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Great Opportunity in Resort Vacation Rental Market Investment – Cash Flow Analysis

by: Jeff Quintin, on April 16, 2012 - Uncategorized

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Almost everyone knows by now that current interest rates are at record-setting lows, providing the optimal environment for investors to get in on the action now and cash in later.  But there is one area that remains a fantastic opportunity right away, without waiting for years for the investment to mature.  The resort vacation rental property market is one area that allows for an immediate return on investment if the property is purchased at the ideal time – and that ideal time is now.  To explain why this is so, I performed a cash flow analysis to see just how things would pan out if a property that fits this bill were to be purchased just in time for the first peak season.

Months-Long Income Generation

As is typical with resort vacation properties, the bulk of rental income comes during the peak season – which in Ocean City NJ falls within the summer and early fall months. The video that corresponds with this article shares a property that is listed on the market as of mid-April 2012 that is currently booked through the end of September 2012.  The funds generated during these key months will carry the featured property forward for the next fourteen months.  Though the average carry-forward period is about 8-9 months it can be more for some properties like this one.

Positive Cash Flow Covers Expenses

A concern of many investors considering vacation rental properties is whether there will be enough positive cash flow for expenses.  As you will see from the cash flow analysis summary below, in this case there is plenty of cash available after the mortgage has been covered. The positive cash flow with a 12-month income/12-month expense leaves more than enough to cover expenses that keep the property operational.  This includes utilities, maintenance, phone/internet, content insurance, sprinkler systems, cleaning and more.

Timing Prior to Peak Season Essential

The only way this will work is if the property is in your possession prior to the beginning of peak season, making now the ideal time to purchase your investment property.  Assuming a 60-day period before closing, purchasing the property now will get you to closing in time for June 1.  The onward cycle begins just in time for your first mortgage payment, which would be due August 1 in this scenario.

Analysis of a Property Listing

The property featured in the video has a list price of $989,000 – it is located one block from the ocean in a popular vacation destination (Ocean City, NJ) has 5 bedrooms and 3 bathrooms. The charming resort home is a hotspot for vacationers and has already been booked through September 29, all done by the current owners (VRBO) – eliminating additional rental management or commission expenses.  At $4,700 per week of rental income, the total income generated by the end of the season is over $61,000!

At a cost of $989,000 the 25% down payment would be approximately $247,000. Financing on the balance of $741,000 at a jumbo loan rate of about 4.375% for a 30-year fixed mortgage.  Additional loan terms  – you can also get other terms like a 5-year ARM, or other options to get the rate down much lower – but with the 4.375% jumbo fixed rate loan for 30 years the monthly payment with principal and interest would be $3700.  After adding taxes, adding up to $521 a month –total monthly payment is $4224 a month.

By closing on June 1 and with a 60-day closing, the income will come immediately.  The first payment of $2,400 being due on August 1 will be paid with that income, as well as covering the next 14 months.  Looking at the positive cash flow analysis – that actually gets the owner through to September 1 2013.  But by May of 2013 another $61,000 comes back your way again, carrying the property through January 2014 plus the next 14 months ahead. This complete cash flow cycle keeps cycling year after year after year.
To recap this incredible investment scheme: 110% positive cash flow with 25% down. Property carries all year round with peak months’ income.  Money left over.  Positive cash flow.  Benefit of being able to pay it down and pay it off, retrieve your down payment, enjoy the tax benefits and do this all while having the off season enjoyment of a resort property.

Bear in mind that this concept will not work in all markets – rather it is designed to flow perfectly in regions that are income-generating resort areas where a major portion of the year’s income typically comes during one time of the year.  Beach towns, ski and mountain resorts or areas that are high-traffic and highly popular as vacation destinations are all ideal properties for this investment scheme.  In most of these cases the majority of renters come through during peak season during a 3-4 month period of time leaving the remaining year for the owner to enjoy the property while peak income carries the mortgage forward.

If you would like to explore properties for potential investment, including the one discussed in this episode, or you are considering a property and would like us to conduct a cash flow analysis for you, contact us today.  We look forward to assisting you in making this phenomenal opportunity become reality!