Investing in Real Estate in Charleston, SC is something that is forever changing. Each decision causes a sequence of events that reveal the strength or weakness of your initial expectations. Our first vacation rental located on Folly Beach was performing very well so we decided to stretch our funds by taking cash out from this asset and buying another property nearby. Read on to see the economics of why we did this ...
We bought 113 East Arctic Ave., Folly Beach back in late 2014 as an investment property and high-end luxury, vacation rental. A $1M investment that was predicted to return around 9%. It was bought for cash and as a new venture we wanted to prove this performance before considering bank leverage. The home is fully booked through the summer and well in to the fall, performance is very good even as we raised rental rates and spent on improving the facility.
My wife is a Realtor and was listing another similar property on Folly a short few blocks away at 406 East Ashely Ave. One block back from the beach on high ground with beautiful gardens and a pool. Newer home, 4 bedrooms, 3 bathrooms listed at $1.18M with a motivated seller. We offered $1M with an agreement that the owner could use the property for her family vacations 1 month a year for 5 years, at our expense. A deal was agreed at the offer price. You can find details of this new property below.
So off to see our friends at BNC bank on Meeting St. to seek funding. Banks are naturally cautious so we did not push the envelope here as financing on Vacation Rentals are a new proposition for BNC. Our request was for 50% Loan to Value over a 15 years amortization. BNC offered a 4.25% rate at the loan conditions above.
This is the rationale of why we did this (figures are approximate and for illustration only):The Return Strategy on 1 investment property:
- Total invested $1,000,000 cash
- Costs of Capital $0
- Net rental return after all costs $110,000
The Return Strategy on 2 investment properties:
- Total invested over 2 properties $2,000,000, $1M Cash, $1M bank funding.
- Total Mortgage repayment $90,000
- Interest for first year $42,500
- Capital repayment for the first year $47,500
- Net rental return after all costs $220,000
- Net rental return after mortgage interest - $177,500 (before tax)
So in summary, using bank funds at 4.25% to leverage our asset increases the return by over 75% with the two properties making a 17% return on investment. Our bank is happy as they are meeting targets and earning money for their investors and we have two luxury vacation rentals appealing to slightly different vacationer lifestyles in a very popular coastal destination.
Thought - We have protected our business here from swings in the market by a cautious LTV, loan-to-value. An inflationary hedge is included in that property prices tend to follow inflation in a perfect world.
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