Big Bear Real Estate Investing – Frequently Asked Questions
Q: Is resort market real estate a good investment?
A: Real estate rarely loses in the long term, especially in vacation resort markets. Understanding the Big Bear Lake vacation rental market is important in supporting this point. Big Bear Lake draws vacationers from five densely populated areas – Los Angeles, Orange County, San Diego, Palm Springs, and Las Vegas. Proximity to these highly populated areas creates a steady flow of vacationers. You don’t have to be a millionaire to invest in a vacation rental home. Based on your current financial situation, you can invest in vacation rental properties ranging from tiny cabins to luxury lakefront estates. There is demand for all types of rental properties.
Q: Is now a good time to buy a Big Bear Lake vacation rental investment?
A: Any investment is a personal decision for the investor and it is his or her job to do sufficient research to make sure this is the right move for them. An important question would be, are people renting vacation properties in the current market? Yes they are. There has been a socioeconomic shift in who is vacationing and where they are going to vacation which is important to understand. Families who might have gone to Aspen, Tahoe, or Mammoth in 2005 are coming to Big Bear for their annual winter vacation because it’s closer and more cost effective. Families are still vacationing, they are simply downsizing their vacations in some cases. It is important to work with a resort market real estate expert that can educate and inform you on the details and nuances of vacation rental marketing and current economic conditions.
Q: Can I buy a vacation rental that will cash flow?
A: This is a tough question to answer because everyone’s financial situation is different. In addition, different vacation home buyers have different levels of interest for personal use. Location as well as other criteria, and different vacation rental companies have varying levels of dedication to marketing and managing the rental. It is important to do your homework, understand the criteria for a good revenue generator, and research all the vacation rental companies in Big Bear to makes sure you are setting yourself up for success. Knowledge is power.
“The first order of business when pursuing a resort market investment property is to reconcile the head and the heart.”
Q: How much can I expect to make in rental revenue from my vacation rental investment each year?
A: It is hard to make a sweeping statement that will apply to all homes and homeowners. That said, vacation rental homes tend to bring in around 5-15% of the home’s market value in rental revenue annually. For example, a property valued at $250,000 can bring in anywhere from $12,000 to $37,000 in annual rental revenue. Where your investment property falls depends on several factors such as location, size, amenities and personal use. It is important to work with an agent and vacation rental company that will inform and educate you on the criteria and practices that will maximize your revenue generating property.
Q: How can you predict if a market will appreciate over time?
A: Property value growth is an important consideration when buying a vacation rental because most vacation home owners are in it for the long term. You’ll earn revenue but it would but it would also be nice to know how your investment will appreciate. Your real estate agent should be able to inform you of current market conditions and how property values have increased or decreased in recent years. How does your agent do this? With real estate comparables in the market in which you are interested in buying. Your agent will also help you review property tax records and parcel data. This will enable you to examine how the taxes have increased or decreased over the years and also the changes of the value of the home or homes in the area.
Q: Is it better to buy a vacation home in a popular area of Big Bear Lake or a more remote area of Big Bear?
A: Where you buy a vacation rental investment will likely depend on your budget and your personal preference. A cabin in a more remote area may cost less but may be more difficult to rent. Revenue comps are important when trying to grasp the investment properties potential. An agent with a comprehensive understanding of the different areas and their revenue generating potential is critical to your investment success. Your real estate agent should be able to give you compelling fact based information on a given area’s potential. The only way an agent will be able to do that is if they are working in close relationship with a vacation rental company that has a large inventory and allows that agent to have access to the hard numbers their vacation rental properties generate. Make sure to ask your agent if they can answer these important questions to your satisfaction. Don’t settle for answers, get actual revenue comparables for the area and property type you are interested in. Remember, this is an investment, you need to see the performance of a revenue generating investment property or one like it, not just hear about what it “might” be able to do.
Q: What is the best area in Big Bear to buy a vacation rental investment property?
A: The best area is the area you and your family enjoy the most and can afford. One of the most valuable assets of a vacation rental investment is the ability for personal use by it’s owners and their friends and family. If your family prefers winter sports you will want to take a good look at the cabins close to Big Bear’s magnificent resorts. If your family likes to get out of the heat in the summer and escape to the cool mountains, you may want to look closer to the lake. Don’t forget to work your personal interests into your investment purchase. You and your family should look forward to returning to your vacation cabin every year. Also keep in mind, if you love your cabin it is highly likely that other families will love it too and want to rent it for their vacation.
Q: What amenities should I look for in a potential vacation rental?
A: The “must have” amenities vary a bit from location to location but there are some basics you need to know about. Some basic amenities are a spa, game room, boat dock, pool, garage, and pet-friendly. Other amenities and criteria will fit into making your cabin competitive for attracting renters and your real estate agent should be able to tell you exactly what those are for the property that interests you.
Q: What is the ideal number of bedrooms and bathrooms?
A: The ideal number of bedrooms and bathrooms vary. The more rooms the better because large groups like to rent out cabins and share the costs but you might not be able to afford a 6 bedroom 6 bathroom cabin. A good rule of thumb is equal bedroom to bathroom ratio or no less than one deviation. When vacationing, people generally want their own bathroom. If you find the perfect cabin for you and your family and it needs an additional bathroom, work it into you budget and add one on. There is an abundance of 3 bedroom 2 bathroom cabins in the Big Bear Lake area, a way to distinguish your cabin’s ability to rent would be to add an additional bathroom and create a three bedroom three bathroom vacation rental.
Q: How important is a view?
A: For many vacation home buyers a view is a key amenity in itself. A view will always attract more renters but you will likely spend more money on a cabin with a view. Over 70% of reservations are taken online and how your cabin represents online will make a difference. Cabins with views will draw higher rents just as lakefront cabins will. As with all amenities, you will work all the criteria of your potential purchase into the formula of your revenue-generating resort market investment property. Certain amenities such as a view will naturally attract a more upscale vacation renter.
Q: How do I determine a cabin’s rentability as a vacation rental?
A: First, find out if the home has ever been on a vacation rental program. In a vacation rental market that information should be accessible to the agent you are working with and it is a reasonable expectation for them to provide rental history if there is one. If there isn’t a rental history there are similar cabins in the area of your interest that are on a vacation rental program and your agent should be able to get their rental histories for you to review. Do not settle for “opinion” about a cabins revenue generating potential, look at actual comps.
Q: Is it a good idea to buy a fixer-upper as a vacation rental?
A: Whether or not to buy a fixer-upper is your call. While you may be able to buy a fixer-upper at a rock bottom price right now, it might require a bit of time and money before it can begin to generate revenue. If you are resourceful and experienced in fixer-uppers you might find some great opportunities, however, the further away the property needing fixing is from your permanent residence the more challenging the task of getting it fixed and functional to generate revenue. Be practical when considering a fixer-upper.
Q: What should you research before buying a vacation rental property in Big Bear?
A: If you intend to rent out your vacation property, one of the first things to check would be restrictions and requirements on short-term rentals. Your real estate professional should be able to help and you can also contact the planning department of the local government office for zoning restrictions. For example, cabins on government land may not be rented out on a vacation rental program. Your agent should be able to inform you of all these important details. Another consideration is the cost to insure the home. Make sure you have an understanding of the insurance requirements of a vacation rental property as well as the level of insurance of the vacation rental company you choose to be associated with.
Q: Is it better to buy a condo or a single family home?
A: There are pros and cons to each property type. A condo will obviously provide for easier maintenance from afar and also have shared maintenance costs with other owners in the complex. You will be able to advertise the extra amenities in the complex. For example, you might not be able to afford a cabin with a pool or boat dock but if you buy a condo, your guests will have access to the pool and boat dock in the complex. Vacation condos are also usually built in the best locations because the developers have enough money to invest in the land. At the same time there can be limits within the homeowners association when it comes to rentals. You and your renters will also lack privacy because you are sharing walls with your neighbors.
A single family home will provide for much more privacy. In general, it can be less per square foot, however, you have to maintain the exterior and grounds yourself. Make sure to get a detailed report on the revenue potential of a condo vs a single family cabin. Your Big Bear real estate agent should be able to help you with this information.
Q: Can you use an IRA when buying a vacation home?
A: Yes, you can use your Individual Retirement Account (IRA) to purchase a vacation rental home. It’s called a self-directed IRA. Realize though, if you use a self-directed IRA there are some very strict federal guidelines. Notably, you are never allowed to stay in that home. It’s to be used strictly as an investment. You’ll also need a custodian to manage the account. To find a custodian or learn more about using self-directed IRAs to purchase vacation homes, Google “self-directed IRA”. This can be an especially appealing option to investors with more than one vacation rental investment whereby the investor has a vacation rental they can use but also an investment that they do not use. It’s a good idea to consult with your CPA when considering this route.
Q: When buying a home, how do you determine whether it should be classified as a “second home” or “investment property?”
A: Mainly for mortgage purposes, you need to determine whether you will be using your vacation home as a second home or as an investment property. This makes a big difference in the kind of mortgage you should obtain. You must realize that this is only a question for mortgage purchases, how you claim your property on your income taxes is a completely different issue.
With a “second home loan” you must be able to qualify under the loan’s terms. Generally, it means you have to be able to afford it just as you would your first home. Under this loan there is no consideration for potential rental income.
An “investment property loan” is a mortgage where everyone concerned knows you are buying the property strictly as an investment. Accordingly, certain factors come into play. The bank will want to know the rental history of the property, which will be taken into consideration for your affordability factor. Also, these types of loans are considered by the lender to be higher risk. So the risk for the bank translates into higher interest rates and higher fees for you.
Q: I already own a cabin rental and am thinking of buying another. Should I buy a second vacation cabin in the same market as the first or should I buy somewhere else?
A: If you already own a second home and you are interested in another, you might want to consider buying in the same market as your current vacation home since you are already familiar with the area. However, this does not allow for diversification or variety in your family vacations. Some owners choose to have a beach house, ski cabin, and/or desert home so they can stagger their busy seasons, enjoy different kinds of vacations and also manage risk in case of a natural disaster. But this also means more research to really learn each area. A very good resort market real estate agent will be able to assist and refer you to another high performance resort market real estate agent in another market. Another option is the resort market upgrade. Once equity is built in your current mountain resort vacation rental property, perhaps it is time to start looking at that lakefront property you have always wanted or get into the six bedroom luxury cabin that is in the high end rental income bracket. Your Big Bear resort market real estate professional will be able to help you truly achieve your vacation home investment ownership dream.
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