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.

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.

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.