real estate

Vacation condo deals not risk-free

Steve McLindenQuestionDear Real Estate Adviser,
I want to buy a vacation condo and rent it out as an investment. What are the pros and cons? I want to start small and buy with cash. Is this the time to do it?
-- Judy B.

AnswerDear Judy,
Rock-bottom pricing in many resort areas suggests this is a pretty good time to buy vacation condos. Some South Florida markets have seen 60 percent discounts off 2005 to 2006 condo asking prices.

But -- and yes, there's always one of those in real estate investment -- there's an abundance of sellers coming out of the woodwork now. Couple that with high unemployment rates and it may suggest a stalled recovery and/or that much-feared double-dip recession.

As for paying in cash, an all-cash offer always wields more negotiating clout and allows you to forgo the iffy mortgage-approval process. But it also ties up your assets.

There are other drawbacks to an all-cash deal. Should you encounter some worst-case scenario, you may be forced to sell at a big equity loss. In other words, if your "cash condo" were to lose significant value, you'd have no one with whom to share the risk.

What's more, you can get a tax deduction on the mortgage interest on the condo -- but there's no deduction if you pay in cash and don't have a mortgage.

If you do decide to pay in cash, take certain precautions. For example, you won't need an appraisal if you buy in cash, but you should get one done anyway to determine the unit's up-to-date value.

Also, ask the condo association for a "proof of funds" to see if there are adequate reserves to handle maintenance issues. Determine if a large number of foreclosures in the community might further compromise operating funds.

You say you want to start out small, but you'll probably want to buy a condo with at least two bedrooms to accommodate vacationing families. You should also determine in advance if you want to rent out the place on a weekly or monthly basis. Some condo communities frown on transient visitors and may impose fees and restrictions on owners in that business.

A good rule of thumb in destination areas is that you'll need to rent the place out for four to five months annually to break even. That's based on an assumption that one week's rent in a modest condo during peak seasons will be roughly equivalent to a monthly mortgage payment. (Even if you do pay cash, a little quick math should give you that sum.)

Becoming a landlord is not the sort of thing you enter into lightly. You'll need to study up on how to manage, maintain, furnish, promote, lease, price and secure the place. Fortunately, there's plenty of resource material available from folks who've learned the hard way.

Among the better-regarded books on the subject are "How to Make Your Vacation Property Work for You!" by Alfred and Emily Glossbrenner and "How To Rent Vacation Properties By Owner" by Christine Hrib Karpinski.

Websites such as landlordassociation.org and mrlandlord.com can serve up additional food for thought. As for marketing, I suggest posting for-rent property on at least three websites.

If you live close enough to your investment condo to look after it, you might be able do without the services of a property manager, whose fees can cut into your income stream by anywhere from 15 percent to 50 percent. Interviewing and securing reliable and reasonably priced repair contractors well in advance will make that job easier for you when something goes wrong.

As for location, beach-vacation resorts are most frequently targeted by investors. But you might also consider mountain and lake-area resorts in noncoastal areas that have been performing well.

Judy, your success in this venture will largely be based on how much homework you do. Good luck!

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