by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
How about a vacation property, on Perdido Key, Pensacola, Florida, which cash-flows with just 25% down payment?
This Realtor-listed property sold for $238,000 in November of 2019 and this FSBO sold for $242,500, two weeks ago. Both properties are 2 BR 2.5 bath bungalows and are in the Purple Parrot Village Resort, a community of about 150 bungalows on the east end of Perdido Key, walking distance to Johnson State Beach, a half-dozen restaurants, and less than 10-minute drive to two golf courses, a dozen restaurants, Big Lagoon State Park, and the world-famous Flora-Bama Bar and Marina on the Alabama state line.
While there are no similar properties listed now, a few of the 2BR, 2.5 BA bungalows turn over each year and its; likely that one of these can be purchased for less than $245,000. Let me walk you through how I analyze or “screen” properties like this one for investing purposes:
I star by using the public-facing rental calculator on the Vacasa website to get a rough annual income estimate. When adjusted for the amenities, it shows $45,000. That is above the average for the area so I adjust downwards (to the average) to arrive at $39,000. Vacasa (and most other vacation property management companies) charge a 30% management fee so our adjusted annual income will be $27,300
We plug in the following annual expenses:
$1500 for Repairs/Maintenance
$2800 for taxes
$8400 for HOA fees
$ 300 for insurance
$10,788 to cover the 30-year fixed rate mortgage, for $183,750, at 4.125% (4.38% APR)
As a Vacasa-Certified Real Estate Broker, I have access to some pretty nice analytical tools so here are the numbers in a nice report.
The down-payment plus closing costs will cost you approximately $66,000 and, while it’s not uncommon to purchase these properties furnished, you may want to spend $5,000-10,000 changing/updating the furnishings. Your investment then, should be around $75,000.
I can’t predict the future but I do think these properties will double in value over the next 20 years. Let’s assume it only appreciates at less than 3% annually and, in 20 years, sells for $375,000. If we assume selling costs of approximately 8%, that should net the seller $345,000 before paying off the $80,000 mortgage balance. The final amount before capital gains taxes to the seller would be $265,000 or about 3.5 times the original investment.
Investing in real estate can be risky so you shouldn’t go it alone. Consult a real estate broker licensed in the state where the property is located. Risks include: Acts of God/Nature, changing tastes, demographic shifts, and property management.
