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Lessons from a Vacation Home Investment

Saturday, December 08, 2012   /   by Nathan Clark

Lessons from a Vacation Home Investment

 I have friends who a few years ago, purchased a vacation home in a community on one of our nation’s coasts. I’m not going to say where, exactly, just to be safe in keeping them anonymous.


At the time, I thought it was a great purchase for them. Prices of properties in this area tumbled when the recession hit, and the area the property was in was an area they’d been visiting for years. They were familiar with it, enjoyed spending time there and, in fact, purchased a property they had rented on vacation before. 


There was a bit of a debate between the two of them about what to do with the condo unit when they weren’t using it. At first, they let it remain empty except when their family wanted to use it. One of the couple was fine with this – they got some rent money from family members to help them cover some of the expense, but they didn’t have to worry about having tenants in there all the time.


 


The other half of the couple, however, felt they were leaving money on the table. Especially once they started using it less and less themselves, it seemed a waste to have it empty during prime vacation months. Plus, they were getting a lot of inquiries about its availability. 


So they started renting it out to vacationers and snowbirds who would commit to at least two months at a time. They were able to fill the unit exclusively with referrals from other unit owners – people they knew – and friends. If they didn’t know the occupants personally, it was OK, because they knew somebody they did know. 


But then at the beginning of last year, they decided they wanted a smaller place. Prices were lower, even, than when they purchased the first place, so they decided to buy another place. They decided it would be one that only they would use, and because they had so much demand for the first place, they would keep it and just rent it out.


That’s when they were approached by a unit owner they DIDN’T know who told them he knew somebody who would sign a one-year lease. The timing worked out for them, as they were just wrapping up a three-month seasonal lease, and they didn’t have any commitments in the immediate future. They figured one tenant for 12 months would be less of a hassle than getting people in and out for a couple months at a time. Plus, this person would commit to the summer months, which is off-peak and usually meant the place sat vacant.


 Well, it didn’t work out so well. Other unit owners began complaining to them about the tenant. There were issues with frequent, different guests walking in and out of the building. There were noise complaints. Then the guy started being late on his rent.


 Long story short, they had to evict the tenant. When they did, they discovered that the place had been trashed in a few short months. They would have to do a major clean-up and some repairs to get the place ready again. 


Now, I feel badly for these friends. They’re nice people and they got taken advantage of by being too trusting. But they did make a few mistakes we could all learn from: 


First, they didn’t have a property management company. When it was just a matter of family and friends using the place, it was OK. But when they began to rent the place more than use it themselves, there was nobody to check in on the unit or screen prospective tenants.


 They were renting to strangers but they were handling the property as though they were still renting to people they knew. This is a mistake. Also, they were not down there very often themselves to check the place out. When it was friends and family, that was OK because those people took good care of the place. When they were renting to people they didn’t know, the unit was not as cared for. Not visiting themselves and not having a property manager meant that damage went unnoticed for months. 


Unfortunately, there is a bit of an “I told you so” situation between my friends. I can see both sides of the argument. One person loved the place as somewhere they could go to get away and occasionally family and friends would stay to help cover costs, and the other saw an asset not living up to its potential when it was sitting vacant during peak vacation months. You could say that both people were right.


 But both of them being right doesn’t help them much now because the way they tried to manage the situation was wrong. It’s hard to be an absentee landlord in ANY situation, and having a strictly defined property management structure in place is imperative.


 I hope this story doesn’t scare you. I just shared it so that you can see that it’s important to properly manage ANY investment property, whether you can adequately handle it yourself, or if you need to hire someone to do it. 


In these friends’ case, what happened shouldn’t have happened.

Nathan Clark & Associates
Nathan Clark Team
39 Cedar Swamp Rd
Smithfield, RI 02917
401-232-7661

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