Thursday, May 11, 2006

Is A Vacation Home A Good Investment?

So is buying a vacation home a good investment. It really depends on several factors:
What are your investment objectives?

Are you looking for positive cash flow? Appreciation? Or both
As with any real estate investment location, demand & supply are key criteria
What are the rental seasons? Is this a desirable location year round? Winter? Or summer?
What are the tax implications of your vacation home? This depends on your current income and what you can deduct for and how much you will be using your home. WE will look at taxation in future commentary.
What will your costs be? Property management, utility, housecleaning, insect control, cable etc
What will your amenities include? Will you position your home as a high end rental or basic?

There are many criteria to consider before you can decide if it’s a good investment for you. In today’s blog we will look at the projected growth of the Vacation Home Market.

The vacation home market is experience solid growth as baby boomers take hold and begin to drive future momentum into the vacation home market for the next 16-25 years. “Vacation rentals represent a $30 billion slice of the travel industry and have always been an attractive alternative to hotels” - WVR Group CEO Brian Sharples.

Vacation Homes Become a Popular Alternative Lodging Solution. Travel industry analysts have noted a jump in demand for vacation home rentals for several reasons:

Increase in the need for group-friendly settings.

40% percent of Americans bring children on their longest vacation

33% of people travel with either family members or friends.

A Web-savvy world- "The Internet is continuing to change the way people travel. They go online to book homes because it is easy and just as affordable as a hotel room. As a result, the industry is growing at a pace of more than ten percent per year," -Christine Karpinski, referring to the online vacation rental industry.


Vacation Home Owner Demographic Profile (based on the National Association of Realtors study 2005):

Vacation Home owners 55 years old with a total household income of $71,000, have no children with 71% of vacation home buyers have no children and generally buy a detached single family home (83% of purchases). Vacation homes have a median size of 1,290 square feet and a median purchase price of approximately $190,000 and about 14% of these buyers plan on renting their home out.

According to the American Resort Developers Association (ARDA 2004) Older householders and those with higher incomes are also more likely to own a vacation property with 15% of all householders over age 55 having a getaway as opposed to 4.2 percent of householders aged 40 and under.

Vacation Home Owner buyers are different from investment home owner buyers as these buyers tend to be younger (47 years of age), more affluent (mean income of $87K) and do not plan to use their proportions for recreational purposes with only 10% planning to do so. When you’re looking to buy a vacation home you need to decide if you’re buying that home as a true “2nd Home” or a True “Investment Property” or a hybrid of 2nd and Investment Property.

Three-fourths of vacation-home owners purchased for personal use, although one-third also wanted to diversify investments, and 18 percent intended that the home would become a primary residence in retirement. Only 13 percent of vacation owners listed rental income as a reason to buy. The typical owner spends 39 nights per year at their property, and three-quarters do not rent out. Of those who do rent their vacation home, the median number is 12 nights per year.

Two-thirds of investment-home owners purchased their property to generate rental income, and half viewed the property as a way to diversify investments. Eight out of ten spend no time in their property. Not surprisingly, 80 percent rent it out, with 73 percent renting for at least six months per year (NAR 2006)

Vacation Home Market Growth

Based on the ARDA 2004 market study 26.7% percent of American households believe their chances of purchasing a recreational property some time in the next ten years are "about 50-50" or better, and a full 44 percent think they have at least some chance of buying such a property within the same time period. The Concorde Group (2004) projects that 44 percent of all households feel they have a chance of purchasing in half that time - five years.

The real engine of growth in vacation homes are the baby boomers. Baby boomers in their peak earning years are igniting demand for second homes with a a record 445,000 vacation homes were sold in 2003, a 24 percent gain from the 359,000 sold in 2001, according to the National Association of Realtors. “As demand rises, prices for vacation homes probably will increase at a pace more than double the 6.7 percent forecast for the overall residential market in 2004” according to David Lereah, the NAR's chief economist. "It's all demographics," said Lereah. "We're seeing the baby boomers nearing retirement age, and we're seeing real estate play a more prominent role in their investment planning because of their memories of the stock market declines." For the years 1940-1994, inclusive, 202 million Americans were born; about 77% of all Americans now living were born after 1939. During the baby boomer years, 1946-1964 (inclusive), 75.8 million Americans were born. The biggest year of the boom was 1957, when 4.3 million boomers were born. Boomers today represent 28% of the U.S. population but starting in 2005 every b7 seconds a boomer turns 50.

Minorities have become more active in the market, accounting for 11 percent of vacation home purchases between 2003 and 2005 in contrast with 6 percent of purchases in 2002 or earlier. In the investment property segment, minorities accounted for 17 percent of transactions between 2003 and 2005 compared with 11 percent in 2002 or earlier (NAR2006).

An unexpectedly high number of vacation-home owners, 21 percent, own two or more vacation homes. In addition, 34 percent of vacation-home owners report they own two or more investment properties. More than half of investment property owners, 53 percent, own two or more investment homes and 12 percent own two or more vacation homes. Analysis of U.S. Census Bureau data shows there are 6.8 million vacation homes in the United States and 37.4 million investment units in addition to 74.6 million owner-occupied units.

In the next commentary we will look at areas that are becoming popular for vacation home purchases.

Monday, May 01, 2006

Why This Blog?

Why create a blog dedicated to vacation home rentals?

We learned the hard way. In 2003 we bought our first vacation home in Arizona. What helped seal the deal was the fact that the developer had paired with a property management company that had national exposure. They would rent the home and we would get the income. This fact helped propel us beyond our fears of taking on a second home.

What we learned was the property management company was only interested in taking 30% of our revenue and billing us a monthly fee plus all sorts of additional fees: housekeeping, monthly walk through, filters, etc etc. Things like marketing our property, competitively pricing it, and renting it was the furthest thing from their minds. But the scary thing is we kept on with it for another year and a half.

I started to research vacation home rentals on the internet and found an entire community, and industry we're springing up; unleashed by the internet. I researched prices of folks that we're competing against me right next door, and we're under pricing my unit, whose rates we're set by the property management company, by some 35%.

I slowly started to realize that I had to get back in control of my investment. Real Estate can be a wonderful investment if you keep control of it. I had given away my marketing, my pricing, my customer engagement, and my property management completely over to people whose business model objectives we're entirely different from mine.

To date we have increased our revenues some 600% in less than 12 months, our utilization rates have grown 10 fold, and we have a customer base. Things are so good we even purchased another vacation rental property, and created a company under which the units are held. Check out our web site at http://www.breovacationrentals.com

The reality still remains that the majority of people who decide to rent their homes do so in ways that do not maximize their return on investment. They use real estate agents, & property management companies. They do not take credit cards or even have a web site. What they fail at most is that they do not see their vacation home rental for what it is: a business.

We hope to share a few things we have learned in the coming months and our experiences as we continue to strive for continued success with our business. We want to receive information from others and build a community that promotes the vacation home rental industry.

Please let me know of any topics that you want to see addressed or any ideas and experiences that you have had in renting your own homes.

THX
ED