How to Buy a Deep Creek Lakefront Rental Home - Part 1
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By: Mike Kennedy mkennedy@railey.com 301-616-6106 November 21st, 2008 Category: Deep Creek Lake Buyer Info, Deep Creek Lake Real Estate |
The first question a prospective investor or buyer who wants to purchase a Deep Creek Lake vacation rental home is usually -”How much rental income can these types of homes generate?”
Annual Gross Income
So as a guide, Railey Mountain Lake Vacations has compiled a small chart of the annual gross rental income from their top lakefront vacation rental homes. The chart below depicts the approximate annual owner gross income from their top 3 producers based on number of bedrooms. Please note these are all lakefront homes - not homes with just lake access or no lake access at all.
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Annual Gross |
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Owner Income |
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| Bedrooms |
Low |
High |
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9 |
LF |
$120,000 |
$180,000 |
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8 |
LF |
$137,000 |
$168,000 |
w/ pool |
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8 |
LF |
$82,000 |
$120,000 |
w/o pool |
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7 |
LF |
$71,000 |
$97,000 |
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6 |
LF |
$55,000 |
$76,000 |
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5 |
LF |
$40,000 |
$52,000 |
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4 |
LF |
$36,000 |
$48,000 |
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3 |
LF |
$26,000 |
$28,000 |
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2 |
LF |
$16,000 |
$26,000 |
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Features & Amenities
As you can see from the chart above, having an indoor pool as an amenity can dramatically increase rental income. However, there are some other common features and amenities that these top performing homes all share. They include;
- Level lakefront settings
- Beautiful views
- Bathrooms equal to the number of bedrooms
- Quality furnishings and décor
Railey Mountain Lake Vacations also now offers the services of full time interior decorator for your vacation rental home free of charge if you utilize their property management services. Railey Mountain Lake manages the largest number of vacation rental homes in the Deep Creek Lake area - currently standing at 375 houses.
This is just the tip of the iceberg when considering purchasing a vacation rental home - other very important considerations include expenses and Garrett County zoning issues. I’ll try to touch on these items in future posts.
Please give us a call or drop us an e-mail - we’ve provided much guidance over the years to purchasers and buyers for these types of homes. The buying process can be a bit tricky but can certainly yield positive results in the long run if done right.
Tags: Deep Creek Lake Investment Homes, Vacation Rental Homes
November 21st, 2008 at 3:44 pm
Mike,
Can you tell us how these numbers translate to current and historic cap rates? As an investor that is what really matters to me. If I’m paying $1million for a 4 bedroom LF house it’s not going to produce the cap rate I’m looking for. So what is the typical selling price for each of this designations? More info would be very helpful not only to me but other readers as well.
November 25th, 2008 at 2:57 pm
Sam – Great questions and comments.
Unfortunately, due to the fact that lakefront property has appreciated so much in our market over the past 10 years - from an investment perspective you would have a hard time finding a property you could buy now that would have a high cap rate. That wasn’t the case 10 years ago – you could find a 4 bedroom lakefront vacation rental that could be purchased for $550,000 that was doing $48,000 in annual gross rents. Property management cost you 20% back then, your real estate taxes were around $5,500, your utilities were probably $2,500, and your insurance was probably $500 a year back then. That left you net operating income of around $29,900. The cap rate in this example would be around 5.4%.
Fast forward 10 years later to today– that same house is still doing $48,000 in annual gross rents but now it will cost you $1,200,000 to purchase that same house. Property management is still 20% of gross rents, real estate taxes are probably $10,000 now, utilities are probably now at $5,000 a year for a house this size, insurance is around $1,500, and don’t forget all the misc yard work and snow plowing that is probably another $1,000 a year. The NOI now is around $20,900 and the cap rate is 1.7% ($20,900 divided by $1,200,000).
However, there have been some good deals from a cap rate perspective the last few years. One of our larger 8 bedroom indoor pool rental homes sold for $1,750,000 last year. The NOI on a house like that was around $100,000 – that put the cap rate around 5.7% on this purchase - not bad from an investment perspective compared to putting your money in a CD or the stock market.
If you are purchasing solely on cap rate alone, then watch for the pool homes to hit the market. You also have the option of adding an indoor pool to an existing rental home that may be for sale – this is certainly another strategy you can do to increase the cap rate – and there are some existing homes currently on the market that would be good candidates to add pools to. I will say most of our buyers now don’t buy solely on cap rate alone – most who buy a vacation rental nowadays are happy to get most or some of their normal operating expenses covered. A typical rental homeowner in Deep Creek resort market uses the property ½ the time for personal use and the rest of the time the property is rented.
November 26th, 2008 at 5:42 pm
Thanks for the info Mike. Those numbers are roughly about what I had expected.
I can certainly see the benefit to renting to cover expenses and getting some pleasure for nothing. I also suspect some current buyers of these properties accept low cap rates and spectulate that appreciation will improve their longer term investment gains.