I've made one really bad decision with money. In 2008 we bough a rental property in the North Georgia mountains. This month we sold it - and I never thought this day would arrive.
We lost money, and I've never been happier to lose money before. Because now we can stop throwing good money after bad and start recouping what we've lost. Now, we start moving ahead.
At the time we bought this rental cabin we'd sold 3 previous homes; 2 that we lived in and one that Becky had lived in then rented out. All of those previous homes were sold for a profit. But the rental house was painful, and took its toll mentally and financially. So this article is all about learning from my mistakes.
Lesson number one is to buy low and sell high. We did neither. We bought at the peak of the housing bubble. A few months later the bubble burst and the market crashed, hard. Goldman Sachs apparently knew the crash was looming as early as 2006 and hedged against it. Gifford and Gifford did not!
Lesson two, if you want a rental property you need to know what it can really rent for. We had two main property managers we wanted to work with because this was going to be an out of state venture for us ... even though the cabin was just a few miles from Becky's parents.
The first company was good about detailing what percentage their share would be, but couldn't give us a good idea of what we might rent out the cabin for. The second company told us what we wanted to hear. Then, once we signed with them, we ended up renting for half of what they said they'd charge our renters. Ouch!
All of our calculations had been based on twice as much as we ended up getting. I had assumed weekends-only as a baseline, 8 rented nights per month as a minimum. With that alone, based on the property managers initial calculations, we'd have broken even (with tax breaks and made a profit during peak seasons). End of the day I've broken even in exactly one month, and never made a profit. Ugh.
Lesson three, insurance for a vacation rental property is much higher than for a rental property with a full time-resident or a home you own. Ugh. We didn't know this going in and had we, we would have waived off.
Lesson four, go with a place with more bedrooms. Our place was really a one bedroom with a loft. We looked at some cheaper but more remote places that had 2 bedrooms plus lofts. These properties could have housed 8 or more people. These models also had space for a pool table which apparently is very popular for this region. Who knew? Not us.
So lesson five is do not mirror image. By that I mean don't assume that what interests you is what will interest your renter's demographic. A lot of what we bought in this place fit our taste. Apparently, when people want to vacation in the mountains they don't mind being remote. Not a big selling point for us, but it is a key point for our target demographic.
Lesson six can apply to anyone buying a house, rental or otherwise. If the appraisal comes in low, use that to get out ... or negotiate a better deal. Instead we foolishly sought a different bank to fiancee with. Nothing against the bank, just a bad decision when we could have saved money or backed out. Especially since there were other, viable options.
So when does owning a vacation rental property make sense? When you can pay for it in cash. And you want to stay there yourself from time to time. And you are close enough to fix things yourself, quickly. We even had a break-in/robbery shortly after buying the place and had TVs stolen. Easier to deal with these things if you are local. Becky's folks did a ton for us, no doubt, but that is a lot to ask of family. Again, much better if you can tackle it locally on your own.
What could I have done with the money instead? Invested it. Of course the market has not fully recovered from its peak but most of our investments are nearing where they were prior to the crash. And putting more money into stocks after the crash makes sense when you're investing for the long haul, back to the aforementioned buy low and sell high methodology. Missed a good opportunity there.
Savings, oh sweet mother of pearl, I should've saved this money for a down payment on our final house. The place we'll live when I eventually retire from active duty and stop moving every 2 years. We could have put the money in a CD and made some money back. Or we could've dropped that dough in my kids' 529 plans. In retrospect, these were all much better options.
The other thing we could've/should've done is wait. Neither one of us was totally for the idea. It was my wife's idea first, then she got cold feet (smartly!). But I thought this was something she really wanted and might have been a good place for her and the kids to hang had I ended up on a deployment for a year (Iraq, Afghanistan, Korea etc). Also we'd done so well in real estate with the previously mentioned houses that I didn't want a portfolio without any real estate. Had we waited for the market to crash we'd have either waived off or bought low!
Now to be fair the rental market has increased for us with each successive year. And if that trend continued in 2011 we might have actually eventually broken even. But it is not worth the stress. Every time you think you're about to get ahead of the game a hot tub cover needs replaced, the washing machine breaks, or someone complains about a mattress and you drop big coin to get a new one. Or some fool reserves a week - golden! Then they leave after the first night. Now it is too late to get anyone into the place for the rest of the week. Ugh. We've been, most months since we bought the place, carrying what equates to two mortgages (although actually it is a mortgage on the rental and rent on our residence.)
Now that we've closed, and taken our licks, we can start investing both in the federal government's 401K plan and Colin's 529 (Liv will get to benefit from my new GI Bill ... we only have to cover 1 year for her undergraduate degree, yay!) The 401K plan, or TSP, gets us tax breaks as well as systematic investing. Though not without risk, it is an much better bet than the rental cabin.
We will earn it all back eventually. And now that we're out from under the cabin experiment, we have a ton more monthly money freed up with which to buy camera gear! Oh wait, my wife is glaring at me. Ok, so we'll save for a "final" house and invest for retirement and college. Either way it feels like we've won the lotto. Moreover, the stress on us has been lifted. We're among the lucky ones who did not end up in a short sale or foreclosure in what were, and in many cases still are, very dark times for real estate.
Now there are some people out there that are making huge bank off of their rental properties. Maybe they can leave a comment about what has worked for them that we should have done differently. But again my advice is put money in the house you live in, in a 401K and in no-load, index funds. Baseball cards are probably a better bet as well!
Gifford is a career military officer, husband and father of two. He blogs about photography, family and travel at thegloger.blogspot.com.
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