Buying Investment Property: Things to be aware of as you go through the process.
Buying investment property in the Outer Banks is a big decision. I am sure you have heard this before, but real estate is all about location, location, location. It is no different with an Outer Banks rental property investment opportunity.
Which town are you buying investment property in?
Our first plunge into the Outer Banks vacation realty market was in the
town of Duck
because of our familiarity with the town from our many previous vacations.
Based on this decision, should you look to purchase ocean front, ocean side, sound side or sound front? Ocean front is as the name implies the first house right on the ocean, but generally behind a dune for protection during hurricanes. The majority of the Outer Banks takes Route 12 as the center of the island; with those east of Route 12 as ocean side, and those west as sound side. The exceptions are the towns of
Kitty Hawk, Kill Devil Hills
and Nags Head, that also has Route 158 running north and south. In this case, there is a section of those towns referred to as “between the roads”. As you might suspect, with all things being equal such as number of bedrooms, number of bathrooms, age of the house, and other amenities (i.e. swimming pool, elevator, and so forth) ocean front will be the most expensive as it can demand the highest weekly rental rate, followed by ocean side, sound front and finally sound side. There are some exceptions when it comes to sound front, depending on the attractions of the town, where sound front may demand more than ocean side. This may occur in areas where the emphasis may be more on either water sports or the ability to dock a boat versus having beach access. When considering these choices, we decided to buy ocean side, because we did not have sufficient capital to serve as a down payment for an ocean front rental, but wanted the house to be on the beach block.
As you further consider buying investment property, you may also want to have a relative size in mind. The four bedroom homes are usually rented by single families, while the five to seven bedroom homes are usually two families and the eight and over houses are generally rented by three or more families. The single family houses, if properly maintained, can develop a very loyal rental base. As the number of families that must agree to continue to vacation together on a yearly basis increases, the harder it is to develop that loyal following in the larger houses. On the other hand, there are far more houses in the four to five bedroom range than there are of the larger houses, so supply and demand helps to ensure a constant demand for the larger houses. In the end, we decided to look for an eight bedroom house, because we knew a moratorium was about to be put in place for building houses in Duck with more than six bedrooms.
Right about now in the buying investment property process, if you haven’t already, you probably want to find a good Outer Banks realtor to work with. As with most places, there is the concept of a buyer’s agent (one who looks out for the best interest of the buyer) and a seller’s agent (one who looks out for the best interest of the seller). Find someone who you are comfortable with, who you believe is an expert on the town you are interested in, and you can trust to help you through the process.
The next decision in buying investment property is do you want to build or buy? The pluses on the build side are that it will be a brand new property, which is generally highly valued by renters. The idea of being “first” draws a group of renters that will almost assuredly guarantee you a solid booking in the first year. Another plus is that you get to outfit the house to your exact looks and specifications. You decide the layout,
you decorate it,
and so forth, and it becomes a reflection of you. A minus for the build decision is the long lead time before you can actually start collecting rental income. It generally takes about a year from start to finish to build a house in the Outer Banks once you’ve selected the lot, decided on your plans, received all of your pre-build permits and are ready to move forward. You also have to deal with all of the permitting issues, from site approval, to septic, to occupancy that come into force during the build process. This can be very stressful. Another minus is that generally you will have to deal with
two investment property loans, first the construction phase loan, and later the actual mortgage.
There are also pluses on the buy side. First, the house is ready to collect rental income from the day you purchase. Basically, on settlement day, any rentals currently in place become your revenue through the end of the year. Secondly, the house is fully furnished. Generally, all contents of the house, unless excluded in the sale agreement will become your property. All contents are generally valued in aggregate at $1 to avoid the issue of personal property tax. The other thing you gain is the rental history of the house. You should have a dedicated group of renters already committed to the house from the previous owner. In addition, it is likely that the house is already in
a rental management program,
and has an advertising history. The first time through the buying investment property process, we decided to buy because, quite frankly, I did not want to deal with the build process. Just buying was scary enough the first time through. The second time through the buying investment property process we decided we wanted to build in a town we were unfamiliar with but gave us the feel of the Outer Banks when we first started to go to Duck in 1992. The development we decided to build in was being viewed as the cornerstone in luxury as Salvo started to reposition itself.
