Tom Kelly: Where to buy? Evaluating basic vacation, investment possibilities

Whether you plan to personally enjoy the use of a property or are looking to derive income from its ownership, where you buy will go far in determining how well you can realize your goals.

The importance of the factors determining the choice of location will differ depending on your plans for the property. For example, when considering a short-term investment, it’s usually better to emphasize locations close to your primary residence. You are more familiar with the qualities of the area, and you can easily look in on your property even if you use a professional to manage it for you.

This may not be as important a factor when choosing a vacation home, especially if you have an eye to retire there. The convenience of the property to the type of activities or environment you most enjoy will be very important, even if being in that location requires traveling several hours to reach it. For retirement homes, the need for consistent social and medical services often becomes critical, as does the proximity of transportation centers that will allow family and friends to come for a visit or in an emergency.

There are two aspects to selecting a community in which to invest or vacation. The first of these can be done in the relative quiet of the home or office, and that is gathering information. Here, the internet is a marvelous tool and ally, since it can provide the facts about a given community with greater detail and far less effort than would be available or required if you were to seek out the sources yourself.

The second part of selecting a community is personal inspection. While the internet can give you a very good overview of the facts about the community, there is no substitute for the personal visit. You must take the time to actually inspect the area. For investment, this means seeing the property at different hours of the day and night. For vacation property, it means spending additional time in the area.

Let’s look at the considerations that go into choosing a community in which to buy, either for long-term investment or vacation purposes. These obviously overlap in some ways. A vacation home can be a source of investment if you want to rent it out when you are not using it or if you are looking to realize a profit when you sell it. We will differentiate between the considerations that are most important for investment property and for vacation property but will indicate which considerations are important to both. We will also look at the information gathering and personal inspection aspects and suggest how to accomplish these efficiently and economically.

A lot of real estate investment advice, particularly the type you see on television, makes it look so easy. If it were, there would be no profit available since everyone would do it. But with careful observation and decision-making, it can be done successfully. The primary motivations for buying investment property are income and appreciation. There are three basic types of investment homes: single-family detached houses, condominiums, and multifamily buildings. Multifamily buildings can either be market rate rentals, where the processes of supply and demand will determine prices, and government-assisted housing, where rent levels and income eligibility levels are preset by federal, state or local government.

Each of these types carries with it its own challenges and financial arrangements and each will appeal to different markets. As a general rule, multifamily buildings, either market rate or government-assisted will have a more continuous rental history than the other types. However, these are investments requiring substantial capital and large maintenance budgets. It’s usually better for the small investor who is attracted to this property type to become part of an investment group, either private or through a publicly traded real estate investment trust.

Single-family rentals are generally easier to manage, both financially and physically, for the small investor. They can be acquired with a relatively low capital investment. Record keeping is simple and the tax-reporting requirements are as simple as those for regular income. Physical upkeep is simple (and virtually identical) for anyone who owns a principal residence, whether he does it himself or hires professionals.

The major issue with single-family rental housing is continuity of occupancy. Since most of these properties are located in predominately owner-occupied neighborhoods, the departure of one renter may not be immediately followed by the appearance of another. Thus, advertising costs to keep the house occupied are likely to be high. Both higher vacancy rates and higher advertising costs will affect the net income from investment in this property type. The exception to this is the investment property located in a vacation community. Here management and advertising fees are wrapped together, and if you choose an effective representative, continuous rentals (at least during “the season”) are probable.

Condominiums represent sort of a middle ground. Acquisition costs are similar to those of the single-family house, but the additional condominium fees are analogous to the higher maintenance costs of multifamily buildings. Condominiums, however, are more flexible investments than either of the other two. You can buy a condominium as either a full-year home investment or as a vacation season investment. In either case, it can serve as a dual-purpose property if you choose to spend several weeks a year in it as a vacation home.

You will find it most efficient to specialize in one of the major investment types, particularly if you own more than one property. The lessons you learn from your first experience will make subsequent purchases and sales more rewarding. Before you can begin assessing communities and looking for property, you need to make a basic decision as to the form of property you choose to buy.