Planning for retirement on Hilton Head inevitably revolves around the cost of the house, condo, or apartment where you plan to spend your “golden years”. Depending on relative housing values, the sale of your primary residence in another area of the country may not produce enough cash to buy something of equal value on the island, and a large mortgage payment in retirement is not usually considered financially prudent.
The Hilton Head real estate strategy we will explore in this post involves purchasing a condo or house for short term rental. We will discuss the long term rental market in a future post.
The recession of 2008, and recent historically low interest rates, created new opportunities to invest in Hilton Head real estate. The goal is to secure a property that can be rented short term and will have positive cash flow, or at least break even, between now and actual retirement. When the time comes, you can either move into this property or sell it and buy or lease another property because your early investment kept pace with real estate values on the island.
Hilton Head is one of the most popular vacation destinations in the southeastern United States. A reported 2.5 million people flock here every year to experience good weather , beautiful beaches, golf, tennis, fishing, boating and dozens of other outdoor oriented activities. This provides a steady source of rentals for property owners on the island. The wide appeal of Hilton Head’s amenities results in many different kinds of short term rental options from beachfront houses set up for multiple families to condos with proximity to championship golf courses, tennis and restaurants.
The word from friends we know who are currently looking for property on the island is condos on the island are presently a great buy because they can be bought farther below their historic highs than houses. Also, with the national economy recovering, the short term rental market is strong with tourism approaching its former pre recession levels. Part of the appeal of buying a property that can be rented short term is the owner can block out time to enjoy the property for their own getaways and vacations.
Here are some of the key things to consider when looking for a short term rental investment property on Hilton Head:
1. Work With a Realtor
Find a reputable realtor with a proven track record in the short term rental market. Talk to them and get a feel for how well they actually know this market. Different realtors specialize in different areas. A realtor who excels in selling multi million dollar homes in Wexford may not be the best source for finding a condo property in a tourist area.
2. Buy Right
As obvious as this sounds, making the right purchase means being able to be somewhat emotionally detached from the lure of the beauty of the island. Find a reputable realtor, or realtors, and be patient. Make a couple trips here and look at as many properties as you can so you understand the different possibilities. People come to the island for a wide variety of reasons and you should consider this in the context of what you like to do and the times you would like to visit if you plan on enjoying the property yourself. For example, if you are a golfer perhaps you will want to buy a property that has stronger rentals during the beach season but tapers off during golf season. Local Hilton Head Island real estate dynamo, Robbie Bunting, recently posted this overview of the geography of the HHI rental market http://www.youtube.com/watch?v=RN4YtSHKr7c.
3. Get Pre-approved Financing
When you find the right property, the last thing you want to have happen is to lose out on the deal because you get caught up in red tape in securing financing. Obtaining preapproval from a financial institution will improve your chances.
4. Request Rental Records for Multiple Years
If you are serious about a particular property, and it was rented out in the past, this is a great opportunity to find out how it may rent in the future. Request the rental history- as many years as possible. One year does not always give an accurate view of what is typical. If the property was not rented in the past, see if you can get rental income figures for a similar property in the same building or development.
5. Request Cost History
There are many costs to owning and renting out properties on Hilton Head. Be sure to request records of utilities, maintenance, association dues, past assessments, management fees, house keeping costs, replacement costs of appliances and HVAC equipment, and taxes. Be aware that the real estate taxes can be almost double for an out of County owner than for a local Beaufort County resident. If the property was owned locally, the past taxes do not reflect what you might have to pay. Don’t forget to build in the costs of hiring a management company to market, rent out, maintain, and clean the property.
6. Have the Property Inspected
Be sure to have the property inspected as a condition of the sale. This is almost always done these days, and the cost is generally borne by the buyer, but the last thing you need are unexpected costs after the sale. Many sellers now offer a one year warranty on appliances and equipment which can give the buyer peace of mind.
7. Analyze Cash Flow
After you obtain good rental and cost information, develop a simple spread sheet to see how the property looks over the period of time you expect to own it. Remember to add financing costs to the costs mentioned above. Allow for years of lower rentals and apply some inflation multiple to all the cost and tax categories. Build in replacement costs for appliances, HVAC, and Plumbing fixtures. If you plan on owning for many years, assume you will want to do general updating at some point and budget a small amount for it every month so you will not be caught off guard. Last, don’t forget to consult an accountant to explore the tax consequences of buying the property. Sometimes the cash flow analysis looks better if depreciation and other deductible expenses are considered.
8.Investigate Rental and Management Options
There are many companies in the area that will handle the marketing, renting, maintenance and cleaning of rental properties so you do not have to be involved on a daily basis. There are also ways, like VRBO (Vacation Rentals By Owner) for you to be more “hands on” with some of these items to reduce fees. Be sure to get advice from your realtor on reputable companies and don’t forget to build these costs into your analysis.
Our friends from Akron, the Lahovich’s, recently bought a condo in Palmetto Dunes in the Villamare condominium development. They spent about a year and a half looking online, talking to realtors, and visiting properties when they vacationed on the island. Villamare appealed to them because they are avid tennis players, golfers and have children that enjoy the beach.
Palmetto Dunes offers all three and much more. Their 2 bedroom, 2 bath unit was rented in the past and had good information available to help them with the decision. Joe and Karen worked with local realtor Beth Drake to find their dream property. If they decide to move to Hilton Head permanently when they retire they will have a great property to sell, live in, or keep for income when they sell their residence in Ohio. The Lahovich’s are marketing their beautiful condo in Palmetto Dunes through VRBO at http://www.vrbo.com/505281. They also have a management company, Wyndham Vacation Rentals, who handles rentals, maintenance, and housekeeping.
Given the ups and downs of the financial markets, investing in Hilton Head real estate now may be the best way to insure you will have the place you want when you decide it is time to move here. There are no investments without risk, of course, and the strategy we discussed requires being able to weather the ups and downs of the economy. Through this last cycle, Hilton Head fared better than many resort areas. If you think you might like to move here one day, come visit, rent a place like Joe and Karens’ condo at Villamare, talk to some local realtors and check it out!