Make Money Owning A Beach Home

Many property owners combine the pleasures of a beach ownership with the benefits of a healthy cash flow. In multiple instances, rental income can pay all the operating expenses (taxes, insurance, utilities, janitorial, etc.) and the mortgage payment. At times, it even leaves a nice “residual”. Check the below examples for actual houses or condos.

If you want to receive a customized estimate on a specific property, scroll down to the end and let us know which property.

The purpose of this section is to give you an in-depth understanding of owning a rental home being rented by the week-end or by the week to vacationers in NW Florida. Numbers vary from one house or condo to the next, but this should give you an good idea of what this type of investment entails. We will be delighted to provide similar reports for any house or condo you will consider purchasing.

Under “CASH FLOW FROM OPERATIONS”, you will find details of projected gross revenues (Gross Rental Income); of the expenses necessary to the proper functioning of the investment (Operating Expenses); and the resulting Net Operating Income, or NOI, calculated at the Gross Rental Income less the Operating Expenses. The NOI is the most reliable indicator of a real estate investment because it is NOT investor-specific; in other words, it remains the same whether the buyer pays cash or obtains bank financing, and regardless of the tax situation of the investor.

Under FINANCIAL SNAPSHOT, we shall find the CAP RATE, defined as the NOI divided by the acquisition price. The CAP RATE is the only common denominator in all real estate investments, and can easily be used to compare investment merits between remote locations (St. George Island vs. Naples, for instance) and between different types of investments (Vacation Rentals vs. Strip Mall, for instance).

Under FINANCING/MORTGAGE OPPORTUNITIES, we shall analyze the possibility of financing 80% of the purchase price, and its consequences. We shall arrive to a true cash return on investment; and a true return on equity (ROE). Some of these numbers might surprise you...

Other remarks: the estimate of the gross rental income assumes no owner-occupancies and a property in top shape; this property may need minor “improvements” such as interior repaint and new furnishings; the cost of upgrade is not factored in the acquisition price (but it can be assumed that the contract price to acquire might be lower than list price, thus leaving some money to carry out said upgrades. I strongly advise that you hire a tax attorney to assist you to verify my calculations and assumptions; I will be happy to talk with her or him if you desire.

Cash Flow Examples

BEACHFRONT HOUSE, 44 or 68 or 152 East Gorrie Drive, St. George Island, Florida

Beachfront houses can often generate turbo-charged rental income! Some large beachfront homes, when in excellent condition, can gross over $200,000 per year! The ones selected are entry-level ones: a 3 bedroom/3 bathroom narrow beachfront home.

CASH FLOW from OPERATIONS:

Gross Rental Income (GRI).........$75,000
Operating Expenses (OE).........<$47230>

property taxes $4,250
insurance premiums $7,000
janitorial $5,200
maintenance $2,000
utilities $4,600
trash $480
wifi/television $1,200
management (30% of gross) $22,500

Net Operating Income (NOI)......$27,770

FINANCIAL SNAPSHOT:

We assume a Purchase Price of $539,000 (list price of MLS# 256351 at 68 E. Gorrie Drive)
We have calculated the Net Operating Income (NOI), $27,770

===> CAP RATE = 5.15% (NOI divided by Purchase Price = 27,770/539,000)

FINANCING/MORTGAGE OPPORTUNITIES:

Assumptions

Purchase Price of $539,000
80% Loan-to-Value ($431,200 financed)
20% Owner’s Equity ($107,800)
Closing Fees ($8,000)

===> Cash from you at closing: $115,800 (= 107800 + 8000)

Interest rate 5.5%
30-year amortization

Consequences

Cash Needed at Closing $115,800
Monthly Mortgage Payment (Debt Service) $2,448/mo (or $29,380 per year)
Interest portion of the debt service 1st year, $23,571
Depreciation 1st Year, $23,327 (assuming the breakdown: land is worth $100000, house is worth $394,000 and furnishings are worth $45000)(house depreciated over 27.5 years = $14,327)(furniture depreciated over 5 years = $9000)
Tax Benefits
- The IRS takes the NOI (+$27,770); and allows you to deduct the interest (-$23,571) and the depreciation (-$23,327); resulting into a net taxable loss of <$19,128>.
- The IRS would conclude that your investment creates a loss of $19,128 the first year, a loss that should be deductible from your gross income reported; in other words, you would be making $19,128 less because of your investment. The amount of this saving is equal to your marginal tax rate (39%) multiplied by your loss of $19,128. Your tax savings would therefore be $7,460. This means that, without this investment, you would have had to pay additional Federal income taxes in the amount of $7,460 --- the very definition of a “tax shelter”... Of course, please run this by a tax attorney for confirmation and before you base any decisions on this.

After-Tax-Cash-Flow

Your return on investment, cash, should be $17,518. It is calculated as follows:

NOI of $27,770
less Debt Service (12 mortgage payments over one year) <$29,380>
plus Tax Credit of $19,128

===> = $17,518

Even better:

Your true Cash Return on the Investment after tax, for the first year, would be $23,327 (= $5,809 paid towards mortgage principal reduction + $17,518 of positive cash flow).

Your “Cash-on-Cash Return” would therefore be 20.15%. This is calculated in dividing your after-tax revenues of $23,327 by the amount of cash you invested to acquire the house ($115,800). 20.15% Return On Equity... Wooooow!!! In other words, it would be similar to finding a bank paying you, after tax, over 20% interest on your CDs.

In summary:

the CAP RATE is 5.15%
your cash needed at closing (assuming an 80% loan) would be $115,800
your income after tax, the 1st year, should be $23,327
your “Cash-on-Cash Return” would therefore be 20.15%. This is calculated in dividing your after tax revenues of $23,327 by the amount of cash you invested to acquire the house ($115,800).

Note: We have focused on three beachfront single-family homes located in the heart of St. George Island. They are narrow (15 feet) because they are positioned on 25-foot wide lots. Their central location, a short walk from all stores, restaurants and bars, make them highly desirable vacation destinations. All three houses have 3 bedrooms and 3 bathrooms. They are listed, as of May 2017, between $539,000 and $585,000.

In the assumptions below, we will elect a Gross Rental Income of $75,000. For the purpose of this study, the three houses are somewhat interchangeable. The real property taxes vary between units slightly, between $4,000 and $4,500. We shall use $4,250.

For the insurance expense, the actual premiums are as follows:

MLS#258393: Total $6798 {windstorm $1362 + flood $3791 + homeowner $1645}
MLS#256351: Total $7824 {windstorm and homeowner $4978 + flood $2846}
MLS#257394: Total $9513 {windstorm $7396 + homeowner $1295 + flood $822}

As you can see, insurance premiums vary greatly from one (identical) house to the next. They is a good picture of the insurance market, where shopping always pays. We shall use $7,000 as a likely overall insurance cost if shopping reasonably well.

BEACHFRONT, 2-Bedroom Townhome 300 Ocean Mile, Townhome I-6, St. George Island, Florida

CASH FLOW from OPERATIONS:

Gross Rental Income (GRI).........$50,000

Operating Expenses (OE).........<$29,075>

property taxes $3,444
homeowners’ dues $2,832 (includes trash, common area)
insurance $3,899
janitorial $5,200
maintenance $2,000
utilities $3,000
trash, included in dues
wifi/television $1,200
advertisement/promotion/agency (15% of gross) $7,500

Net Operating Income (NOI)......$20,925

FINANCIAL SNAPSHOT:

Purchase Price $368,000 (list price of 300 Ocean Mile, I-6 – MLS#251633)
Net Operating Income (NOI) $20,925

===> CAP RATE = 5.7% (NOI divided by Purchase Price = 20,925/368,000)

PLANTATION HOME, 1939 Smuggler’s Cove, St. George Island, FL 32328

The following study is a valid example of the ability of non-premium properties to pay for themselves through transient rentals. The rental income, in this case, covers all of the operating expenses.

MLS# 255315, 1939 Smuggler’s Cove, St. George Island, FL 32328

I have provided below estimated financial data pertaining to the rental of the above-referenced house, if used as a rental.

Under “CASH FLOW FROM OPERATIONS”, you will find details of projected gross revenues (Gross Rental Income); of the expenses necessary to the proper functioning of the investment (Operating Expenses); and the resulting Net Operating Income, or NOI, calculated at the Gross Rental Income less the Operating Expenses. The NOI is the most reliable indicator of a real estate investment because it is NOT investor-specific; in other words, it remains the same whether the buyer pays cash or obtains bank financing, and regardless of the tax situation of the investor.
Under FINANCIAL SNAPSHOT, we shall find the CAP RATE, defined as the NOI divided by the acquisition price. The CAP RATE is the only common denominator in all real estate investments, and can easily be used to compare investment merits between remote locations (St. George Island vs. Naples, for instance) and between different types of investments (Vacation Rentals vs. Strip Mall, for instance).

ANALYSIS of the Plantation HOUSE at 1939 Smuggler’s Cove:

CASH FLOW from OPERATIONS:

Gross Rental Income (GRI).........$36,000

Operating Expenses (OE).........<$30,086>

property taxes $4,660
homeowners’ dues $2,796
Plantation rental tax $2,000
insurance $3,050
janitorial $4,000
pool service $1,200
maintenance $2,000
utilities $3,300
trash $480
wifi/television $1,200
advertisement/promotion/agency (15% of gross) $5,400

Net Operating Income (NOI)......$5,914

FINANCIAL SNAPSHOT:

We assume a Purchase Price of $475,000 (list price)
We have calculated the Net Operating Income (NOI), $5,914

===> CAP RATE = 1.2% (NOI divided by Purchase Price = 5,914/475,000)

Make Money Owning A Beach Home

Cash Flow Examples

AGENT ON DUTY