Mid-Upper level Gated community home - instead of selling/leasing - thinking of renting it out as a short term vacation rental

It may be different in Fullerton, as that's not really a "hot spot" for vacation rentals, but here on the Central Coast, you need a business license, there are zoning restrictions regarding the number of short term rental properties in a given area, and you have to pay "bed taxes" to the city. If you get caught operating a vacation rental without all the necessary permits, etc., the fines are quite high. (And everyone seems to eventually be caught, because the neighbors complain.)
 
My image was unduly coarse, and I half heartedly apologize for using it ? to be honest, I?ve been saving it for a special occasion. This is that occasion. Yours is an exceptionally bad idea, however, my explanation was exceptionally light on analysis and exceptionally personal ? everything in proportion! Assuming that I got your attention, and because I kind of owe it to you, lets do some basic cash flow analysis and see what this project really looks like.



I'm going to take a flyer and guess this home sells for about $800K in today's market - but I'm going to take a conservative line and use $600K as a baseline. OP estimates $1500-4500 a month, and I'm going to be extra conservative and assume they will have zero vacancy and get $5000 a month. Since this is a higher end home in a nicer North County neighborhood, it hasn't corrected yet, and could lose as much as 30%+ YOY but I'm going to be insanely extra conservative and assume it's only going to back up 15%. This is a Fantasyland cash on cash projection ? it has as much chance of coming true as the Kings winning the NBA championship this year:



Cash flow in (blended rental rate x months x occupancy rate)

$5000 x 12 x 100% = $60,000

Cash flow out (current market price - future market price)

$600,000 - ($600,000 x 15%) = - $90,000

Estimated Fantasyland YOY Return = -$30,000. Not sexy.



Here's a more real world guess on what this deal looks like, and I'm still gonna throw them a bone on the rental rate and occupancy:



Cash flow in (blended rental rate x months x occupancy rate)

$3500 x 12 x 80% = 33,600

Cash flow out (current market price - future market price)

$800,000 - ($800,000 x 30%) = -$240,000

Estimated more realistic but still optimistic YOY return -$206,400. Really, really not sexy.



Here?s what I think will really happen:



Cash flow in

$6000

Cash flow out

$800,000 - ($800,000 x 40%) = -$320,000

Total loss YOY = -$314,000.



Except I haven't figured in any maintenance or cleaning or admin costs yet ? so the reality the reality is far worse. There?s nothing I can do to make this deal cash flow positive.



<a href="http://www.vacationrentals.com/vacation-rentals/Newport-Beach-California.html">And then there's your Newport based competitors ? you?ll need to be at a discount to these folks.</a>



<a href="http://www.calculatedriskblog.com/search/label/Hotel">Plus, there's no shortage of hotel rooms these days.</a>



And then there's this:



[quote author="IrvineHousingBlogFan" date=1241236992] We would live less than 10 minutes away so we would be able to easily come by if any issues developed but it might be a headache. Good idea about letting our neighbors use the home to relatives/etc. </blockquote>


It's not far enough if your former neighbors decide they've had enough of your tennants nonsense. Not only can you be in your former hood in ten minutes, your former neighbors can be in yours in ten minutes.



IMO this ? <em>hands down</em> the worst investment plan I've ever seen posted on this site, and we've had some doozys. The only rational solution to your problem is sell the house and rescue what?s left of your equity.



I?d be interested to see what your analysis looks like, or if you disagree with my numbers.
 
plus, iirc, most short term management agencies take ~50% of gross for cleaning and renting, for vacation houses that rent out on a weekly basis.
 
IHB Fan, my answer to your questions "how would it feel to be a neighbor to this house?" is that I would be ticked off and i'd try to report you to the police. But when i realize that the police won't actually do anything and that i'd have to actually go to city hall and find the right person to start a case against you and that case would take at least a year to build, i'd give up the fight and occasionally let me dog crap on your lawn.



While i do agree with most everyone on this forum that operating your home as a vacation rental is, well, I don't know, calling it retarded would be insulting to actual retarded people, I do think there could be a market for periodic leases for fully furnished homes as people either need a place for a month or two as the leave the county, enter the county or before they get married or something. As everyone mentioned before, much much more risk, but you can charge a very hefty premium (which, in my opinion would be nowhere close to justifying the risk),
 
[quote author="tkaratz" date=1241332194]calling it retarded would be insulting to actual retarded people</blockquote>


Are you referring to yourself? Serious question.
 
[quote author="asianinvasian" date=1241335256][quote author="tkaratz" date=1241332194]calling it retarded would be insulting to actual retarded people</blockquote>


Are you referring to yourself? Serious question.</blockquote>


Make this warning number 2. We are all playing by the rules now, and either you will too, or... just us mods will and you know what will happen then. No more name calling or personal attacks.
 
Aside from all thats been said - which is completely awsome- you have to look at your time. If you think this investment will be cheap and easy, it won't. I've been in the rental business (as a land lord) for a while now. I hate it and still hate it, I have an agency do it because it saves my sanity. This thing will gobble up all your time and effort, but if you want to take a gamble on it. By all means do it.



Just let us know the real outcome, I promise, I won't bag on ya. I've made my own mistakes and paid and paid and PAID for them. I'm happy to be a poster child so that other people may learn.



NoVas's numbers are a good 1st cut, they need refinement, but really its a ROM (rough order magnitude) calculation. It isn't pretty and it shows you the MANGNITUDE you'll be hemmoraging in cash. No amount of taxes will help you at that point. If you want and can afford it, go for it. Whenever I get a long term rental, I usually calculate a 30% vacancy fee. Not pretty, but it has never failed me yet.



Anyways good luck

-bix
 
[quote author="biscuitninja" date=1241393246]NoVas's numbers are a good 1st cut, they need refinement, but really its a ROM (rough order magnitude) calculation. </blockquote>


The only way my numbers need refinement is if somebody wants to be real precise and figure out how much money they are going to lose.



Or, it's like waiting for a train to wreck when a bridge washes out. You know the outcome will be horrible, the only thing to speculate on is how many cars are attached to the train!
 
[quote author="graphrix" date=1241358448][quote author="asianinvasian" date=1241335256][quote author="tkaratz" date=1241332194]calling it retarded would be insulting to actual retarded people</blockquote>


Are you referring to yourself? Serious question.</blockquote>


Make this warning number 2. We are all playing by the rules now, and either you will too, or... just us mods will and you know what will happen then. No more name calling or personal attacks.</blockquote>
I think AI needs a temp ban to sit in the corner and think about what he did....you gots the power, make it happen!
 
<blockquote>"OK, so now it?s official. The first quarter of 2009 experienced the worst year-over-year revenue per available room drop in the U.S. lodging industry?s organized history."

</blockquote>


<a href="http://www.calculatedriskblog.com/2009/05/hotel-revpar-worst-year-over-year.html">http://www.calculatedriskblog.com/2009/05/hotel-revpar-worst-year-over-year.html</a>



Fresh off CR, it seems timely.
 
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