Investing in Vacationland Paradise

We met some fellow Minnesotans down here in Florida yesterday. Unlike us, they jumped into investing in a Florida vacation cottage a couple years ago when they first got the urge. They snapped one up when the Margaritaville Orlando resort was relatively new and said they have already seen a couple hundred thousand dollars of appreciation.

The colorful cottages are bright, nicely designed, and well-furnished. They come with their own Margaritaville margarita blender in the kitchen. The cottages sit behind the impressive Jimmy Buffett resort and a walkable shopping/dining district. As you might expect, the cottages carry a premium price point relative to other nearby neighborhoods that don’t have Jimmy’s island life endorsement. You can rent them out to other vacationers when you aren’t using them yourself.

Financially, it seems like a great set-up, but I do have my doubts. The monthly HOA/resort fees for a cottage are close to $600 a month. Taxes ($500/mo) and insurance ($250/mo) aren’t cheap either. If you rent them out, our new acquaintances said the rental company takes close to 40% of the rent and they felt “nickled & dimed’ on cleaning, maintenance, and other fees. They stopped renting their new place because they felt the juice wasn’t worth the squeeze.

While they were enjoying their tropical cottage, our money stayed in the stock market and grew more than 35% over the last few years. With that kind of return, I certainly don’t feel too bad about missing out on the Florida vacation home boom. That said, while we aren’t the type that would have taken out a mortgage to buy one of these cottages, low interest rates would have produced an incredible return for people willing to roll the dice.

We’ll be looking at some other developments while we are down here, but I don’t want real estate to overshadow having fun & chillaxing in the sun. While I respect people who can make a quick decision about investing in a vacation property, I don’t think that will be us.

Have you ever jumped into buying a vacation property?

Image Credit: Margaritaville Orlando Resort

11 thoughts on “Investing in Vacationland Paradise

  1. In last week’s post, I mentioned the appreciation of a former vacation rental house (that we previously booked), during our trip to the FL Keys. I used this a as a rough barometer of the current market down there. It’s been an amazing run up in price over the past few years. We have been traveling to the Keys for the last seven years. Every year, we have considered buying a vacation rental, but have not. During that time, we have likely averaged ~+12% gains in our stock market investments, and I have averaged 12.5% ROI (partially leveraged, but not including appreciation) on our MF rental property portfolio. Being a rental property investor, I don’t typically count on market appreciation, it’s more about generating “living expense” cash flow and appreciation is considered “gravy”. I have viewed (purely) market appreciation as speculative investing, while cash flow can be readily predicted and calculated, so I’ve internally deemed it a “safer” type of investing (…to each his own!). As you mention, taxes, insurance, and maintenance is also typically significantly higher on vacation rentals. Don’t even get me started on the $600 to $1800 monthly HOA fees and exorbitant management fees! So whenever I have run the vacation rental numbers, the ROI’s are lucky to reach 3-4%. So I always took the approach that I could invest locally (at home) in “safer” MF rentals, and continue to rent “pleasure” vacation properties (with that “safe” MF rental cash flow) a few times per year, and come out ahead by NOT owning a vacation rental property, and also not being stressed by having the vacation ownership worries.

    I may have been wrong…

    By not accounting for real appreciation, I’ve likely missed out on hundreds of thousands of dollars over the last seven years in that particular (FL Keys) market. I knew it was in a low market cycle at the time (seven years ago), and still couldn’t pull the trigger on buying. I still view appreciation as a highly speculative investment, but IF the investment is a low percentage of your overall portfolio, then I could make the argument to make it an small “alternative” investment worthy of the greater risk. I certainly would not wager 20% or more of my portfolio…but the next time the market cycles down in the Keys, I may make a small 10% “wager” on the next market up cycle. But then that little voice still tells me to keep pleasure and investing separate…so I am still not 100% convinced that I want the ownership worries, so we will see what happens…

    Good luck on your considerations of a vacation rental. It certainly has its own complicated set of considerations!

    …My wife (that little voice…who is usually right!) tells me maybe it’s just best to just have another vodka tonic and enjoy the trip and forget about investing a while….😉 Cheers!

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    1. I’m with you … wait for the next market bust and make a small investment in something. It has to be in the next 12-36 months, right?

      The thing that gnaws at me is all the time I spend arranging places to rent each winter. Since we don’t own, I figure we should live a bunch of different places. No sense being tied down anywhere. That means I’m constantly looking – which has become harder with the dog, since we need something pet friendly.

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      1. I hear ya’. I still like the idea of having options and not feeling tied to one place, but the hassle of finding good ones (especially with our 90lbs Golden Retriever) is definitely a pain (and a premium). We are struggling with this too, but it can be an expensive trade off. We had a mountain log cabin for for fifteen years (the land even longer). We sold it in 2019. I wouldn’t trade the memories we made there with our kids for anything, but I do NOT miss owning it.

        I do think they cycle is topping out again. I think by our next presidential election, the cycle may come back around to reality. We could already be seeing the initial tail winds with recent inflation and the slight market corrections in January. Who knows?! I certainly don’t have a short term crystal ball, but I’ve watched the real estate cycles enough times now to know they are real cycles (with real profits and losses). Recognizing the cycle at the appropriate time is the key. “Know your market”, as the old REI saying goes! It’s certainly a completely different beast to how we invest with MF rentals.

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  2. On the surface, your earlier spreadsheet showing they were getting slightly over $300 per night made it look good. But with the vacation real estate company taking 40%, the rent is really $180. The HOA and Real Estate Taxes totaling $1,100 almost equals a low interest mortgage to buy the place, and these fees will continue to go up.

    People like ourselves, buy based on what our spreadsheets tell us instead of our emotions.

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    1. Yeah – we’ll be holding off, but there is a genuine real estate mania that you can get caught up in down here. There are as many vacation properties / sales showrooms as there are knockoff Disney t-shirt shops! 🙂

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  3. I have been dragged into a timeshare seminar twice while down in Florida on vacation (free tickets, $200 cash for an hour sales pitch thing) The numbers don’t make sense. Just look at the aftermarket prices for resale of timeshares to prove it’s a bad deal. Vacation homes being an investment doesn’t make sense to me. The sales pitch lasts a lot longer than an hour and the pressure and BS numbers and points and so called benefits are shoved down your throat. It’s like talking to brainwashed salespeople that can’t see the reality since they have bought into it too. Keeping you money in the market and paying to rent a vacation home is a much better investment and provides more flexibility and less stress.

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    1. I only made the mistake of attending one timeshare seminar once. I pulled the old empty pocket routine to make the salesperson lose interest very quickly. Ironically, I had a brother and sister in-law who had much less, but never learned how to play the old empty pockets routine.

      These vacations are not free, because they cost your time. I ran the numbers and came to the same conclusion that having same funds invested at my normal expected rate-of-return afforded me the ultimate in vacation flexibility to go where I want, when I want at a cheaper price. Compounding and dividend growth keeps you ahead of the inflation that the salesmen use to justify locking yourself into a timeshare contract.

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      1. We stayed at a nice Hilton timeshare a couple years ago. A nice 2-bedroom condo was only $120/night. It was a nice resort and easy to crash the party with timeshare owner resales for the week.

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    2. We have never gone to one of those timeshare seminars. When we were first married, the promise of ‘free theme park tickets’ was compelling, but we avoided them. I’ve used a service called David’s DVC Points to buy into a Disney timeshare for a week once. I remember talking to DVC owners at the pool bar who were appalled at how little we paid to stay at ‘their resort’.

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      1. Very smart to avoid the pressures sales of timeshare seminars, we did get our gifts in the end but it was not worth the time and effort to sit through and argue. They wouldn’t take no for an answer and you end up getting pushed off to the next level of sales person….

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      2. The Finance guy on one of the businesses I led came back from Florida after buying a vacation timeshare. I thought, “what kind of Finance guy, are you?!” 😉

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