Owning a vacation home has certainly gained in popularity over the past 10 years for several reasons. COVID-19 changed the way we vacation and many of us are seeking lodging that includes privacy (no shared space) and cleanliness, less foot traffic.
People have also discovered owning a vacation rental can serve multiple purposes.
1. A strong revenue source.
2. A secondary home for family and friends where the property is not being rented.
3. A possible tax deduction.
4. Real Estate appreciation.
The right home should appreciate over time.
The Four Types Of Investors
The Passive Investor: Are looking for a property they can use but rent when they are not occupying the property. In this scenario, the investor is looking to recoup some of their expenses, insurance, taxes, and HOA fees. Usually, they are working in another profession and are not retired.
The Hard-Core Investor: Is the individual who is expecting the property to cash flow and will demand a CAP rate of 5-10%. A CAP rate is an assessment of what a property will yield. The calculation is: The Net Operating Income divided by the purchase price. This type of investor will never or rarely use the property and is not emotionally attached to the property. They typically seek multi-unit properties.
1031 Exchange: One of the last tax break frontiers. This is for the investor who wants to sell an existing rental property and take the proceeds and invest in another rental property. This allows for the capital gains taxes to be deferred.
The Flipper: This investor wants to purchase a distressed property, which could be a short sale, a trust sale, or a bank-owned property. The investor will improve the property through repairs and remodeling, place it back on the market, and sell it for a profit. It is beneficial for the investor to have a contractor’s license or talent in remodeling or an arsenal of people who can turn the property for the investor. Timing is everything when you are a flipper. Which type of investor are you?