In this article, I will explain the differences between purchasing a short term condo versus purchasing a home. There are many factors that come into play and one isn't necessarily better than the other. It comes down to your expectations, amount you are willing to spend, and how involved you want to be with your property. If you want more information on short term rentals in general mostly condos due to their complexity, read my previous article "What to know before purchasing an investment property in Myrtle Beach." Feel free to comment and share!!
Short Term Rental Homes Vs Condos.
First, a short term rental is defined as a rental that is on a weekly or monthly basis, also known as a vacation rental (Anything 6 months or longer is usually a long term rental). A vacation rental property can be a home or condo and must be in what is called the "short term rental zone." This means that the area it is located in is suitable for short term rentals and that it is allowed. Typically anything on the east side of highway 17 (ocean side) allows short term rentals but not always. Ask us or your realtor and we can check and see if a property is suitable for short term. You can go the route of buying a home close to the ocean and renting it out short term or buy a condo and renting it out. Which route you go depends greatly on the funds you have and what you're willing to spend.
A home close to the ocean suitable for renting will usually be very large and able to sleep a great number of people, thus maximizing occupancy which is critical for short term rentals!! A lot of beach homes that are rented out have anywhere from 4-8 bedrooms and 3-5 bathrooms and are ocean front or walking distance to the beach. Obviously, a home close to the beach will be very expensive so if you have limited funds, you will have to go the condo route which is a whole different ball game. The great thing about buying a home over a condo if funds allow is that usually, beach homes don't have HOA fees or Home Owners Association Fees. The fees are typically high on ocean front condos and always go up not down. Not having that fee at all is a huge plus and is one reason many investors choose homes over condos.
Also, since you're not in a building that has a management company in place like many ocean front properties, you can pretty much use any management company you want or self manage if you have the time to do so. The management fees for a home are also usually less than the onsite management fee of a condo. Usually anywhere from a 10-20% management fee which they take out of your gross income. Each property management company differs on their rates but you want to find the best one for your property. I'd rather pay 20% to a company who will market my property well and keep it occupied more often than pay 10% to a company who doesn't market it well and keeps my property vacant more often than not. So shop around if you choose not to manage yourself or ask your realtor for recommendations. Two main things that determine how much you can charge for a short term rental are occupancy and amenities. The more amenities you have, the more you can charge. The more people you can sleep, the more you can charge. Homes win at occupancy, and condos win at amenities typically.
Now that you understand the gist of a short term home rental, let's talk about condos. If you've ever stayed at an ocean front resort with a check in desk that seemed like a hotel, it actually may have been individually owned condos that the company onsite just manages and runs like a hotel. If you have been to Myrtle Beach and stayed ocean front, chances are high that's exactly what you stayed in unless you were at a well known hotel chain like Hilton, Mariott, etc. Basically, people buy condos in a building that is managed by what they call an "onsite rental company." This company charges a rental split, usually between 35-50% and manages the property, markets it like a hotel would, and has an onsite housekeeping, maintenance and room service much like a hotel. You also have HOA fees that you have to pay that usually include your home owners insurance, and some if not all utilities and access to the resort's amenities.
You're probably already weighing out the pros and cons in your head of condos versus homes right now. So let me list them before I go further. Homes you don't have HOA fees, but you will pay your home owners insurance out of pocket and not in a bundle package like with a condo. HOA fees on an ocean front condo almost always include the home owners insurance but ask your realtor to double check this! But, HOA fees never go away so that's a plus for homes. Also, you noticed the high management fees for an onsite rental company. Another plus for homes. But there is a convenience you have with condos where everything is taken care of and included for one fee and you don't have to go out and look for everything. With condos, you will have an onsite maintenance. With homes, if you manage yourself you will have to find someone to fix issues when they arise and believe me, they will arise! If you use a property management company with a home, they contract out people or have their own maintenance to fix issues but they aren't onsite obviously so guests will have to wait until the maintenance person shows up to have anything fixed. With a condo, they are always onsite ready to fix any issues that come up just like a hotel. Also, taxes are most likely going to be higher on a home than on a condo for obvious reasons, especially when taxed as a second home or investment property (6%).
So now that you understand the differences, you probably want to know why you would go the condo route at all with such high rental splits as well as HOA Fees. Well there are only two reasons, money and convenience. If you don't have a substantial amount of cash ($500,000) or more to buy a home or can't finance that amount, you probably won't be able to get a home and will have to pursue the condo route. Just finding a home close to the beach for the price above or lower is highly unlikely which is to be expected. And if you don't have the time to self manage or deal with an offsite rental company which is what you're using with any home, a condo may be a better route to go due to the all inclusivity of condo rentals.
The reason condo HOA fees are so high (usually $500-$1,200 a month) is because the fee covers your home owners insurance, your internet, cable, electric, water & sewer, trash, and access to all resort amenities. If you had all of those things in your home, you might be spending around that a month anyway because I promise you, your guests could care less how many lights are left on as they come and go while on vacation. So to have that all included and not worry is "convenient." The reason the rental splits are so high with onsite rental companies like mentioned above (35-50%) is simple. They know they can charge it and get away with it. It sounds horrible, but they are sometimes a necessary evil. These rental fees are taken out of your gross income just like with a home. They include the marketing of the unit, having the 24 hour onsite services like front desk, room service, maintenance and housekeeping as well as access to the resort amenities. So if that isn't worth 35-50% of your gross income to you, you can try using an offsite company to manage your unit.
But wait, can't you only use an offsite company for homes?
No, you can use an offsite company to manage a condo unit in a building that has an onsite management company in place. NOT ALWAYS, so check with your realtor. But most of the time, you can use an offsite company. But there is a catch sometimes. Of course there is right? First off, if you use an offsite company to manage the unit in a certain building, the onsite company located in the building will not rent your unit out at all. This means that any direct call ins to the resort will never have access to your unit whatsoever. They also lose access to the onsite services like housekeeping, maintenance etc. You can probably see how that could cause problems. Also, SOME BUT NOT ALL onsite companies will not let your guests use the resort amenities (pools, gym, lazy rivers, etc.) if you rent through an outside rental company. Who wants to stay at a resort where you can't use the pools at the resort? So that's where the "necessary evil" comes into play. Not all resorts do this but it is imperative that you check and make sure before you purchase any condo. Also, an offsite company from my experience usually generates less gross income for your unit because it's just tough to compete with the actual onsite company.
The best way to see if you should go onsite vs. offsite with a condo is seeing what similar units "net" with onsite and offsite in the same building. Onsite company A might generate $40,000 a year but after expenses, you only walk away with $10,000 whereas with offsite company B, they might only generate $30,000 a year gross but you walk away with $15,000 in pocket due to less fees. It's recommended that you find a good realtor to run these numbers for you due to hidden costs you might not find on your own!
I mentioned that Occupancy and Amenities play a huge role in what you can charge for a property as far as renting it. Resort style properties typically have a whole different feel than homes and a lot of people prefer that. You have lazy rivers, multiple pools and jacuzzis, water parks sometimes, gyms and onsite restaurants. Unless you plan on adding all of those things in your home and I know you don't plan on it, that is a huge plus of the resort style condos. When it comes to occupancy though, most resorts have 1,2 and 3 bedroom units. Well some families come down in large groups or students come down from college in a group of 20. Or a family of 10. You can't always squeeze them in a 3 bedroom condo. A home works perfect for them and $3,000 a week doesn't sound expensive when you split it 15 ways.
Realistically, a home is usually going to bring in more gross income annually. It just will due to occupancy allowance alone. But if you can get 3 condos for $200,000 a piece and make the same amount of money as 1 $800,000 home and save yourself $200,000 grand, why not? It really just depends on your expectations and what you can spend. If you have unlimited funds to spend and want to buy a home, that's a great route. If you have $200,000 and want to get a condo that will make less money but a similar return on investment, you're still doing well. If you don't know which route to go or are torn, contact me and I can explain in more detail the pros and cons of each and help you decide.
I will end the article on this note. If you have enough money and can go the home route, I recommend it. If you still want to have a great investment property but don't want to spend a substantial amount of money, first read my article that I mentioned at the top of the page as it explains condos in great detail. If you still want to go the condo route after reading it, contact me and I can guide you in the right direction from there. Although there are pros and cons of both, they both can be great income producers and I wouldn't shy away from either one. It really just comes down to your personal situation and what you feel more comfortable with, what kind of return you expect, how much you are willing to spend, and how hands on you want to be. I mentioned that you could self manage a home above if you wish. Just in case that's the route you want to go, you can self manage a condo as well. But check with the onsite company and make sure they don't have any restrictions if you choose to do so or it will impact your income!
I hope this article was helpful, and check back later as I will have an article up comparing long term rentals vs. short term rentals in case long term is a route you're interested in as well. Thanks for reading!