In this post, we'll dive deep into my first investment property - a vacation house and how that purchase accidentally triggered a passion that has resulted in 4 long term rental units and another vacation rental currently under contract! We'll discuss how and why buying a vacation home might be a perfect investment strategy for you!!
Pro-Tip #1 - you can buy a vacation home with only 10% down payment!
Pro-Tip #2 - vacation rentals (Airbnb) typical cashflow 2X that of a long term rental
The Back Story
After graduating from college in 2010, I was fornutate enough to be one of "those" people who knew somebody that had a house on Cape Cod. This house was perfect for the many of us friends that desired to vacation there for long weekends over the summer. The house belongs to my roommates grandmother, "Grammy". Every weekend during the summer months we'd venture on down to the "Cape" to hang out for the weekend. Being the amazing woman that Grammy was, she welcomed all of us with open arms. Sleeping arangements really just meant that you crashed in the finished basement, on the couch or floor. We didn't care though, we were spending time on the "Cape". As time went on, and significant others added into the commotion of eating and sleeping arrangements, many of us considered the thought of renting a nearby home so everyone could have a little more space. After 9 years of sleeping anywhere that we could in Grammy's house, my wife and I booked a week long vacation at a cape house not far from "Grammy's".
The Purchase
We booked that cape house on July 6th, 2018 for the week of 4th of July, 2019 (yes a full year in advance). As the year passed and we got into February of 2019, my wife noticed a few smaller (2 bed/1bath) homes in the same general area of cape cod were listed on Zillow. The price points of these homes were in a range that didn't totally freak us out and we noticed in the listing notes that some of the homes for sale had been used as short term rentals. We keyed in on one home in particular that was a 5 minute walk from the beach, a short drive to "Grammy's", and walking distance to some of our favorite local bars and restaraunts. The details of the listing were as follows:
Location: Dennis Port, Dennis, Massachusetts
Listing Price: $279,000
Previous Year Income: $18,000
Days on Market: 60+
Additional: all furniture included
We did some quick napkin math and realized that if we could replicate the $18,000 in income (from Airbnb and VRBO) then we could cover our annual expenses and we could get a free vacation out of it. Worst case scenerio, we knew that if nobody rented from us, that we could atleast cover the $1,200 per month mortgage. So....we jumped in. We went to the open house in February of 2019, and through some negotiating, we managed to get an offer accepted at $262,000 contingent on an inspection and all furniture to be included.
To this day that single purchase has been one of the most critical and smartest investments that we could have ever made, aside from buying our primary residence... needless to say, we cancelled our reservation at the rental.
Sunny Daze Cottage 2019 - 2020
We named the home "Sunny Daze Cottage" after our Great Dane, Sunny. In year 1, we decided to put the home on Airbnb and we strategically priced the home a bit cheaper than the surrounding rentals. We also allowed dogs. Most importantly, we blocked off the week that WE wanted to vacation there - the 4th of July week!!! To our surprise, managing a short term rental took far less time than we anticipated, and it was fairly easy to find a cleaning person who showed us the ropes on how to manage an Airbnb. Not only that, from May - October, we saw almost 85% occupancy and I believe we grossed right around $23,000. Not bad! A free vacation and a $5,000 jump from what was previously stated by the sellers. We were able to pay the mortgage all the way through the off-season on the proceeds alone, while also making some updates to the house such as putting on a new roof!
We were excited about this new found income stream of ours, and couldn't wait for the 2020 season! We opened up the calenders for the 2020 season right around February 2020. Quickly we noticed the booking calendar begin the fill up! For anyone who does not own an Airbnb, you get a small rush every time there's a new booking :) Then in 2020, the Covid-19 Pandemic hit. To be honest, we were fully prepared to hunker down at the cape for the entire summer, figuring all of the renters would cancel. Since this was a safe purchase that we could afford, we weren't too stressed...I mean, a full summer on the cape?... Sure why not!
To our surprise, more and more people began booking. It became apparent that guests would rather stay local and come to the cape because they couldn't fly to a destination quite as easily as pre-pandemic. In 2020 we gave ourselves a 16 day vacation, 13 of those days spent on the beach, and to make up for the loss in rentals during that time, we allowed bookings as early as mid April... We also increased the nightly rate by 5% now that we had a steady stream of guests! We couldn't believe it! In 2020 we grossed $27,000 in revenue, had gotten to enjoy a free 16 day vacation, and were able to give 2 friends of ours free long weekend vacations at the house!! Our occupancy rate jumped from 85% to 90%.
Sunny Daze Cottage 2021
2021 happened to be our best year yet! By making an incremental increase to the nightly rate and expanding the rental calendar, we were able to gross $31,000. More over, this was the year that we finally began buying more properties. However, we didn't have the cash on hand to buy another cape house or another house locally for that matter. As 2021 got under way, we noticed a few houses in the neighborhood that were similar in size and spec sell for $300K - $400K. Much higher than what we paid for Sunny Daze Cottage. This meant that our equity stake in the home had grown substantially! Equity is the difference between what the home is worth and what you owe on your mortgage. To leverage this equity, we had an appraisal done and learned that through a home equity line of credit (HELOC) we could borrow up to $55,000. That is more than enough to get started with real estate investing!! So not only has this little vacation home given us a positive cashflow and free vacations, it has now given us $55,000 to be used towards buying another investment property!!! We pay this home equity line of credit back through the rental income of our other properties.
Financing Hack - Affording the Down Payment
One trick that we use when buying a vacation home is the low downpayment 2nd home mortgage option. Most lenders that provide mortgages for 2nd homes will allow you to put only 10% down for a down payment! We didn't know that at the time of purchasing Sunny Daze Cottage, however we are using this strategy for our vacation house in Maine! This might greatly reduce your barrier to entry when considering buying a second home. With that, you may be concerned about PMI and a higher monthly payment. Always run your numbers. Use websites such as Airdna.co to estimate the revenue that you could make on a home to make sure you are cashflow positive! For me personally, I don't worry about higher monthly payments so long as I hit the cashflow metrics that I'm looking to achieve. Also remember, don't just look at year 1, look out 10 years to get an understanding of the home value appreciation and growth in cashflow. Remember, real estate investing is a "get rich slow" strategy - this isn't the stock market or crypto.
In Summary - Who Says Investing Can't be Emotional?
In summary, buying a vacation home most certainly can be emotional. It's a powerful way to be able to make a strong investment, with high cashflow (if purchased in the right market), and score a free vacation once or twice a year for yourself and your family. Doing a "Vacation House-Hack" is a great way to get into real estate investing!