Growing up in Massachusetts, many of my friends’ parents had second homes or vacation homes on Cape Cod that they went to every weekend in the summer and spring. Cape Cod is about an hour from Boston and a popular local getaway for people within a few hour’s drive.
When families purchased these homes in the 1970s or 80s, they were $30k-$70k, or sometimes handed down from previous generations. In today’s money, that was somewhere around $300k.
I always dreamed of buying a vacation home on the Cape, but how was I going to afford another property when I just bought one? Simple; let someone else pay for it!
It all started when I introduced my now wife to one of my best friends growing up. We went to dinner and talked about all sorts of things. My friend’s in-laws have a second home on Cape Cod that he and his family often visit.
When they go, he usually rents a nearby home due to the increasing size of the families. He pointed out that the Cape often gets booked up in the spring and between little availability and high rents, he decided to build a pool at his home instead of spending thousands a week to rent a home on the Cape.
A lightbulb went off! If people are willing to pay that much every week and availability is low, maybe this is my chance.
The next day, my wife and I began to pencil some numbers. I look back now, and as real estate investors with very little experience, our math regarding cash flow was terrible – but it ended up working out because we took a chance.
A three-bedroom home was renting for $2,500/week during the peak summer season. On a $275k home, principal, interest, and taxes would be roughly $2,000 every month. We then came up with this formula to evaluate cash flow:
$2,000 in monthly expenses * 12 months = $24,000
$24,000 / $2,500 = 9.6
9.6 was the number of weeks we figured we’d need the occupancy rate to be 100% whereas we didn’t have to pay out of our own pockets. Of course, we didn’t factor in things like utilities, landscaping, property maintenance, cap-ex, etc. We simply figured the rental income meant we wouldn’t have to pay for the home ourselves.
But what about a down-payment? Buying a vacation home as a second home meant one of our options was to only come up with 10% down, plus typical closing costs which were doable for us at the time. We began searching. The housing market at the time was favoring the buyer, but the inventory was still tight. Luckily, we began this search at the start of the winter, which is typically quiet in a summer rental market.
After some searching, we found a fully-furnished turnkey property that had a solid short term rental property history. We found the property ourselves, made an offer, and it was accepted! Now the fun began and the reality set in: Once we closed in April, we needed to make some small updates and actually rent it for the upcoming summer season as the first mortgage payment would be due soon.
Our first order of business besides making some updates was to get it listed on the popular short term rental websites like VRBO and Airbnb. We had a friend over to shoot some photos for us. A couple of other friends helped with decorating and yardwork. Not long after we listed it, the reservations began to come in. A week here, two weeks there, we couldn’t believe it.
We have also made improvements in the home that allowed us to refinance and add almost $100k of equity to the home. We were able to pull out some of the equity through a cash-out refinance to pay for the upgrades as well as use it to put towards the downpayment of another vacation rental property.
One of the most rewarding parts of this process was helping two friends purchase property on Cape Cod as short term rental properties. We were able to learn from a few mistakes we made along the way and ensure our friends let their guests pay for their second homes.
Some of the lessons learned along the way include not falling in love with a property. If your goal is to truly have your guests pay for your home, you’ll need to treat this investment like a business, not a hobby.
Make sure the numbers pencil correctly and do your research on the specific market you’re looking at by talking to local investors, reading competitive property reviews, and connect with the previous owners if possible.
A Few Tips for Buying Your Own Vacation Home
- Utilize a real estate analytics tool, like Mashvisor, to evaluate the performance of a potential investment. I like to personally focus on occupancy rate, location, and # of reviews.
- Get to know the intricacies of the local housing market. On Cape Cod, for example, the summer months between Memorial and Labor Days are when the weekly stays are the most expensive and sought after. However, lowering your minimum stay to 3 nights will help you capture guests that want a weekend getaway in the Spring or Fall. Get a few of these and it could pay for a bathroom remodel!
- During your first year of renting the property out, focus on getting 5-star reviews. This may mean lowering your price to be competitive. The first 10 or so reviews are the hardest but will help your listing stand out to potential guests who are looking for an experienced host.
- Keep a list of your guests’ contact information. At the very beginning of the season, email every single one of them offering them a sizeable discount if they book by a certain date. This will provide you some capital early on in the season as well as make your vacation rental property more desirable when potential guests see that it’s already booked vs. being wide open.