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Vacation Property Investing -- Fun or ROI?

Management costs vary, but one thing is pretty constant. In many small vacation oriented areas, especially when we're talking about condos, there is an entrenched management structure you must use.
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There is a group of rental property investors out there who are in this investment niche only because they perceived an opportunity to buy a vacation property they can enjoy and get back their costs and even possibly make a profit from renting it out when they're not using it.

The saying is that "we buy with emotion and justify with logic." Nowhere is this more evident than with vacation properties. Every year you go to your favorite mountain ski area and pay a fortune to rent a ski condo for a couple of weeks. You have a great time, and you plan on coming back next year.

At some point you may fall into the "why not make money and have fun too" mindset? After all, if you are spending a lot of money once or twice a year for that condo rental, why not buy one and let the management people rent it out when you're not using it? You get income which offsets your costs, and you could even make a profit.

The first error made is in multiplying that $300/night ski condo rental rate by 7 days a week for 5 months out of the year. That's around $9,000. Sure, you have to take out your two week rental because there will be no income. But, there is also summer rental. Most ski properties are in areas popular with summer visitors as well. So, you can add to your returns with income throughout the year.

But, taking into account seasonality, vacation months and a much lower per night rental rate, the absolute most you can normally expect is maybe another $12,000 per year. But, that's not too bad: Adding those together, you're getting more than $21,000 in income and you get to enjoy your skiing trip each year with free lodging.

Vacation Property Management Costs

Management costs vary, but one thing is pretty constant. In many small vacation oriented areas, especially when we're talking about condos, there is an entrenched management structure you must use. Their fees run the gamut from as low as around 30% to as high as 45%.

Let's look at that $21,000 +/- again. Go to the low end and take out 35%, and you end up with $13,650. Remember that we estimated rental days, and you can fall short. But, the thing to remember is that few vacation property owners who use their units for recreation will see a truly acceptable return on investment for their properties.

Yes, if it's more about enjoying the unit, then no problem. But, if you paid that $300/night for two weeks, your out of pocket is just $4,200. If you buy it with a mortgage payment, you're unlikely to get your payment back in rental income. Sure, there are some tax breaks, but it's usually not the awesome investment anticipated.

Another thing that a ski area real estate broker shared with me is that the "justify with logic" thing usually lasts until just after closing. Most of his buyers found that the logistics of putting their personal belongings in a lockout closet was a hassle, as they couldn't keep a lot of personal stuff in the unit that they would like to have there when they arrive. They ended up unpacking the same as if they rented the unit. So, they pretty quickly decide not to rent out the unit. That's OK, as they played the "justification" piece and they're happy buyers.

I'm not against vacation property investment, but it's a whole lot more difficult to show anywhere near the ROI you can get from low priced rental homes in the city. But, it's sure fun to go skiing!