Sebrina, my wife, is an undefined force of nature. Pretty and petite, when she sets her mind to something then the best that can be achieved is to steer a course but there will be no possibility of going astern or stop all engines.
We have five children and the start of grandchildren so having a place on the beach became her focus. We live full-time on Johns Island, SC, rustic and beautiful with it’s deer and Osprey, so a place on nearby Folly Beach made sense. In this event, we would seek a property that would produce income whilst also hosting the odd weekly or weekend family stay-over. Acquiring an income producing vacation property is an improvement over one standing empty most of the time.So an existing home had come on the market on Folly Beach, oceanfront, near the pier, and right in the middle of all the activities, ideal elements for an income producing property. Previously under-rented and with a motivated seller. We put two properties in Mount Pleasant up for sale to raise cash and discussed an interim owner finance deal with the seller that would pay down her existing mortgage and provide full cash repayment within 6 months.
Now the purchase price was around $1M BUT the unit next door sold in 2012 for $1.1M so we should reasonably expect about $100K in equity on day 1. That’s a sizable drop but we also agreed to let the seller use the property 2 weeks a year for 5 years as she loves taking her grandchildren there. Our prediction of weekly vacation rental income is around $120K for the year with a 10% management fee (it’s our company) plus the usual operating costs for this Folly Beach rental.
Tying up so much cash is going to limit other opportunities so we will need to negotiate financing. That means we take a little pain for a year until rent rolls are established then speak with our local banks once we show performance. I’d go for around 50% Loan to Value so we give them plenty of security reducing their risk and protecting our relationship. This is how the investment looks for 3% property inflation with 50% financing.
|Calc Offer price (10% cap rate)||$1,067,894|
|Cap rate at actual offer price/mortgage||10.9%|
|Total 7 year cash gain||$1,098,745|
Maybe you are reading this and thinking, "That’s a tall order for me," I don’t have that sort of cash available? Well the total investment here is considerably lower than many retirement accounts. An annuity would yield maybe 4% or so. This investment keeps you active if you manage the property yourself, yields nearly 11% in year 1 (13% for self management) and returns a total of over $1M over 7 years. That’s over $120K per year and the added bonus of family fun at the beach.
We risked our own cash and sealed this deal. I have a happy wife and we have indeed enjoyed some time there ourselves.
- Holiday homes such as this vrbo Folly Beach home should, and can, be a positive cash-flowing asset
- Banks will finance a lot of deals if you educate them on the investment income potential and proactively reduce the risk.
- Motivated sellers can often help make a deal happen
We will return to this example in 6 months and see how our predictions played out in practice.
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