Start Small With Investment Properties
I just had an interesting conversation with a friend of mine about purchasing a vacation home as an investment property. She is a young single 100% traveling consultant just like what I used to be. She makes great income and pretty much lives in hotels and on company’s dime with no other significant expenses. With all the extra cash she has saved up, she’s been toying with the idea to buy a 500K – 600K beach house in the East Coast where she vacations a couple of times a year.
On the paper, it all looked great: It’s a wonderful vacation spot! She can use it for her own benefits or invite family and friends over. She can then rent it out the rest of the year. But for some reasons, my guts feeling tells me NO.
I have always had a principle to “Start Small and Start Simple”. Real Estate investment is a tricky long haul business that involves in a lot of money, energy and time. If you are using it as your primary residence, then it is a different story. Because in worst case scenario, you have bought a piece of roof on the top of your head. But if the property is purely for investment purpose, you will have to crunch the number to see whether it suits your current situation or not.
Using my friend as an example, the reasons I think it is not a good idea to sink in $100,000 cash right now are:
- After crunching the number, she has to spend about $15000 a year to keep up with the cost. That is, after factoring in the rental income (which is a hugely optimistic assumption), the tax benefits and other regular maintenance expenses. It’s more than $1200 a month expense! Unless she lives in it, it doesn’t make sense to throw so much money in it.
- She is still young and hasn’t started a family yet. There will be a lot of good usages for that 100K cash. By putting so much money on one property, that’s one giant egg in one giant basket. I just don’t think it is a good idea.
- Vacation rental home is a tricky business simply because A) You are not local B) You have to rely on management company. C) You change tenants every week or so. Without any previous landlord experiences, it could be a bit overwhelming at first
So my suggestion to her is to start small and start local. Find a cheaper rental property near where her parents live and ask them to help out to manage it. Then, after a few years, refinance it or take out the equity and buy another (or more) rental(s). Repeat the process until she is comfortable with the whole thing. Then she can buy something big and fabulous.
A few years? Doesn’t that take way tooooo long? You may ask. After all of these years investing in rental properties, I have to say that real estate business is a long haul type of thing. There is really no fast money especially in rental business. Well.. flipping business might be a different story. I will soon find out.