Buying a beach house: Understanding the Numbers
Have you always wanted a beach house but think it’s out of reach? Maybe it isn’t – if you play your cards right. After almost 10 years of trying to figure out how to make buying one make sense, we finally did in 2016. In this post, Buying a beach house: Understanding the Numbers, I’ll tell you about how our passion for buying a beach front home developed. Tomorrow, I’ll describe how we found the right spot in the post Buying a beach house: Finding our Beach. Then I’ll tell you about how we found and bought the right home in the post Buying a beach house: Closing the Deal. Here is our story.
It started with a vacation
My wife and I vacationed every year for 10 years in March on either Folly Beach or Isle of Palms, SC. We rented an ocean front home for a week and loved it so much we began staying two weeks after a few years. After working my brain to a mush all year I needed a vacation something fierce. While at the beach I would do almost nothing, and it was everything I thought it could be. We learned that a week was just about enough time to unwind and the second week tended to be the actual vacation.
We thought “We gotta do this more. What if we could LIVE here? Ok, that’s not feasible, but what if we could come more often? How can we do that? Let’s buy a house, rent it out in the summer, make it pay for itself, and we can stay in it “free” as much as we want when not rented. It’s brilliant!”
Looking is free
Every year we would spend the first half of the trip doing absolutely nothing and coming to realize how life altering it was to do nothing – at the beach. We would then spend the last half of the trip looking at every ocean front house (and a couple “almost” ocean front houses) for sale in the area hoping we could secure a future of going to the beach on our own schedule while having others pay for it.
We knew nothing about the economics of owning a beach house except for the fact that we didn’t think we could afford it; at least not while staying within what would be considered the parameters of financial sanity. But we looked anyway. Plenty of other people owned beach houses and rented them in the summer. I figured that there must be something I didn’t know, and I needed to know it. How were they making it make sense to own these homes?
On Folly we looked at little shacks of a house – small 3 bedroom 2 bath floor plans of maybe 1200-1400 sq ft. They were selling for $1m-1.2m and they were far less than fancy. They were on the beach and that’s about all they had going for them (which to be honest, is a lot I suppose). To get something “real nice” (in the words of Cousin Eddie from Christmas Vacation) you’d spend $1.4-$1.8M. For something on Isle of Palms you’d be in the 2M-4M+ price range, but you’d have something super nice (and I would expect nothing less for that kind of money!!)
After a heafty 20% down payment which resulted in still yet a heafty mortgage, you have taxes, insurance, maintenance, utilities, and the always looming cost of major repairs or upgrades like HVAC units, which we came to find out are eaten up like tic tacs by the ocean air. (See what I mean in a video I made here).
We learned that the taxes on houses like these are between $8,000-25,000 per year or more. Insurance can be as much as the tax bill. Insane, but it makes sense due to the risk of loss the insurance company is insuring against. Utilities are about what you would expect, except for the power bill, which I think is higher than your primary residence would be – mostly because of the HVAC running to keep it cool in the summer. It doesn’t help that the doors are constantly being opened and closed, or just left open, plus the lack of shade since there are almost never any shade trees on ocean front lots.
In total you are “all in” for about $100,000-$250,000 per year. Staggering. Impossible. Perhaps.
Rental Income is the key
Unless you’re ultra wealthy you have to factor in and rely on the annual rental income to even begin to come close to being able to afford an ocean front beach house.
In the summer these houses can rent from $2,000 to $10,000 per week or more and there are about 14 primary rental weeks in the summer months (roughly Memorial Day through Labor Day). The Folly Beach houses we were looking at were bringing in $50-70k in rent for the summer ($90-100k if you rent year round), and the bigger fancier houses were up to $150-200k for year round rentals. Bear in mind the rental management companies (which you’ll need – forget managing it yourself) charge 15-18% of the rental amount collected, so you have to back that out of your numbers.
It just doesn’t make sense
No matter how we ran the numbers, it never made sense to buy. And what I mean by “made sense” is that nothing would ever pay for itself, or “stew in it’s own juices”. Even if it came close to covering the mortgage and expenses by renting almost year round, it just wasn’t worth the risk. And, the fact that the house is always “available to rent”, to even those last minute deal hunters like me, means you wouldn’t ever really feel comfortable planning ahead to use your own house for fear of giving up potential rental income needed to pay for it.
We just never could make it make sense – but we kept looking. Year after year we kept going back and kept looking, dreaming of owning a beach house but never finding the right deal – the right magic combination of price and rental income to make it happen.
When the trip ended each year we would go back to normal life for another year and not think of owning again until halfway through our next trip.
2016 was different. I thought ahead. The definition of insanity is doing the same thing over and over expecting a different result, right? In my next post I’ll tell you the details that led to the purchase of our first beach house.