With the uncertainty of the stock market, people are looking for alternative ways to invest. Real Estate has always been a good place to invest for the long term. It is true that real estate values are down at this time; however, historically, the real estate market has always rebounded. During the past few years we have seen an extraordinary increase in market value, and investors have been able to purchase and “flip” the property quickly for a profit. Those days have passed; however, for the buyer who is willing to hold the property for the long term, a good profit can be made.
There is much news today regarding the decline of the housing market and a large number of foreclosures. One should not expect that to be the case in many resort areas. Many resort areas have seen relatively few foreclosures and almost no instances of subprime lending. You are not likely to find a depressed market on beachfront condos, but for those willing to walk a half block to the beach prices may be significantly lower than they were just a year ago. This is not so much because of the economic crisis, but because of over-building which created too much supply for the demand. As the existing inventory of real estate depletes we should see a smooth rebound in property values. Values could drop even more, but not likely as construction has slowed and the surplus inventory has declined. For the buyer intending to hold the property as a long term investment in a family vacation home or as a retirement home, there should eventually be a return on the investment.
Most families plan their vacations well in advance; however many frequently just want to take advantage of a weekend break. It isn’t always easy to make “spur of the moment” arrangements for accommodations. This is not an issue when you own your own vacation home. When buying a vacation property, you should consider your preferred lifestyle. After all, the purpose is to purchase a place for you and your family to enjoy. Are you best suited for a condo, house, or townhouse? Do you prefer beachfront, interior island, or a golf villa? Do you prefer the beach or bayside for boating and fishing. Do you prefer winter sports?
In order to help pay for the vacation home, consider renting it to tourists when not using it yourselves. During this period of uncertainty, many people are staying state-side and traveling closer to home. Houses and condos in resort communities provide all the comforts of home with the option of eating in or dining out with plenty of activities that don’t cost much, if any, money, such as pools and beaches or fishing from docks and piers. There is always the option of some paid-for activities mixed in. Frequently, for a family, vacation home rental is cheaper than a couple of hotel rooms when occupancy limits and comfort prohibit a family of five or six from occupying a single room.
For purchasers, mortgage rates are cooperating. Rates are slightly higher for investment properties, but if your property qualifies as a second home, you can save a point or two. Frequently a monthly mortgage payment is less than or equal to one week of rental income during a peak season. It would be possible to pay the mortgage with twelve weeks rental. There is no guarantee that you will have twelve weeks rental at high season prices, and there are other expenses to consider such as utilities, condominium or association dues, property taxes, property management, etc. One helpful consideration is that there are a growing number of retirees who choose to leave the cold weather of the northern states to “winter” in the warmer coastal and southern climate. These people add to the support of the vacation home. In other words, you might not cover all of your expenses; however, you will cover most while your property grows in value. And don’t forget about the possible and beneficial income tax deductions.
When figuring your profits, keep in mind that there are tax deductions allowed by renting out your home when not using it yourself. While the following is believed to be true, you should consult an accountant or tax professional before counting on the information and don’t hesitate to phone the Internal Revenue Service to get clarification.
You can rent your vacation home for up to fourteen days a year without having to declare it on your income tax return. If you rent it out more than that, you must declare the income; however, you can deduct many expenses. Most of your association dues cover deductible expenses. You take deductions for all of the same things that one deducts for any rental property, insurance, utilities, repairs and improvements. Let’s review this. Unless the rules change, if your own personal use amounts to more than fourteen days a year, or more than 10% of the number of days the home is rented out, whichever is longer, the house is considered your residence. If you use it for fewer than fourteen days, or less than 10% of the time it is offered for rent to others, it is considered a rental property.
What about those who buy a vacation home and are considering retiring while still owning it? If one occupies that vacation home for at least two of the five years before retiring, couples could qualify for up to $500,000 of tax-free profit or $250,000 for a single person, on the sale. The first home would have to be sold first, but that home can also qualify if you stay within that five year period. Check with a tax professional or the IRS before taking the step to be sure that rule is still in place.
No one should purchase a vacation rental property on the assumption that it will pay for itself, especially if there is a large mortgage involved. If you are fortunate to pay cash, or have a very small mortgage, you are more likely see an annual profit. Ask to see a rental history of the property you are considering. If it has not been used as a rental before, ask your agent to find histories on comparable properties. If you can cover your mortgage, taxes, association fees, insurance, utilities, and unexpected repairs, you may see a profit, or at least will have a second home that renters are paying for, and you can take your profit from the future sale. If you can’t see a profit from the rental, is the difference worth the investment for the future and your ability to vacation there for the time that you own it.
Keep in mind that the high rental season may be the same time that you and your family will want to use the property, usually summer. Try to plan your vacation in spring or fall when the weather is still great, and there are few tourists. If you have school aged children, plan for the first week of summer vacation or the last week before school starts. Most families don’t travel the first week after the end of the semester and plan to be back home just before school starts to purchase school clothes and supplies. By all means, leave July for your renters. You may also wish to use it at Christmas and if you are within a short travel time, target those long weekends which are not federal holidays, but perhaps teacher staff development days when the children are out of school. While many resort areas, such as South Padre Island, see a lot of traffic and visitors on those long federal holiday weekends, there aren’t as many overnight guests as one would think. One is more likely to see local visitors who live close enough to go home in the evenings. If you want to rent on those long weekends to those who do stay overnight, try offering a special rate, rather than trying to hike up the rate. You will come closer to attracting those who are traveling for the entire weekend, and some rent is better than no rent.
Choosing the right place to invest is crucial. Look for a resort location with affordable homes. Find a place with good properties that are affordable for you. Jennifer Openshaw, AOL Family Financial Editor says to choose locations with plenty of inventory under $350,000. The location should be within a few hours of travel time from major cities. There must be an active vacation rental market there, and plenty of activities for the family, and for sure for your lifestyle. The town should have room to grow.
While other places may be more suited for you, I, of course believe one should look at South Padre Island, TX where I live and work. If you need to be beachfront or bayfront, and can use a smaller condominium, you can stay under that $350,000 mark. For those willing to step back to the other side of Gulf Blvd. , which runs along the beachfront high-rises, there are many, many condominiums and townhouses to choose from with easy beach access and priced from $100,000 to $350,000, depending on your needs. For that matter, the entire island is only ½ mile wide from Bay to Gulf, so one can easily walk from bay to beach. There are plenty of nice and fairly new 2 and 3 bedroom condominiums in the $180,000 to $250,000 range. Just look at our listings to see. In the past, SPI has seen annual increases in property values to be as much as 20% , and while that may not happen again, we will see more realistic, steady increases in the future.
SPI attracts buyers from the entire state. It is located 1½ hours by car from McAllen, less than an hour from Valley Regional Airport in Harlingen or Brownsville/South Padre Island Airport in Brownsville. Driving time is about 4½ hours from San Antonio, about 6 hours from Houston and Austin, and only about 3 hours from Corpus Christi. While there are other coastal resorts closer to some of these cities, South Padre Island sports superior beaches, bay, and accommodations, at least in the opinion of many.
Only about five miles of the approximately thirty-five mile long island have been populated, and we see potential for growth to the north. Already new developments are pushing north.
As for activities, South Padre Island is a popular location for boating and fishing, water park fun at Schlitterbahn, birding with over 300 recorded species, windsurfing, kiteboarding and sailing. The island has an entertainment district that provides bayside restaurants and outdoor clubs where one can dine casually and listen to all kinds of music. Here one can watch the fireworks over the bay every Friday night from Memorial Day to Labor Day. For those brave enough, there are bungee jumps and go-carts. For those who want fine dining, there are several restaurants to choose from. And in just thirty minutes, you can visit Mexico for dining, shopping and a taste of the Mexican culture and crafts. See our page on Things to Do. Just over the Queen Isabella Memorial Causeway, eighteen holes of golf await the golfer in one of the Rio Grande Valley’s finest golf courses. And, there is plenty of affordable real estate there as well, with good vacation rental history. Visit our website for information on a great place to invest.
Whether South Padre Island or another resort, now is the time to invest in a vacation home that suits your lifestyle, has potential for appreciation, can help pay for itself, does not cater exclusively to the very wealthy, and is close enough to your home to allow you to take advantage of vacation time, both planned and “spur of the moment.
Charla Gray Tibbetts
South Padre Island, TX 78597
June 14, 2009
IRS publication 415; 523
Kiplinger.com Dec. 2008
Your Vacation Home: Find a Smart Buy, Jennifer Openshaw, AOL Family Financial Editor