the capitalization rate or the possibility of appreciation in the value of the property. Nothing exciting but still a good solid investment.

Investment real estate done right, is a multi pronged strategy where the investor can leverage their money while earning income with capital appreciation as the end gain. Stocks can vaporize, real estate lasts forever and historically, has seen positive gain spread out over time. Real estate is not a short term investment.

Here on the Outer Banks, investment real estate has possibilities not available in most areas. Here you can own a vacation rental home that you can enjoy the use of while simultaneously enjoying the investment benefits of the typical real estate investment. By maximizing the rental potential during the summer vacation season, you can realize income and still get to use the house in the off season.

Vacation Rental Homes

Adding a rental home to your investment portfolio comes with benefits not available to other types of investments. Rental homes on the Outer Banks are not like those where you live. A vacation rental home is only rented during the vacation season, so it ends up being empty for most of the year. Vacation renters pay in full before they check in to your house, so they are never behind on the rent. What other type of investments offer you the opportunity to entertain family and friends in the surroundings of your beach house?

Leverage

$500,000 house as an example. A 20% down payment of $100,000 will enable the investor to leverage a $500,000 asset and over time, let the equity build. You can postpone when you realize the appreciable gain on the entire $500k by waiting until you retire to sell, thereby taking advantage of the lower tax bracket retirement brings and preserving more of your profit.

Financing

If you live a considerable distance from your potential vacation rental home then you might qualify for a second home loan. A 2nd home loan has the combined advantages of a lower interest rate plus a smaller down payment required. An investor loan has a higher interest rate, requires a larger down payment but you can use the proven rental income to help qualify for a loan. So while an investor loan might be more expensive on the front end it might yield higher returns on the back end due to being able to leverage your investment with the rental income.

Positive Cash Flow

The ultimate real estate investment is when the rental income covers all the expenses. If there is profit left over after holding costs then it is called Positive Cash Flow. Instinctively, investors want to buy a house and have the house pay for itelf. This train of thought is encouraged by the endless stream of advertisements claiming positive cash flows for new developments. This is almost always just hype. The exception here is oceanfront home ownership. Most oceanfront homes generate substantial income, escpecially the larger and newer homes which can generate more than enough income to cover all the expenses with money left over after expenses that you can will have to declare as income. Passive income for tax purposes

Due to the overwhelming popularity of the Outer Banks, it is very rare to find a positive cash flow home. Of course, there is always a point where an increased down payment can turn any home into a positive cash flow.

Most of the time, however, the rental income will help cover some or most of the holding costs. Oddly enough, the more expensive a home is, the greater the odds of achieving positive cash flow. This is because the pricier homes are usually located closer to the beach which is popular with renters.

Holding Costs

This is the true untold story for most people when they invest in real estate. It is the savvy investor who knows what to look for (how to find) the not so obvious costs associated with real estate investments. These hidden cost can seriously affect your Potential Gross Income (PGI).

The obvious expenses being utilities, insurance, maintenance, and property taxes. A lot of so called Positive Cash Flow properties don't look so good when you factor in the often overlooked rental commission. To befuddle you even more, some rental companies will charge a lower commission and then charge fees for services not included in the commission but necessary to manage the property. These fees can cover such items as linens, pool maintenance, and credit card costs. This can sometimes add an additional 5% to 10% to the stated commission. Once you have a true picture of the holding cost you can look at the Effective Gross Income and how it will help or hurt your situation.

Cash Flow Worksheet

Here are some sample Proformas to help you analyze your available options and see if this is the course you would like to proceed with. If have heard of these proformas by some other name such as Investment Examinations, Investment Analysis or even the classic 'Performa' they all share one thing and that is the same lack of accuracy.

Every effort has been made to provide accurate data but it needs to be stressed that these proformas should only be used as guidelines. If one of these proformas is your guiding light and is convincing you to follow through with this investment, then please take this Proforma to your accountant. None of us here are accountants and we all hire professionals to do our taxes. Everyone's situation is different so please consult with your personal accountant.

Tax Benefits

The mortgage on a 2nd home is written off just like it is on a personal residence. All maintenance and operating costs are also write offs. There might be depreciation and other benefits depending on your personal situation, so the smart move is to consult with your CPA.

Investment Homes For Sale

Below are some cash flow real estate investments. The investment homes listed below are located fairly close to the ocean and as a result, they tend to produce higher rental income. Oddly enough, the pricier properties are usually cheaper to own. While all real estate is a good investment, rental homes can generate 5%-8% Gross Rental Performance which goes a long way to contributing towards the carrying costs. If a home can generate 10% of the purchase price in annual rental income, then it should get real close to paying for itself.

If you are not sure where you fit in or you are not sure what your options are, give us a call 800-647-1868 and let us help you figure out the best possible scenario for you.