Picking a Rental House

This is the first article in my series of buying a rental house.

As we spread out beneath the dwindling sun in Scituate, Ma, I was at peace, and surrounded by the people I love. I looked across my shoulder at my wife, and didn’t have to say a thing to understand that she felt the same way. Every happy line on her face was screaming so. I talked with my uncle about the five bedroom beach house and the market conditions that made its purchase possible. It was an eye opening conversation. I’d noticed the for-sale signs lined up like the endless relentless waves that pounded the shore. I had always considered beach houses to be the domain of the rich, an unattainable goal.

Clearly, conditions had changed, and there was opportunity. After talking to my wife, we considered the possibility that a beach house might not be just an impulsive buy. It might actually be smart. We decided to give this decision some serious thought.

Why?

Buying a house is a big decision. I wanted to shed some light on the sometimes dark and personal places to show you how we came to the decision to buy ours. I also want to talk about the business side of this decision. People buy a second home for many different reasons, and we had a Texas Gulf sized bucket of reasons to consider buying ours:

  • We have always loved hospitality. We have often had housefuls of youth or guests, and love to set up an environment that others enjoy.
  • We’ve long considered rentals as a possible business. Back when we were first married, we considered buying a house in the Northeast as a bed and breakfast. We didn’t have the financial resources to pull it off, but filed the idea away for later application.
  • Our kids are growing up. They are old enough to enjoy beach vacations, and we love sharing this kind of time with them. Our oldest is going into the 8th grade, and we feel like we have five more years of vacations with her.
  • We love the beach. We were told to buy a rental property in a place that you love to go. Chances are, others will love it too.
  • We think that right now, real estate represents a better investment than equities.

But there were also some risks to consider. The real estate market is far from stable; the very same forces driving prices and interest rates down are a weak economy that will impact the pool of renters. Beaches have storms; the Gulf coast has oil and possible spills; the wrong customers can hurt you. There was no hiding the fact that real estate always involves risk.

In the end, we decided to buy. So are we looking at this house as an investment or a second home? Well, yes. Both, I think. We definitely want this house to pay for itself through renters, but we also want a place that we enjoy going, and we want something close and spacious enough to share with our family and friends. We think any hassles will be worth it.

Where?

Having decided to buy, and understanding why we were doing this to ourselves, we started to look around. We did some reading about demographics. We considered getting a house in a college market like Starkville, Ms. (where I got my undergraduate degree) or Austin, Tx. (where we could live and manage the properties).

We then took a closer look at Scituate, and found that we could possibly buy a place for $500,000 or less, but that place would take lots of work and the peak rental season was short. We considered the Florida market, and found more severely depressed prices. In the end, we thought Florida was attractive, but there was risk with the Gulf oil spill and we would not be able to take advantage of the property with any real frequency.

Finally, we looked closer to home. We quickly zoomed in on Mustang Island and the surrounding areas, and South Padre with its surrounding areas. Of course, the beaches in South Padre are a little cleaner and bluer. You don’t have to worry so much about things like jelly fish and seaweed (though they were never too bad to handle for us).

Mustang Island

In the Port Aransas area, we had a location that was less developed, and that idea was attractive to us. We like NATURal better than HOTel. There were other advantages as well. Port Aransas is a four hour drive from our home, and South Padre is closer to seven.

But location is big for potential renters too. With any rental property, you need to understand who your customer is likely to be. Port A. gives us the Houston (2 million plus), Austin (1 million), and San Antonio (1 million) markets, to put more than five million people within around a four hour drive. That’s about what I’m willing to drive for a weekend, so it was attractive. We also considered the variety of season. Texas peak season runs March (Spring break), and May through mid September. We also get Winter Texans as potential renters. Port Aransas gave us the near perfect combination of a wide renting season and huge markets, with relatively scarce resources.

South Padre

This area has very nice beaches, and a nice proximity to Mexico. Though the United States renting population  close to South Padre is not as great, there is a broad pool of Mexicans who like to vacation in the United States. The water is a little bluer and clearer; the beach a little cleaner. There are no cars on the beach, either. It feels more like a big city beach than Mustang Island, and that has its set of advantages and disadvantages. In the end, it’s a nice beach, but it wasn’t our nice beach.

Mustang Island was for us.

What?

The next decision we had to make was what to buy. We considered a condo or a free standing house. We looked at both. As we honed in on Port Aransas, the amount of new condo development was concerning if we wanted to buy an inexpensive condo and be able to resell it, as new condos will come way down in price in a down economy, but they are not yet seriously depressed in price. There is 5-10 more years of development for condos in Port A, and we did not want to wait that long for our property to appreciate.

We did consider condos in a complex (we could generally get some very attractive rental properties that way) and free standing one or two family condos and homes. We eventually decided that it didn’t matter to us how the property was zoned. We’d find a place we liked. We also decided that proximity to the beach mattered, and it mattered a lot.  Location, location, location.

We also wanted a place that would sleep a lot of guests, and sleep them comfortably. We often travel to the beach with friends, and as our daughters get older, bringing friends will be important to them. Form a rental perspective, the number of comfortable beds is everything.

We finally settled on a three bedroom home (really, a free-standing condo) that slept twelve in three bedrooms comfortably. We could actually sleep more, if people want to take advantage of the various sofas and floors. The great sleeping accommodations make it cost effective for large families and groups and just about perfect for us.

So, we found the right location and the right set up, and now we needed to know the rental history. The owner had a good marketing plan and a good understanding of what it would take to keep the place full and had been very successful. We’ll tell you if what we’re doing keeps working.

I’m curious. What did you look for in your rental house?

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