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Vacation properties? Out. Investment properties? In.
According to a recent National Association of Realtors report, for the first time in five years, more people are putting their real estate dollars into investment properties rather than purchasing vacation homes.
"Baby boomers at or near retirement continue to propel the demand for second homes, although headwinds softened the overall volume of vacation sales last year," said Lawrence Yun, National Association of Realtors chief economist in a press release. "The expanding pool of buyers amidst a dwindling number of bargain-priced properties led to tighter supply and fewer sales and caused the price of vacation homes to rise. Furthermore, the turbulence that hit the financial markets the second half of the year likely seized some would-be buyers' available cash."
The survey found that after a five-year decline, investment-home sales in 2015 jumped 7% to an estimated 1.09 million from 1.02 million in 2014; vacation-home sales last year declined to an estimated 920,000, down 18.5% from their most recent peak level of 1.13 million in 2014.
If you’re considering buying or renovating your property to take in a little cash with a home-sharing site or longer-term rental, Scott McGillivray, host of HGTV’s Income Property show, says you have to think beyond the purchase price and monthly mortgage outlay to figure out if landlording makes sense financially. “Always make sure the total rent will cover all the costs of running and maintaining the unit, plus a little extra. This positive cash flow will ensure you’ve got a profitable long-term investment,” he says.
Before You Renovate
Before you put pen to paper, you’ll need to do some research, especially if renovations are required to make a property suitable for multi-unit or multifamily use. “Zoning and bylaws always come first. Make sure it’s legal to have a multi-family unit in your area,” McGillivray says. “ The properties with the best opportunities will also have a separate entrance, good ceiling heights on all levels (6’11” in at least 75% of the space), good size windows, and a large floor plan . Bungalows usually have the biggest lower level floor plans if you’re thinking of a separate basement unit. You should also look at the proximity to destination areas such as schools, hospitals and highways. Usually the closer you are to an urban center the easier it is to rent.”
McGillivray says that the biggest mistake would-be landlords make is going light on the soundproofing between units, which can be expensive or complicated in an already finished space. “Noise is the number-one complaint in multi-unit residences, whether it’s a house or a condo. And sound separation is not a simple fix in a finished space.”
And if you’re wondering if you should leave things alone in a fixer, vs. making improvements and charging more rent, he says to go ahead and make the place the best it can be —this means adding a washer, dryer and dishwasher to the unit, and making sure that the entryway is easy, without requiring too many stairs up or down to the sidewalk. “Always go for higher rent, because you get a double payoff. You can charge more rent and you can increase the value of your home through value-added renovations. Also, the higher the caliber of the space the higher caliber of tenant you will attract—they will treat it better and likely stay longer.”
Finally, if you’re hiring out the work, ask the contractors lots of questions. “If you’re adding an income or in-law suite always ask if they have ever done a legal two-unit conversion. There are some legalities involved that the average contractor might not know about. Also, be sure to get (and check!) references to find out the circumstances of their previous jobs,” he says.
