Find out if owning an investment property is right for you . . .

Owning an investment property in a busy tourist area like Orlando usually falls into two categories:
1)For personal and family vacation time, but renting out to tourists the rest of the year.
2)Purely for investment and rental income purposes with no personal use, rented out twelve months of the year to a local resident.

Vacation rental property considerations
Most buyers in our area tend to opt for the first option, mainly because of the benefit of personal vacation use throughout the year whenever the opportunity arises. Most of these buyers realize that the rental income will generally offset most of the expenses, but will not usually produce a profit, nor even cover all of the expenses involved. This is particularly true if the property is financed and mortgage interest becomes a substantial portion of the expenses.

Electricity and water costs are much higher when rented out to tourists, who take lots of showers and run the air conditioner longer. Furniture and housewares need to be replaced more often and more repairs will be needed. A good property management company needs to be hired to keep the property in tip-top shape for tourists, who will not tolerate shabby or unclean rentals. A flow of rental bookings is important, so owners can either market the property themselves via the many online vacation rental websites and other means, or they can hire a management company who produces rental bookings. Most owners use a mix of the two methods, but the more owner bookings you get, the higher the income, because management companies will deduct a commission on bookings they provide and also their source of bookings may well be lower priced wholesale bookings from tour operators. Some companies offer guaranteed rental programs, but although there are a few legitimate companies out there, you need to look very closely at what is being offered. There are often restrictions on personal usage time, requirements to buy only certain properties that are higher priced to begin with, plus sometimes difficulty getting paid what is owed. Generally, whenever things are "guaranteed", you are paying for it somehow!

The most successful short term rental property owners are those who are more "hands-on" and involved with bookings, as well as keeping a close eye on how the property is being managed. Not everyone wants to be so involved, but this type of property is very attractive to many people who are happy to own a piece of the Florida sun that they can visit whenever they like, while at the same time mostly being paid for by rental income.

Long term rental property considerations.
Operating costs are lower because the tenant pays their own electricity, water, phone, internet, TV and sometimes landscaping. Monthly rental income is constant and fixed for the term of the lease (usually twelve months, with many tenants renewing the lease at the end of the term).

Unlike tourists, who always need a pool, many residents are not that concerned about having one, so many long term rentals don't have pools. If you do have one, we always recommend that you pay for a pool service, rather than expecting the tenant to handle this on their own, because many tenants will not be as diligent as they should be when taking care of a pool, which can lead to unnecessarily high expenses in the long run for future repairs. Most tenants expect to pay more rent for a house with a pool, so your pool service fees should be covered by that. Also, most tenants prefer unfurnished homes, so there are no furniture replacement costs and generally less repairs.

Consider location before you buy.
If you are sure you never want to rent your property short term to tourists, then the entire area is open to you (although there are a few neighborhoods which do in fact restrict the percentage of rentals). If you do want a short term rental property, or you think you may want to in the future, you need to be sure your property is located in one of the many properly zoned short term rental neighborhoods in the Disney area. The benefit of buying in one of those neighborhoods anyway, regardless of the type of property you are considering, is that a short term rental zone is also good for long term rentals. That way, if you start off renting short term and decide you want to convert to long term rentals, that is easily done. However, you cannot convert from a long term rental to a short term rental unless you are in a proper zone.

Dolby Properties has specialized since 2000 in selling both vacation rentals and long term rentals, so we know the rules and regulations of various areas. We also know which neighborhoods are popular with tourists and which residential neighborhoods are best for long term rental tenants. You need proper guidance with this, so make sure you don't make a costly mistake by going it alone or using an agent without the proper experience!

Below is an estimate of income and expenses on the two types of rentals.
If you do have a mortgage, a portion of the mortgage payments indicated will be applied to your principal mortgage balance, so any negative cash flow is not actually a loss. Net profit (or loss) does not take into account income taxes, which are personal for everyone, but generally speaking, most people will have little or no income tax liability after taking into consideration the allowed tax depreciation. In addition, you should expect that your property should increase in value by around 5% per year, but of course this depends very much on what is happening with market conditions at any given time, which we have all experienced this past few years worldwide, can never be guaranteed.

Alternative # 1-SHORT TERM RENTALS (updated Aug 2016)
Rental income shown is for a typical Disney area furnished vacation home with private pool. It assumes a total of 39 weeks of rental, after paying out commissions to travel agents and other rental agents, but including several weeks of renting out the property yourself. Please note, it is highly unlikely that you would achieve 39 weeks bookings unless you are actively involved in obtaining your own bookings through marketing the property yourself, rather than expecting this from all management company bookings.



 

3 bed villa
(average $200K)

6 bed villa
(average $290K)

Rental income

$ 23,400 (11.7% gross ROI)

$ 34,125 (11.8% gross ROI)

Expenses:

Property Taxes

$ 3,000

$ 4,000

Insurance

$ 1,400

$ 1,700

Pool/Lawn care/Pest control

$ 2,500

$ 2,500

Utilities

$ 4,600

$ 6,400

Management fees

$ 1,200

$ 1,200

Assoc. fees

$ 500

$ 800

Rep & Mtce and furniture replacement.

$ 1,750

$ 3,000

Cleaning(25 cleans&1 major)

$ 2,050

$ 2,625

Licensing, ads & other Miscellaneous

$ 1,000

$ 1,000

Total expenses

$ 18,000

$ 23,225


Net profit before mortgage


$ 5,400 (3% net ROI)


$ 10,900 (3.9% net ROI)


Mortgage payments, based on 35% down payment,

30 year amortization at 5.00% interest




$ 8,376



$ 12,144

Net cash flow after mortgage

negative ($ 2,976)

negative ($ 1,244)


Alternative # 2 - LONG TERM RENTALS (updated Aug 2016)
Rental income shown is for an average $170,000 property, with no pool, suitable for long term rental, with 35% down. We would advise that for this type of investment, it is better to buy lower priced homes without pools, since they are generally easier to rent out. The estimate below does not account for any vacancies, but with good management, vacancies should be kept to a minimum.


Rental income for 12 months $ 14,400 (8.5% gross ROI)
Expenses:
Property Taxes $ 2,500
Insurance $1,200 (less than short term rentals)
Management Fees $ 1,440 (based on 10% of rent)
Homeowner's association fees $500
Repairs & Maintenance & Misc $1,000 (less than short term)

Total expenses $ 6,640
Net profit before mortgage payment $7,760 (5.2% net ROI)

Mortgage payments (based on 5.00%) $7,116 
Net cash flow after mortgage = $644

PLEASE NOTE, NOT ALL LENDERS WILL LEND ON LONG TERM RENTAL PROPERTIES, SO MOST INVESTORS NEED TO BE PREPARED TO PAY CASH.

For those thinking about venturing into becoming a landlord, you might find the following information about the FLORIDA LANDLORD TENANT LAW very useful.

To discover if owning an investment property in the Orlando area is right for you, contact us today and we'll be happy to help you with that decision. Click here to e-mail us at lesley.dolby@dolbyproperties.com


Dolby Properties Inc
Dolby Properties Inc
(407) 352-3664