While there are innumerable reasons to invest in vacation rentals, one of the most common is to prepare for retirement. And, while real estate investment can be both lucrative and secure, there are a few important factors to consider before moving forward:
Financing Your Rental Property
For many in prime earning years, preparing for retirement is more important than immediate supplemental income. Unlike those looking to realize significant and immediate income, there is no need to make retirement-oriented real estate investments using cash. For these buyers, today’s low interest rates allow them to mortgage the purchase of a vacation rental property with a financing term equal to the number of years left prior to desiring income. For example, for a 45-year-old investor considering retirement at age 65, I recommend a financing term of 20 years.
Of course, when you plan to invest in your first rental property, your success in purchasing will be largely reliant on your ability to borrow funds. Know that, in most cases, lenders will not consider a property’s rental history until the borrower has actually owned the property for at least two years.
As such, before you begin your search, it is essential to prequalify with a lender experienced in vacation property lending. Even if you work with a large, nationwide lender, be sure to find a mortgage specialist within that lending organization who lives in (and specializes in) the local market. Failing to follow this advice is the most common reason that a vacation rental sale fails to close. If you are considering a purchase on the Emerald Coast, we are happy to provide recommendations.
Maximize Profits While Avoiding Risk
As you prepare for retirement, it is likely that the amount you can afford to pay for your first vacation rental investment will be determined by the amount of money you are qualified to borrow. Once you determine what that amount is, ask your Realtor to present you with properties which gross at least one-eighth that amount in annual rental income.
For example, if you are qualified to borrow $800,000, you should look for rental properties that gross $800,000 ÷ 8 = $100,000 per year in rental income.
Furthermore, in considering which property (or properties) to buy, allow yourself some room for error. Don’t calculate with a total “break even” goal. Instead, use a goal of 2-3% return on investment during the years in which you are still paying on the mortgage. This extra buffer will allow you to more comfortably manage unexpected property expenses.
As always, in order to maximize profits while minimizing your risk, it is important to find the right property. For more information on what you should look for in a vacation rental property, be sure to read our tips here.