What To Know Before Buying A Short Term Rental in Myrtle Beach

[Jonathan Edmund]

I have a ton of clients that come to me looking to purchase investment properties in the Myrtle Beach area. A lot of them don't understand the rental industry in the Myrtle Beach area. Because of this, I felt it necessary to post our first blog article pointing out key items you need to know before you purchase an investment property in the area. Now, most of the items on this list are referring specifically to "short term" rental investment properties. These mostly consist of ocean front/view condos and homes.

So to start off, let me explain why I'm focusing on short term rentals also known as vacation rentals and not long term investment properties. Most investors want one thing, a quick and large return on their investment. Being that a yearly lease on a condo might be $800 a month for a two bedroom not on the beach, why purchase that when you can buy something closer to the beach that rents for $1,000 a week? Now there are instances where I recommend long term over short term rentals, it just depends on your expectations as an investor. I will have another blog up soon specifically labeling the pros and cons of short and long term rentals. So if long term rentals is the route you're looking to go, disregard this post and check back for my "Short Term vs. Long Term" post.

So without further ado, here are the things you need to know before purchasing an short term rental property in the Myrtle Beach and surrounding areas.

1. Location, Location, Location!

So the most important thing when purchasing any property is location. We all know that. But there is more regarding location that you need to know before purchasing a short term rental. You can't just buy a condo in any neighborhood and start renting it out weekly. It has to be in what's known as the short term rental zone. This means that it's in a location that is known to be suitable for short term rentals and is allowed by the HOA. Check with your Realtor or ask us about any property you think may be in a good location for short term rentals and we can all check for you.

Also, location refers to the location of the actual unit inside of the building. There is a huge difference between an ocean front property and an ocean view property. Don't think because the building is ocean front that the unit you like has an amazing ocean view. A lot of ocean view units are side views and don't have the views that ocean fronts have. They also rent for less. Keep this in mind when looking for a property! A lot of investors don't see the unit in person before purchasing since it's mainly for rental purposes so have your Realtor at least check it out. Bad views=bad income.

2. HOA Fees

This is probably the first question I receive about any property investment or not. What are the HOA fees? This is very important!!! If you buy a property and the HOA fee is $500 a month, that's great but it might not be what you're paying each month. A lot of these ocean front resorts include your home owners insurance in the HOA fee because it's cheaper when bundled together. But some don't include it in the fee. Most of the resorts do but there are a few that charge you in separate installments or that don't include it at all. Check with your Realtor, they will be able to tell you for sure after one easy phone call to the HOA. So check and see if it's included, not included, or paid in 2-3 installments over the year.

Also, see what else is included. A lot of the fees will include all of your utilities including electric, internet, water & sewer etc.. But there are some HOAs that make you pay your own electric and other utilities. So check around with different HOAs and see what ends up being the best deal for you. Because one thing is for sure, HOAs are a necessary evil and aren't ever going anywhere. Also, have your Realtor check for any special assessments that the HOA might be charging for repairs in the building or in common areas.

3. Taxes

This is a short but important point I need to hit just in case you're unaware. South Carolina gives tax breaks to certain people, but only as primary residents. As an investment owner, you are not a primary resident. You actually pay a higher tax for being an investor than you would on the same property if you lived there at least 6 months out of the year. Now taxes are cheap in SC compared to most places, so it's not a big issue that I run into. But you still need to be aware that your taxes will be higher than a primary resident and that it will also be higher in high risk properties such as ocean front condos or homes. You can easily check the taxes on any property if you have the tax map number. Ask your Realtor or visit the Horry County Property Tax Records for more info.

4. Who Manages My Rental For Me?

I could write an article just on this topic alone, and I will. But I will touch a couple key points for you now. MOST ocean front properties have on-site rental companies that manage the units in that building. This is simply known as an On-site Rental Company. They basically operate like a hotel. There are companies out there called Off-Site Rental companies that have their own maintenance, housekeeping and can rent and market the unit for you. Because they aren't onsite and able to assist a guest at any time, they typically charge a cheaper fee of 10-20% gross profit. The on-site companies usually take between 40%-50% of the gross profit.

Now I'm sure you're thinking why in the world would I give someone almost half of my income to rent my property? The answer is simple and it has to do with gross vs net profit. Just because you're paying a higher fee doesn't mean you're getting less money in your pocket at the end of the day. On-site Company A might charge 45% split of your gross profit, but they are bringing in $40,000 in gross income, thus giving you a net of $22,000. Off-site Company A might only take 10% but they brought in $23,000 gross leaving you with a whopping 90%, $20,700.

Now more importantly than that, is what happens in some buildings when you use an off-site rental company. A lot of the onsite companies have a ton of walk-ins and phone calls to book a stay at the resort. If you rent through an off-site company, the on-site company blocks your room off and won't rent it to anyone who comes in the hotel or resort. That is only where they start to hurt you. They will also not allow guests of the owner to use the amenities of the resort, thus hurting the amount it can rent for. Yes they can do this and yes they do it all of the time. And yes, that's why most people just stick with the on-site rental company. Not all buildings disallow amenities so check with your Realtor. Now I'm not saying don't use an off-site company, I'm saying weigh the different outcomes and see which option puts more money in your pocket. Remember that the on-site company also has an onsite maintenance and housekeeping staff. There are certain instances where I'd actually recommend off-site companies, and I'll talk about that another time.

5. Lending Issues on Condos

When you're looking to purchase an ocean front condo or investment condo, I highly recommend paying cash if you can and here's why. Ocean front condos are known by lenders as a "Condotel." Meaning they are a condo that is in what they consider a hotel. Because such a high percentage of these units are investments and not primary residences, the units in these buildings are known as "Condotels" or "Non Warrantable Properties." Because they are considered a high risk property and non warrantable, a lot of lenders will not finance them. Local Realtors will know lenders to send you to so don't worry if you're financing a property of this type.

But it is a problem I almost guarantee you'll run across if you're financing a Condotel. Also, because it's an investment property, any property you purchase will probably require at least 20% down and have a slightly higher interest rate. Because of this, a lot of investors tend to pay cash to avoid these extra fees. But I do sell plenty of ocean front condos to clients who need financing and they usually work out, just with a few more headaches.

6. How do I know what units rent the best?

There are a bunch of things you can do to your unit to maximize profits. That I'll save for another time. To know which unit you should buy, you'll need a Realtor for sure. They can usually access the rental history and occupancy rates for any building that you're looking in. If they can't, well it might be time to switch Realtors. It's not easy to get the rental history on units but to purchase one, you have to have it! Ask your Realtor to get the gross and net income for the past 3 years on any property that you're interested in.

Also, get a list of expenses!!! If you don't, then you have to take the owner's word for the amount the unit generates. Make sure the expenses add up so you're getting the same net number the owner provided you with. Never take someone's word for it, get copies of actual rental documents. All rental agencies have to keep these numbers on file. Do the math with a small number of units you like best and purchase whichever one makes sense financially based on price/income. That number will ultimately be your rate of return. Try to find a property as close to a 10% annual return as possible.

Overview

Those are 6 key points I believe are most important before purchasing an investment property. There are other topics to discuss once you actually purchase the property. I will address that in another article. The best thing you can do is just ask questions. Ask your Realtor, ask the HOA, ask people staying at the resort. Ask questions so there are no surprises later. As I said before, I have a lot of investors that contact me about these types of properties so feel free to contact me directly. I hope this article was helpful and there will be more to come. So check back periodically and see what information has been added!!

[John D.]

Good insight Jonathan.  As a short-term rental owner in this area for 15 years there's a couple of additional points I think anyone reading this would want to know.

Location - I have found that if your property has great photos and a very well-written description of its proximity to the beach, potential renters have more trust and book with you over a listing that just says "beach view".  Guests want to know exactly what they are getting.  We often host families from the midwest and upper midwest and that's a long drive to not be sure of exactly what you've rented.  Over time, guests will leave reviews confirming your description and this will further your credibility and trust.  All that just to say, don't think non-beach view properties are dogs.  We get $1350 wk. for a 2/2 in peak season for 1st tier.

Taxes - Save yourself some headaches.  Pay for a service like Avalara to file your taxes.  The State of South Carolina is a nightmare to deal with on your own trying to stay compliant.  We let Airbnb pay our state tax and the Avalara takes care of the rest in local, hospitality and whatever SPLOST taxes they dream up.

Rental management - I have a strong opinion that you should not use an on-site or off-site rental management company.  Keep in mind that Myrtle Beach is a big destination for Bike Week (Spring and Fall), Youth sporting tournaments year round, golf and conventioneers.  Not to mention regular beach partiers.  These rental management companies will treat your property like a hotel and rent without discernment.  We switched to doing it ourselves with HomeAway and then 3 years ago switched to Airbnb.  We made a lot more money and had a lot fewer headaches and damages.  Find yourself a good local housekeeper, treat them well with the occasional bonus and they will be your eyes and ears.  Airbnb makes it too easy and I enjoy meeting the people.

The trick is to develop a process and stick to it.  Continually improve it to gain efficiencies and free up your time.  I bet I spend less than 10 minutes on every rental and we consistently rent 200 days a year.

Rental history - Unlike long-term rental cash flow, the history of a vacation property is not always translatable to how successful you will be with the property.  Remember that a lot of revenue is built on relationships with return renters and web sites like Airbnb where you build a reputation.  When you purchase a property, those benefits don't necessarily come with it.  You may be starting from ground zero to fill your rental calendar.

Sorry to hijack your post.  Hopefully my added comments will help potential owners in the post-purchase phase to be successful and buy more properties.  I know we plan to so I'll reach out to you @Jonathan Edmund when we get ready to buy again.