Beach rentals, economy both ebb

2007 was a record-breaking year, but that hasn’t been repeated this year.

Washington Post

WASHINGTON — The pool, hot tub and ocean view are the same this summer at Bandit’s Lair, but the seven-bedroom luxury home in North Carolina’s Outer Banks is missing something critical: enough renters to keep it fully booked, even at a 10 percent discount.

Owner Pat Sepanak said she may leave the house in Corolla empty part of the summer. The usual herd of vacation renters has been thinned by economic fears and high fuel prices, she said. “It is a tough time. Everyone is tightening their belts,” she said. Plus, “it’s one tank there and one tank back. I understand the pressure.”

It is the situation facing many investors in beach houses this summer. Last-minute rental bookings are off about 20 percent at Outer Banks Blue Realty Services. After a record-breaking year in 2007, rental reservations are down about 14 percent so far this year at Long Foster’s vacation rental office in Bethany Beach, Del. In addition to the economic pressures, investors are facing competition from new condominium beach rentals that are driving down prices in some communities.

Some vacation home owners are offering incentives or discounts such as free gas or a reduction in the weekly rental rate. Sepanak lowered the weekly rental at Bandit’s Lair, which is less than a mile from the beach, to $4,900 from last year’s $5,450. She discounted another house from $3,950 to $2,900 a week.

Going any lower would be counterproductive, Sepanak said, because there’s a minimum cost to rent out the house. Interiors must be professionally cleaned, and pools and hot tubs must be sparkling.

“Some of them want to pay half the original price” for a weekly rental, said Sepanak, a New Jersey real estate agent. “For me, it’s not worth the wear and tear. I try to set a good price, and then I don’t negotiate.”

In a slow economy, investors with beach properties must be realistic, said Tim Cafferty, president of Outer Banks Blue Realty Services. When a few clients became concerned about the shortage of renters, Cafferty said, his staff suggested they begin offering $250 gas cards. For some homes, the rental management agency will waive its handling fee.

“My advice to my clients is not to panic, to establish the bottom-line rate and then go to that rate as soon as possible and be pleased that you have a fully booked season,” Cafferty said.

The number of people buying vacation properties fell more than 30 percent last year, and the number buying investment homes was down 18 percent, according to the National Association of Realtors. But that could bounce back as investors begin looking for bargains, experts said. Would-be investors should calculate how much they will be able to charge in rent, tally up maintenance costs and determine how long it may take before the venture will become profitable, they said.

“It’s survival of the fittest. It is not like the old days when you brought your old furniture from home. Properties have to be in tip-top condition,” said Sharon Palmer, vice president and manager of rental operations at Coldwell Banker Resort Realty in Delaware. “The ones that look the best, the ones in the best location are going to be filled.”

It can take years to earn enough in rental income to cover the cost of paying the mortgage and maintaining the property, Palmer said.

“In most cases, because real estate has gotten so expensive, it’s very doubtful they are going to have positive [cash flow] unless they’re putting down a substantial amount,” she said. “That rental income will help carry the mortgage, but will not cover it.”

Initially, the benefit to investment properties resides with their tax treatment, financial planners said. While second homes receive tax treatment similar to primary residences, investment properties are treated differently — often to the owner’s advantage.

The investor can write off the cost of maintaining the property as well as the mortgage and property taxes, said Veena Kutler, a financial planner at the Garnet Group in Bethesda, Md. “If you put in a new hot tub, yard services, cleaning services, everything is an expense,” Kutler said.

A typical investor may earn $30,000 in rental income a year but accumulate $40,000 in tax deductions, Kutler said. The owner’s profit comes from the appreciation of the property and the tax deductions, she said.

“It can be difficult to have positive cash flow from rental property,” Kutler said. “And I didn’t tell you about the sweat equity. It is just a lot of work to maintain it.”

Investors are also limited in how they can use the property. To maintain investor tax treatment, they can make personal use of the home for only two weeks in addition to visits to the home for maintenance purposes. Buyers looking for a home-away-from-home should stay clear of the rental market.

“You want to clarify what the main objective is of buying this property,” said Peggy Cabaniss, president of HC Financial Advisors of Lafayette, Calif. “If they use it too much as a vacation home, then it doesn’t qualify as a rental.”

For some investors, beach rentals remain a good bet. Phyllis Martin saves money on her rental property by managing it herself instead of hiring a rental management agency.

The management agencies typically charge at least a 10 percent commission, though some charge 20 percent. In return, they take responsibility for finding renters, ensuring they are qualified, taking calls from tenants during an emergency and cleaning the home between clients.

Martin, who owns three rental properties, initially used an agency but decided she could do a better job.

The energy analyst spends several hours a week weeding out potential renters. She visits the homes on summer weekends to ensure proper maintenance. “I like to do it myself because I like to know who is renting. I just like to know the people,” she said.