How to Invest in a Vacation Home

Do you dream of owning a getaway at the coast, on Mt. Hood, or in some other sweet Pacific Northwest spot, but you can’t afford a whole second mortgage? We’ll help you make a plan to get into a vacation property and have it pay most (or all) of its bills while you build equity.

Where do you want to be?
The first step is to figure out where you want your vacation home. For example, let’s assume you want a place at the Oregon coast. You should think about which towns you enjoy visiting, and consider how far you’re willing to drive to the property. You should set parameters based on a maximum drive time from home, so if you want (or need) to get to your place, the drive will be manageable.

What are the rental rules in the places you’re considering?
You’ll definitely want to understand all current and proposed rules for rental properties. Ask the local authorities if anything new is proposed, and search news articles to see if there are any potential regulations coming.

The main restriction you’ll encounter is a minimum number of nights per rental. Many places have a minimum rental duration of 30 days, which means you could still have a furnished rental and generate income, but you’d rent it for a month or more at a time which would restrict your ability to be there. It would also eliminate the ability for you to do shorter-term rentals, which are especially popular for holidays.

For our example of the Oregon coast, Seaside is one town with relatively few restrictions, so let’s assume you’re most interested in Seaside.

What kind of property do you want?
Think hard about what you need in a vacation home, since it’s likely different from what you need in your main home. For a vacation home, we suggest focusing on a property that’s as worry-free as possible and that’s a size that will rent well. You might have a large home in Portland with a big yard for gardening, but at the coast you might want a small condo that’s low-maintenance and easy to manage.

We’ll help you figure out what’s important to you as you decide what kind of property is best. For our example, let’s assume that you decide on a small condo with just enough room for yourself.

How much will this cost?
Once you’ve chosen a location and type of property, we’ll help you generate scenarios showing how the financials will likely work. We’ll find a listing that’s either for-sale or recently-sold to use as a sample property to run some numbers.

In our example, we’ll use a studio condo with an oceanfront patio in Seaside, 3140 Sunset Boulevard #29. It’s in a cute 1962 complex called the Lanai, and they allow nightly rentals. For a getaway at the beach, it’s pretty appealing.

We’ll assume you pay the list price of $295,000. To buy it as an investment property, this would likely mean a 25% down payment of $73,750, and a mortgage of $221,250. If you borrow this amount on a 30-year fixed rate mortgage at 8.25% interest, here’s how the expenses may look (all numbers are estimates):

Monthly Expenses
Principal and interest $1662
Property taxes $142
HOA dues (includes utilities) $500
Insurance $125
TOTAL $2429

All-in, you’re looking at expenses of around $2,429 a month, or $29,148 a year.

Next, we’ll figure out how much rental income you could generate. Since this is harder to predict, we’ll run several scenarios, from a conservative, “worst-case” scenario to a more generous, “best-case” scenario. For this example, we’ll just do the conservative scenario to make sure this could be workable.

First, you want to determine what you could likely charge for a nightly rate, knowing that the season would make a difference. If you’re buying a home with rental history, that’s ideal. In this case, the condo at the Lanai has a rental history so it is more straight-forward, but there are still variables.

For our example condo, in the Summer months they are able to charge $250 a night, and in the off-season, it’s as low as $125 a night.

Let’s assume in June, July, and August, you charge $250 a night and you rent it for 75% of the nights.

70 nights X $250 = $17,500 income

That leaves the other 9 months of the year, which is likely slower, but would still generate income. Let’s assume you rent it for 2 weeks in May and September, and for 1 week in each of the other months. This would be approximately 63 additional nights of rent, and let’s assume it’s all at the $125 rate.

63 nights X $125 = $7,875 income

Add the two amounts together, and $17,500 + $7,875 = $25,375.

If you don’t want to manage the rental yourself, you’ll likely pay a property manager 25% of your gross income, so your actual income will be 75% of the gross income.

$25,375 X 75% = $19,030 projected income after property management fees

So then you can project your annual expense (or profit).

$29,148 expenses MINUS $19,030 income = $10,118

This comes to approximately $850 a month that you’d pay to own the condo, which would be vacant and available for you to enjoy for roughly 2/3 of the year.

What about remodel or furnishing costs?
The other piece of your budget would be expenses incurred to get your home rent-ready. In the case of this little Seaside condo, it’s been a rental for a while, so you wouldn’t face much expense in the beginning. But if you buy a place that needs furnishings, or you want to make upgrades such as new bedding or cookware, then those costs would need to be added to your initial investment. We’ll help you prepare a checklist and budget for anything you need.

What about appreciation?
This is where the investment really takes off. Per the Regional Multiple Listing Service, here’s the appreciation over the last 10 years in Seaside.

2012 Average Sale Price, Seaside, $198,320
2022 Average Sale Price, Seaside, $505,960
10 year increase, average sale price, 155%
Average sale price increase, 15.5% per year

The average price has increased 155% in Seaside in the last 10 years. By this percentage, a home that was worth $295,000 in 2012 would have appreciated by an average of $45,000 per year, or $3800 a month.

If appreciation over the next 10 years is even 1/3 as much as it was in the last 10 years, the appreciation alone would more than cover the monthly loss on our example condo, and you’d be enjoying it yourself during that time. So, while appreciation does not put money in your pocket to pay the bills, wouldn’t it be nice to be growing equity in a property that’s as fun to own as an oceanfront condo?

We can help with all of this.
We have years of experience owning vacation properties, from nightly rentals to rentals with one month minimums. Buying an investment property like this can be a great way to build equity while having a place to go on vacation, and we’d love to help you find your own getaway.

More info on our example property:

3140 Sunset Blvd
Seaside, OR 97138 
ML#23310220
Listed by Sylvia Stuck at Windermere Realty Trust
Full Listing