This is part 2 of the Five Resort Plan. Read part 1 here.
The Fun Begins
We decided to check out Palm Springs. It met our criteria of being within driving distance and a resort destination where there would be demand for our house. The numbers had to check out also. The rental rate had to be enough to cover our costs (including mortgage after a normal down payment) with an overall occupancy rate of no more than 60%. A higher occupancy rate would represent heaven on earth.
It seemed to work, so we plunged in. We bought several houses within the city limits of Palm Springs. The first house was a "fixer' but the others were able to go straight onto the weekly rental market.
I started my own vacation rental business. I charged myself management fees. The break-even point for the property management business was around 12 houses, so we started out in a negative cash flow situation, but the control over our own destiny was worth the price. We knew that the concept was good. Therefore we expected our friends and clients to sign on to the "5 Resort Plan" as part of their retirement planning. We would soon have enough properties to manage to cover all our expenses and maybe even return a small profit.
I'm telling you this because you may be thinking that you can "save" the property management fee by doing the work yourself.
You will need to get the house "ready to rent" which means that it is livable without the guests bringing anything with them, except their clothes. This property is an alternative to an hotel. The guest will expect it to be like an hotel. Everything must be there just like in an hotel.
You want people to come, they need to know you're there. That means advertising. And the advertising needs to be effective. Good effective advertising costs money.
Then you need a reservation system, accessible online or by telephone (800 number), available 24/7. Just like an hotel. Guests will expect to pay by credit card. The whole reservation system needs to be professional and seamless.
Maintenance and maid service need to be provided promptly when needed.
Check-in and check-out needs to be handled professionally. Giving the guests the keys and inspecting the condition of the property, the supplies, and the equipage with them is absolutely necessary. Guests are responsible for breakage and loss and need to be impressed with the fact that you are on top of it. You can expect charge-backs if you try to bill their credit card for losses, and you haven't done a thorough check-in and check-out.
When you only have one property in an area, paying the management fee makes sense.
When we travel we prefer to stay at four star resorts. We want all of the amenities of a five star resort, but we don't want to pay for the snob appeal. We have structured our vacation rental business to be miniature four star resorts. We don't want to be the cheapest, but we do want to be the best. If the alternative to staying in one of our properties is to stay in a suite in a four star hotel, then we win the value race "hands down".
Our experience has been good. We've managed to get up and going. Our gross rental income pays most of the bills. Most of our costs are "fixed" such as mortgage payments, property taxes, insurance, and furniture amortization, while rental income should increase as the years go by. By the time we are ready to retire we should have positive cash flow from the houses and substantial equity.
Second City
After you've got your first property up and going, you can start thinking about your next one.
This plan is based on having five houses in places you like to visit over-and-over again. Five is an arbitrary number, but a reasonable one. This will let you spend 20% of your time in five different locales, without impacting the occupancy rates for your houses in a significant way.
You may decide that one is enough for you, or you may want ten different places. Everybody is different, both as far as desires for the future and their ability to achieve those desires. Do what is comfortable for you. Remember, this is for your retirement.
Chicago may be America's Second City, but Lake Gregory (Crestline CA, 12 miles straight up the mountain from San Bernardino) is ours. The weather is really nice during the Dog Days of summer when Palm Springs is experiencing 100+ degree heat every day.
We weren't able to find a house in Crestline that satisfied our needs for our personal use and for the vacation rental business, so we decided to buy a lot and build a "perfect" house. Construction in resort areas presents a multitude of problems, but sometimes it is the best choice if not the only choice. One of the main considerations is that it takes a lot of time and attention. One of the main benefits is that you get exactly what you want.
Our lot is only a short block from the lake with a magnificent view. We contacted an architect and a surveyor (for a grading plan). We wanted to maximize our enjoyment of the property. Burrowing into the hillside allowed us to park at street level, and building the house above the garage increased our view of the lake. Like I said, when you build you get what you want, you don't have to settle for what somebody else wanted.
Rental rates at Lake Gregory are half what they are in Palm Springs, but the rental season is longer (all year ‘round). We expect Lake Gregory will be a very good choice for our five resort plan.
We are just getting started. Other places on our list include:
Flagstaff, AZ
Oceanside, CA
San Felipe, BC (Mexico)
Panama City, Panama
Rio de Janeiro or Buenos Aires
The Dalmatian Coast (Croatia)
Where do you like to go? Please let me know. Maybe we'll like it too, and add it to our portfolio. Any other comments you may have are also welcome.
This is a "fictionalized" account of actual events. Names and numbers have been changed in the interest of confidentiality. You should not rely on this information as investment advice, but rather you should seek advice from a trusted investment advisor.
You can read the entire series starting here.
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