These days, Folly Beach SC is plain fun. As the condomiums of James Island have filled out, and the seemingly endless wave of new arrivals continue to move to the Charleston area, then Folly Beach has evolved to extend its season of fun from that of just a few summer months to a continuous year-round vacation destination. For the savvy investor, Folly Beach also represents a solid opportunity less pressurized than those of downtown Charleston. Build on the island, cash flow your property and in turn, have a vacation home throughout the year free of all costs. What could be better?
We have been developing this model for a few years now. Firstly buying available 4-bedroom homes as they appear on the real estate MLS, as well as adding additional 4-bedroom rentals to our portfolio and managing those of another like-minded owner. It has worked well and produced both a solid return and healthy capital growth.
Last year, we saw an opportunity to further develop our portfolio on Folly Beach and this is how the story has unfolded so far. Folly Beach can basically be divided into commercial and residential zones. The commercial zone is a couple of blocks on either side of Center Street, Folly's main business corridor. Here, building density is higher and they have city sewer. So, if you can find land zoned commercial at a good rate, then this is preferable in terms of location and amenities. That is what we found, offered for sale on the MLS. A parking lot between Cooper St. and Erie St., and a dilapidated duplex located directly behind between Erie and Hudson Street. That gave two city blocks adjacent to Center St with the ability to create 7 homes in all, or 26 bedrooms given the allowable density. With the purchase quickly completed, we moved on to design.
"What do vacationers look for in a home?" is a question worth considering. Photography that catches their eye as they browse online booking sites, ample, airy bedrooms but not necessarily large. Good, open common space to enjoy their friends and family with maximum space available. Intimate patios and gardens close to the ground floor, and a pool if they can possibly get one. A home achieving all of the above will rent longer and for a higher rate than any other product located on the beach.
From the site survey process, we knew the parking lot was an ancient sand dune. Elevating the homes to FEMA flood zones (V Zone) and city of Folly Beach requirements typically divorces the ground floor from the grade but not if you can keep the elevation of that ancient dune. A rear yard that is elevated also attracts a summer breeze and allows for pools that are free from the flood risk we have seen over the last two years. On this particular site, the building of two duplex allows for maximum lot occupation without a central setback meaning bigger internal spaces. Designed with a modern beach aesthetic and cool, crisp coastal-inspired interiors, each duplex unit has a private yard with a small pool, a great place for the kids to cool off, but not an Olympic-sized money pit to build. A gavalume metal roof where the roofline is visible and light reflective asphalt shingles where not, will give good thermal performance yet also photograph well. For better thermal performance, we also used high-grade insulation and high SEER HVAC from Mitsubishi. Run costs can be a killer for vacation properties in the hot summer months.
Timing is everything for this type of rental investment. During the winter you are lucky to cover operating and finance costs, January through March you probably will operate at a loss. In Charleston, Spring through Fall is where the profit is made so these properties MUST be ready for the launch of the Spring season. Indeed the interiors must be ready earlier than that, so that we can produce high quality, professional photography and syndicate them to booking platforms in advance. What we can't photograph we will produce as renderings until the final details are completed and the houses are fully ready for occupancy.
We funded this project partly from internal resources and partly from two investors who understood the play and wanted to be a part. So how have the finances panned out so far?
- Aquisition costs: $750K
- Entitlement (soft costs): $150K
- Build costs: $1.7M (6400 sq. ft. total, 16 bedrooms in 2 duplex buildings)
- Interest: 5% Interest paid on 60% LTV Construction line with South Atlantic Bank
Estimated first year's return: $420K gross (based on in-house comperable performance)
Estimated operating expenses including management charges: 45%
Estimated Internal Rate of Return (IRR) over 10 years holding period: 17.4%
Deals like this are hard to find downtown on the Charleston peninsula these days. As in all predictions, we have made some assumptions, but also tried to be conservative, for example allowing for only modest 2% capital inflation. This is a middle-market product, in a downturn we believe we can still place the product and the operating margins allow for some price flexing to achieve that end.
Note: As our newest vacation rental, a project that has encompassed each one of our capabliities - from development, to construction, and vacation rental management - we are thrilled to see this project in it's final stages. Now, it's your turn to experience this product and what a Folly Beach vacation Slightly Off Center entails... Have a look at this newly constructed beach house, comprised of 4 different townhomes (A, B, C, or D) and book your stay with us today!
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