Vacation Rental Purchase Opportunity

[Michael Johnson]

I have a friend who owns an upscale beachfront condo in west FL. The property is located in a upscale area, nicely furnished and well maintained. We have been spent time in this property for the past several years and currently have the opportunity to purchase 25% ownership for 175K. The condo is managed by a local company and rented as vacation property the majority of the time. The yearly gross on the rental is approximately 45K and I believe the management company charges 25%.

My wife and I are excited about the possibility of investing in this property, but still, we are worried about stepping on on the limb with the economy in such bad shape. We own a couple of local duplexes, but this would be our first venture with a vacation rental. Can someone give me a few pointers so that I have covered my bases and asked the right questions?

Thank you for your time.

[Jon Holdman]

If you use a rental property for personal use for more than 14 calendar days a year there are tax consequences. I've not tried to figure out the exact implications, but you should discuss this with your CPA before you jump in.

Certainly just trusting the seller is not a good idea. Do an appraisal. Better still, do two. To get an idea, look for the listing prices of similar units in the same building. Those prices are above what its worth (or, they would have sold.) Get sold comps from a realtor. Best are in the same building, same floor plan and same view. You might find some in public records or on zillow. Ignore the zestimate.

Your friend is valuing this at $700K. I suppose that's possible in some areas.

You say you've been friends for 20 years. Are you willing to end your friendship over this deal? With condo's your never in control The HOA can always cause you grief. With this deal, you have even less control. Your're 25% owner. If you're friend owns the other 75%, you're essentially along for the ride. If the HOA decides they need a major improvement, you get zapped for 25% of your condo's assessment, with effectively zero ability to influence the choice. If your friend decides to remodel or redecorate, you're along for the ride. Even if your friend sells another share or two more shares, you can still end up being along for the ride. By that I mean you will be requested to pay for something you may not want.

Do the HOA bylaws of this building allow your friend to turn his into a timeshare? I doubt it.

Will you get a recorded deed showing your ownership?

Who do you make the payments to? Your friend or your lender? What happens if the payments on the remaining 75% don't get made? Do you end up losing your 25% with no recourse?

The $700K price sounds like a bubble price to me. Prices have fallen a LOT in FL.

What does it cost to just rent a similar unit? Jon has already shown you this is a crap investment. For all practical purposes you're buying a vacation property and hoping to collect a little rent to offset your expenses. $175K is a bunch of money. I've looked at buying something in FL, but I've never convinced myself its effective to buy vs. just getting on VRBO and renting something for a week or two. Further, by renting, I'm not locked into a location.