Gut Check: Saying No – Beach Property
Our last real estate investment was being renovated in the fall of 2021, Property #6, just months after my son was born. The conclusion of that project warrants another post so it will be in the pipeline. Since then, a few properties came across our research, but we ultimately said “no,” to these alleged deals. This post looks at the potential for a resort condo, which we learned has its own category when looking for both insurance and loans. The other opportunities, which I’ll cover in a later post, involved some single-family and multi-family houses in Oklahoma, the market where we originally focused our investments. Another review looked at a townhome (attached housing) in an HOA in the community where we have our primary residence.
Last summer, we were at dinner with a couple that owns a condo on Siesta Key, one of the highest rated beaches in Florida and the United States. Our friend acquired his property from a minor celebrity years earlier at a good price and lower interest rate than today’s. He mentioned that one unit was for sale in the building and a second one was not yet on the market. The condo’s property managers run the rental program. Owners let the property know they’d like to rent their place and block out any dates as needed.
Our first year in Florida, our friends invited us to the beach at their condo. The property has several tennis courts, two pools and beach equipment to rent. And parking! My son was only a few months old and we didn’t have to schlep beach chairs or a canopy, in addition to all the baby things. We talked dreamily about how nice it would be to wake up and walk right out to the beach.
The exterior of the building was dated, but not unfamiliar in design for the west coast of Florida. This state is big on homeowners associations (HOAs) and the fees for beachfront property are generally in the range of $1000 to $2500 per month. The cost covers property management, pool maintenance, insurance, and some utilities. This building’s HOA fees were only $800 and the last time they had an assessment (an extra charge for a repair or project) was about 10 years ago.
All this sounds amazing – great location, low HOA fees and the beach! We contacted the agent listed on the properties. Later that week, Chad and I left the kids with the grandparents and drove over to Siesta Key to look at the properties. The breeze off the ocean filled me with rapture. The salt air made me nostalgic for the summer family trips that I loved a kid.
One property was a 3/2 and the other was 2/2. Both were probably renovated in the 1990s, but really only needed refreshed paint and a little decor to make it look modern. However, one was listed for $1.1M and the other was $850,000.
We talked to a broker about what the cost of a mortgage would be. Because the properties were resort-style, it came with a different interest rate, a higher one than a single family home. Despite our good credit score, we were looking at somewhere between 8.5 and 9.5 percent interest.
Our friend who owned a place there told us that he averaged around $30,000 in profit a year. The agent also mentioned a similar ball park. A $1M mortgage at 8.5 percent would require around $6,500 month plus another $800 for HOA fees. Due to the location on the beach, insurance was also higher; however, it was folded into the HOA fee.
As I mentioned in the last post, I planned to quit my job and homeschool our two children. The monthly mortgage rate would require I stay at my job. We looked at different down payments and other strategies that included the potential partnering with friends and family. If we didn’t, even adding the profit from our Oklahoma properties would not be enough to fully supplement the payments. If we proceeded, we would literally be living to pay for the place.
We analyzed several real estate strategies and value adds:
- Would the joy of having access to the beach, the view and family memories compensate for the money suck this would be on our discretionary funds?
- The expected $30,000 profit ($2,500 per month) would leave around $4,000/ month plus the HOA fees. This monthly payment would rule out homeschooling as I’d need to remain in the workforce. We’d be restricted to staycations at the property and put us in a crunch if we needed to make a large purchase or wanted to do any home projects. We did not like the idea of a property driving our lifestyle.
- If interest rates went down, what rate would make the mortgage payments cash flow with the current income?
- An interest rate of nearly 7 percent would mean mortgage payments of $5,700 plus the $800 HOA fees. It would make the purchase more palatable, but we could not say how long we’d have to pay the higher rate.
- If we held it until interest rates went down, could we do an appreciation play in a few years and make bank on the sale?
- Nothing is for certain. It would be a gamble at best to hope interest rates would go down soon and that real estate market didn’t flatten (slow appreciation) or know how much appreciation could be achieved in a couple of years.
In the end, we weren’t willing to take the risk. It put our financial freedom and independence on the line. We valued those more than we valued the potential gains from this beachfront property. Instead, we decided to increase the cash flow from our existing properties by paying off some of the loans to help cushion us, if we needed additional funds.
Six months later, around a month after I left the workforce, Chad and I knew we made the right decision to say “no” to this property. I’ll elaborate in another post about how 2024 has been like no other for us.