Vacation Home Investors Flourishing in Frugal Economy

With no recovery in sight for the U.S. housing market and recessionary fears lingering, one slice of the real estate industry is holding up remarkably well: the foreclosed vacation rental market.

From the Sun Belt to the Ski Belt, there are plenty of distressed seaside chalets and mountain dwellings waiting for buyers. From the Florida Panhandle to the Oregon Trail, foreclosed vacation properties are languishing on the market and cash-strapped sellers are slashing prices and buyers are finding fabulous opportunities nationwide.

However, buying a vacation foreclosure isn’t easy. But it can be a lucrative business, according to investors, landlords and property managers.

Designed to Rent
Consider California real estate investors Kristina Brown, who, along with her business partner, Caesar Guyot, are slowly building a small real estate empire of profitable vacation rentals and investment properties in New Orleans, La. A successful real estate developer who has a string of investment properties in the Big Easy, Brown makes her home in San Marino, Calif., while commuting once a month to New Orleans, where she scouts for new properties and checks up on her growing inventory of rentals and vacation properties.

“We are making two and a half times normal market rent on our vacation properties,” said Brown, who has purchased 10 income properties in New Orleans. “The small lower unit is booked all of February, and March is sold out except for two days.”

The entrepreneurs say they see pockets of opportunity for profit over the next few years for those who invest wisely in vacation homes as investment properties. Brown and Guyot like to buy vacation rentals and small multi-family properties near universities in the Uptown section of New Orleans. Last year, they converted two units in a six-unit property into vacation rentals, spending $65,000 to remodel, decorate and furnish a 19th century guesthouse and cottage located in Uptown. They advertise the 1,000 square-foot two bedroom, two bath guesthouse rental for up to $1,750 a week. They also use other fee-based websites that bring vacation home owners and travelers together, such as VacationRentals.com.

“This is a great business,” said Guyot, a California mortgage broker and real estate investor. “People are being more frugal with their money now. Instead of renting a hotel room, vacationers are becoming part of the local fabric by renting a vacation home. They can become part of the local mosaic.”

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Last year, 16 million adult Americans rented a vacation home, condo or villa and 29 percent of those travelers reserved it online, according to Forrester Research in Cambridge, Mass. And the online rental segment is expected to grow.

Guyot and Brown’s newly renovated uptown rental — called La Mason Prudeaux — also includes a one bedroom, one bath bungalow in the rear of the property, which rents for up to $1,050 a week. Besides advertising on websites, Guyot and Brown said they are responsible for a host of tasks as landlords: screening renters, obtaining security deposits, signing lease contracts, removing personal items from the property, hiring local managers and cleaning the property after a renter leaves.

“This has been so profitable we are remodeling other units in New Orleans and are also thinking about moving into other areas like Destin, Florida,” said Guyot.

To be competitive in the vacation home market, amenities are more important than ever, according to vacation home expert Christine Karpinski, author of “How to Rent Vacation Properties by Owner,” and director of the owner community at HomeAway.com.

“The average vacation rental generates $30,000 to $35,000 in annual income,” said Karpinski, a serial vacation home owner who started buying vacation rental properties in 1996, purchasing a condo in Destin, Fla. “HomeAway has more listings in Destin than any other market in the United States. It’s the number one vacation destination on our website.”

HomeAway lists over 430,000 paid listings on several websites, including VRBO.com (Vacation Rental by Owner) and CyberRentals.com. Homeowners pay $329 a year to list properties on HomeAway.com, while VRBO.com cost $279 a year to list a rental. Another online vacation home booking company is Zonder.com, which lists only professionally managed rentals.

Who’s Buying Vacation Rental?
Wealth and age are strong factors in the sale of vacation and second homes. Nearly half of vacation home buyers and two-fifths of investment home buyers had a household income of more than $100,000, according to a 2009 National Association of Realtors study. The median age for vacation home buyers was 46, nine years older than buyers of primary residences. And prices are falling. The typical vacation home now sells for $150,000, down 23 percent from $195,000 in 2007, NAR reported. Second-home properties dropped too, falling 28 percent to $108,000 from $150,000 in 2007.

Renters Needed
But in many popular desert resorts and fashionable coastal areas, the inventory of mid-priced rentals has swelled despite brisk demand. And the glut is likely to grow, as more owners default.

For example, demand for vacation-home rentals are weak in markets like Las Vegas, where prices are flat or still falling, according to broker Ruth Ahlbrand, who owns RE/MAX Central Las Vegas with her husband, John.

“Las Vegas is not a good vacation rental market,” warned Ahlbrand, whose firm gives three foreclosure tours along the Las Vegas Strip every week. “We have 11,000 high-rise condos and half are empty. They don’t cash flow. Most Las Vegas investors are buying single family homes in Summerlin and Henderson, where you can make 10 to 15 percent return on a non-vacation rental. And when MGM built three high-rise condo-hotels on the strip, they cornered the vacation rental market.”

Experts say many vacation destinations are experiencing the dark before the dawn and there is going to be a short window of opportunity for smart — and gutsy — investors to jump in and make their future fortunes. For the first time in years, home prices have slipped enough in some regions for the math to work, including the Florida Panhandle, the Outer Banks of North Carolina, Breckenridge, Colo. Big Bear, Calif., and Hawaii, according to Karpinski of HomeAway.com

“This is a perfect time to buy a vacation home,” claims Karpinski, noting that prices are at 2002 levels in some vacation destinations. “In a few years prices will rise and you will kick yourself for not buying now.”

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