Condo Fees & Ins????!!!!

It is going to be tough to rent it for that much for that long. June-October are slow months and you will be able to rent but not for the price you need to. Condo fees here are so high because insurance is terribly high and water is expensive. You will end up paying 5 cents/gallon in most condo complexes. Buy a house with an apartment.

This topic comes up fairly frequently and if you do a search on condo fees you will find plenty of additional information, but basically the fees reflect the reality of living in the islands, where hurricanes (and believe it or not the potential for earthquakes) mean higher than normal insuranse risk, and warm humid weather means higher than normal maintenance costs related to termites, rust and wood rot. You will experience the same issues owning a house.

Donna is correct -- owners rent properties either as A) long term rentals with much less monthly income or B) short term rentals with much higher rates but a lot of vacancies, particularly in the off season. I would have to say that a fully financed property, whether house or condo, is not likely to have a break-even cash flow either way. Most owners either have very small mortgages or depend on the property's appreciation to make their return on investment.

Jay:

SailAway summed it up. Property ownership is expensive in the VI. Makes no difference if it is single family or a condo.

Condo fees may seem high on paper, but when you look at the costs of maintaining a single family home not much different in annual outlays unless you are going to do a lot of the work yourself and have the skills necessary.

The high costs of homeownership is part of the reason there are so many housing blocks (housing projectsts) in the VI.

Look at the bright side, no heating bills.

Jim

Jim,

You certainly have a way with words. I always look for your letters because I find you a wealth of information. I remember your letter earlier this year when I was looking at condos and you gave me a lot of good information.

Sharon

I'd hazard a guess that there is some "magical" number of fully financed units that would allow for "free" owner housing and still be cash flow positive when rented out short term to tourists.

I understand that many factors are involved in determining what that magic number might be.

Major Factors:

1 Total number of units
2 Cost per unit
3 Interest rate
4 Maintenance Fees
5 Insurance Costs (Fire, Flood, Hurricane, Earthquake, etc)
6 Amenity Fees (Pools, Golf, Tennis, etc)
7 Peak Season Rental Rate
8 Off Season Rental Rate
9 Average Annual Income per Unit
10 Taxes

Now, if I assume 175k purchase price per unit (St Thomas) in one of the middle tier complexes, what kind of numbers should I plug in for items 4 thru 9?

Some of you "on-site" guys help me out here.

Jay: If you are going to try to make sense of everything in the Virgin Islands, you are going to burn out quickly! 😉 I can't help you with your magic number, but I want to agree with all of the above that it is just plain expensive to own property in the VI. If you decide to continue to look at condos, you also need to be aware that associations have different rules about renting. Some allow individual owners to rent short term (hotel) and some require owners to go through a particular management company. Some allow 3-6 month rentals, others require a year's lease. Each association handles the insurance issue a bit differently, but there was a hefty increase a couple of years ago. I don't think it is uncommon to pay more in association fees than on a mortgage.

Jay:

I will send you my numbers latter when I find my spread sheet.

What you will find out if you follow this board long enough is people moving to the islands always want to pay $1,000 a month to rent a two bedroom unit. My condo fee including structure insurance is $800 a month, contents insurance another $180 per month and property taxes $75 per month.

Even if you own the condo outright you are under water everymonth.

Snowbirds will pay more for a seasonal rental ($4,000 - $5,000 ) but that is only for two or three months during season.

Property values have appreciated in the past twenty four months, so breaking even on rental property if you purchase it now will be even tougher.

You can eat operating losses in the Contienental US because you hope to be able to flip the property for a profit in a few years. Property appreciation in the VI is much more uncertain. I know of well maintained condos that sold for $300K in the 70's. In 2003 you could buy them for $150K. Blaim it on hurricanes or whatever, but real estate in the VI doesn't have a good recent track record as an investment.

Jim

Thanks Jim.

And thanks to everybody else for their comments as well.

I'm just trying to explore ways I can effectively utilize the capital I currently have to lessen the amount of money I'll have to earn once I move there. The better I can do that, the sooner I'll be able to make the move!

I've been a fairly well compensated person the last few years and I seriously doubt there is any way I'll be able to match what I earn now down there. In fact, from reading the board, $400 to $500 a week might be the MOST I can expect to make at first until I learn some skill set that is in demand there.

Like I said in my earlier post, if I can figure out a way to live essentially rent/mortgage free using my current savings, meeting day to day expenses shouldn't be a problem.

Jay, what East Ender said.

The problem is that a "Magic" number is exactly what we are talking about -- the kind they teach at the Hogwarts School of Real Estate!

Until Jim finds his spreadsheet, I can offer this:

Number 9 is the bottom line that depends on 7 and/or 8. You either rent long term or short term -- not both. Short term is always furnished with utilities and other services included, long term can be either. True, you can rent short term and occasionally get someone who rents at half price or so for a few weeks during the off season, but as Jim implied, you will still end up with a lot of vacant time. Figure gross annual income that is higher than long term by around 25% or so, but with higher expenses as well.

Numbers 4, 5 and 6 you already know. You've been looking and you've seen the realities. A few years ago there were one or two associations that had lower numbers because they were deferring maintenance, but that eventually caught up with them in the form of higher fees and lagging property values. You just can't pretend termites and rust don't exist. You also can't "self-insure" and get a bank loan.

So what you really need to do is fix 1, 2 and 3. Fortunately, this is easily done by buying books and tapes from Robert Allen and Carlton Sheets. Once you've learned their techniques, go out and convince owners that you are doing them a huge favor by buying their properties at 50% to 75% of market value with nothing down and paying 1% interest only payments for 5 to 10 years. (Naturally, this should be a win-win for both you and the seller.) Do this with a dozen or so properties each year and I guarantee you will have tons of positive cash flow and be richer than Oprah in no time.

Sorry for being a little glib. I hope my words are taken with the humor that was intended. I know you are serious in your inquiry and I really do wish you the best. But there really is no "magic number" that makes real estate in the VI make sense. The magic is in the water, the air, the islands and the people.

Post Edited (08-19-04 17:32)

Now now SailAway! No need to get testy! 🙂

The reason for including 1, 2, and 3 is that, assuming each unit makes a net profit (and I realize that is an assumption), the more units you control, the more money you make. The key of course is the marginal operating expense of each additional unit and ceasing to add units once that number increases above the net additional profit. THAT is the magic number.I never said it would be simple.

I think I said in a previous post that, for the purposes of this exercise, I'd do only short term rental, i.e. one or two weeks at the most. Since you appear be quite knowledgable on the topic:

How many weeks per year could a unit reasonably be expected to be rented? (on average of course) 20? 25? 30? 35?....???

What are reasonable weekly rent expectations for peak and off-peak seasons? $750? $1000? $1250? $400?

The tone of your posts seems to indicate that you believe nobody makes a profit renting Real Estate on St Thomas. The plethera of condos and resorts and hotels would seem to contradict that theory so apparently it IS possible to achieve a positive cash flow there without violating any laws of physics.

Vacancy rates are about 60% in St. Thomas so start from there when trying to figure your annual rental income. If you rent short term your first few years are going to be a higher vacancy rate while you advertise and build a clientile. I know Sapphire studio condos that get $110/night in high season (possibly they could get more during Christmas week and President's Day week.) During low season they get around $80/night. Remember that there is a 4% gross receipts tax so that will come right off the top. This should give you some ideas so you can get a rough estimate.

I still say look at buying a home with apartment instead of condos. The reason is that you have CONTROL over your expenses - such as insurance, maintenance, etc and expenses do seem to be significantly less than condos. Or look at homes with several units - they are out there - or apartments and then buy yourself a condo. There are some complexes that have lower fees.

Another thing to consider is that rents have increased so much over the last two years that you may do better renting long term that doing the short term rental thing.

Sorry to leave the wrong impression on owning real estate in the VI's. Thanks in part to the EDC, real estate values have risen quite nicely over the last year or two. I didn't mean to imply that investing in VI real estate is unwise (although Jim's point about roller coaster values in the past is well taken). In fact I believe the opposite.

But there isn't any place in the country where you can realistically buy property for nothing down and expect a 150% cash-on-cash return from rental income. And that's exactly what you apparently expected from the numbers you gave. You talked about $500,000 in mortgages on three condos worth $167,000 each -- that's over 100% financing -- and you wanted to rent two of the three and see enough positive cash flow to cover the costs of the third.

I wasn't clear that you were talking about short term rentals only, sorry. You mentioned an occupancy rate (48 weeks) that is only realistic in the long term market and a regular income, so I was a little confused.

Anyway, I certainly encourage investing in real estate (that's been my business for 25 years) and I think the future is bright for property in the Virgin Islands. But even with 20 to 25% down I would expect to see no positive cash flow before taxes for the first few years because values have outpaced rental rates. After taxes the return on investment looks much better -- real estate is hard to beat in that regard -- and that is exactly why you see the plethora of condos and resorts you mentioned.

But real estate is a long term investment and that's where the real return is. Over time rents will increase and before-tax cash flows will go from negative to positive, eventually providing real income you can actually spend on other things besides paint and new faucets. When the mortgage pays off things get even better. And in the meantime the appreciation in value will be the greatest benefit of all. Can you believe there was a time when you could buy a home in Malibu for $30,000?

But with a fully financed purchase you have to expect to "feed the beast" for a while, so I couldn't help but laugh at your idea of a magic number. It's not laws of physics, it's laws of mathematics. I give up -- how many properties DO you need to buy at a negative cash flow before they cover your expenses? (Sounds like the same "new math" the VI Territorial Government uses in their budgets!)

I'm probably not the best person to answer your questions on specifics, since I don't deal with vacation rentals much. I would talk to the real estate agents that handle rentals for some of the HOA's you are interested in. They will be able to give you specific numbers on rental and vacancy rates.

SailAway:

Sorry, but you're wrong.

I've done 100% + financing a couple of times, rented the property and still had a positive cash flow. The principle is that you buy the property with "no money down", however that doesn't necessarily mean that the seller gets no money. It simply means that none of your money is in the equation. Years ago, in a moment of "weakness", I ordered Carlton Sheets' course. I also thought that this couldn't be true. Well I read the book, listened to the tapes (tapes vs cd's ...it was that long ago) and tried some of his principles. For the most part it worked. I think the hardest part of real estate investing is that you really need to put a lot of effort into it. In other words you need to work hard. Most people won't do the work. You must also be handy....very handy. In the beginning you can't afford to pay someone to fix things....you need to be able to do it yourself.

Jay:

Even in this (real estate) market there are bargins out there. It takes a lot of work to find them though. Do the research. Talk to realtors. Look at properties...many properties (did I tell you this takes time & effort?). I've looked at 100's of properties and made a hundred offers a year. End result....1 to 2 purchases a year. Over many years it adds up. Success won't happen overnight. Good luck!

F.I.

SailAway,

You're right, the 3 unit, 167k, 500k total was a very bad example on my part. I wouldn't expect a to do any 100% financing deals.

Donna,

Thanks for the numbers. Using 60% and $90 per night gives around $1650 per month gross income. Mortgage payment and ins and fees would probably be around $1700 for a 160k condo. No wiggle room there even if I did all the work myself! 🙁 A landlord in those circumstances would have to figure out a way to increase occupancy and/or raise his average rate or face eventually bankruptcy!

Future Islander

No doubt deals are out there! The house I live in now was a HUD foreclosure that I bid on and won at around 80% of fair market value just because it needed a little TLC. I actually like fixer uppers!

Everybody

Thanks for the info. I think we can put this thread to bed now! 🙂

Thanks, FI.

But I don't think I was wrong -- in fact I think you made my point. You had to see several hundred and bid on one hundred to actually buy one or two. So what, 0.3 to 0.6 percent of the market, if that? And you admit that it was a LOT of work.

By the way, out of the ones you did buy for nothing down, how many had cash flows of 1 and 1/2 times your debt service plus expenses? Any?

Now count how many condos are available in the VI MLS and tell me how likely it is that Jay is going to find two properties that earn him 150% of his expenses plus debt service.

I didn't say it was impossible. I just said it wasn't realistic. Do you disagree?

Even Carlton Sheets will tell you that a break-even cash flow on a nothing down purchase isn't easy to find and substantial positive cash flows are extremely rare.

(By the way I have also purchased homes with nothing down. I bought the first edition of Allen's "Nothing Down" in hardback and I own the most recent Carlton Sheets CD's. There is definitely stuff to learn there for those that have the perseverance. But I'm sure you will agree with me that for every person that succeeds in that area there are thousands who discover it is gruelling, difficult work. Real estate agents roll their eyes every time they get a call from someone who just finished a "no down" course)

SailAway:

Yes, you're right. It is a lot of work. But, no work....no gain.

I'm sure thousands of people have purchased these courses and failed to put in the effort.

The numbers............positive cash flow of 100% debt service?????? That wasn't my goal.

Perhaps Jay would be satisfied with 25%.

Realtors........I was lucky....I quickly found a good agent who worked with me...she made a lot of $$$ on commissions.

Regards,

F.I.

A search of the Sapphire Beach Resort website reveals rates starting at a low of $225 per night in the summer for the cheapest suite to as high as $655 per night peak season for the most expensive suite. Rates quoted are European Plan (EP) without meals, per night, single or double occupancy.

A look in the House For Sale section of The Virgin Island Daily News classifies shows a Sapphire Beach Resort Waterfront 1 Br / 1 Bath unit for 175k.

Using the figure Donna gave me earlier of 60% occupancy and the lowest season / cheapest suite rate gives a gross of $49275 annually. Mortgage payment and Ins/fees would run less than $30,000 per year. That leaves a gross profit of $19275 on a single Sapphire Beach Resort unit.

Annual mortgage and fee expense for 3 similar units: ~$90k

Gross revenue from 2 units @ 60% occupancy: ~$98.5k

Manage to get enough cash together for the down payment and arrange financing on 4 units and you're talking 27.8k positive cash flow to cover other expenses PLUS a free suite to live in!

Let's see, 700k less 20% down = 560k. At 7% = 3,592.63 per month. Adding another 6k a month in for taxes, insurance, condo fees and misc and the total's up to $9.5k per month or 114k per year total expense for 4 units. 3 units @ 50% occupancy and $225 per night would generate 123k per year which still gives a positive cash flow of 9k per year PLUS a free suite to live in.

Pure speculation and hypotheticals and back of the envelope calculations with many unknowns for sure, but i'm going to have to give this some serious reconsideration!

Jay

Jay:

Sounds like you are looking at some much more realistic and manageable numbers. Good luck and enjoy. Don't forget the costs of maintenance not included in the association fees -- property repairs, new carpet and paint every so often and the leasing and property management fees charged. But it sounds like you should do fine. De Islons Mon!

Jay:

As they say when building financial models, paper never refuses ink. The rate of $225 per night translates into $6,750 per month for a one bedroom unit.

At that daily rate you are going to have some pretty stiff competition for your rentals. For a longer term rental it is going to take someone making at least $20K per month assuming they can afford to spend 1/3 their income on housing. Or figure two people making $10K per month. Pretty small group of prospective tenants to choose from in the VI. Population of permanent residents just over 50K each on the two big islands.

My point is I don't think you will get 60% occupancy. The realtor I worked with said not to count on more than 12 weeks of rental income per year. I actually got 13 for the 2003-2004 season. So far for the 2004-2005 I only have 8 weeks booked.

Also remember that you have to pay 8% off the top to the government as occupancy tax. In addition, for seasonal rentals you might need to pay commissions to a rental agent. Depening on who and what they offer 15% - 20% isn't out of the ordinary.

While property taxes are low in the VI property insurance is costly. Combined I pay $325 per month for structure and contents insurance.

Finally, don't underestimate utilities. Water and electricity are expensive in the VI.

Keep working your numbers, but what ever you do be sure you have a large cash reserve to cover any shortfalls in revenue as well unexpected maintenance and repairs.

Jim

"As they say when building financial models, paper never refuses ink."

I like that!

Jim,

You mentioned you got 13 weeks occupancy for the 2003-2004 season which translates to 25% for the year.

Is this resort property that you live near or in? Waterfront? What nightly rate are you shooting for? Is your market the vacationing tourist renting for a week or so? Are you also doing longer term leases (say a month) at reduced rates during the off season? Do you do any of your own marketing?

I'm assuming that there are at least a few things I would be able to do myself such as clean up and preparing "suites" for new arrivals as well as inside maintenance. Do you hire these tasks out? Do you even have the option of doing them yourself?

Longer term leasing (again, a say month or so) would need to fetch at least 500 a week to break even although any revenue that exceeded the cost of consumables (water, utilities, etc) is better than the units sitting vacant earning nothing.

Jay

The below ad found in the Virgin Island Daily News sort of answers one of my earlier questions:

"Sapphire Beach Resort 1 Bdr, 1 Bth condo for long term rental. Private balcony with ocean view, full kitchen and fully furnished. All resort amenities, pool, kiddie pool and play ground, tennis and volleyball courts. $2,700/month. Available for immediate occupancy."

Jay

Sapphire has numerous construction problems which are being corrected but all owners have a special assessment they will be paying for the next five years which averages around $500/month per owner. That must be figured into your equation. I have some friends who own there and one of them told me her bill for dues and insurance last month was $1100 for a studio unit.

Jay

Sorry for misleading you. I didn't check your math at 1 AM when I responded earlier and I didn't notice that you were using 60% OCCUPANCY, not 60% VACANCY (and I agree with Jim that even that is rather optimistic but again I'm not an expert on vacation rentals, particularly condos). So I'm sure you've figured out that even with 20% down it wil not be easy to end up with any significant cash flow. In any market where there has been a dramatic rise in values, it usually takes a while for rents to catch up, so this is normal.

Anyway, I thought we had settled the question of whether you can realistically mix long and short term rentals on the same property, but from you last post it doesn't look that way. It is extremely impractical to try to fill in whatever time you don't get full vacation rates with longer term tenants for a number of reasons. To keep FI off my case, I won't say it's absolutely impossible -- but then neither is winning the Lottery...

Man.....

You sure aren't much for "what if" drills.

FIRST, you start out with "out of the blue" estimations, THEN, you collect data and start replacing your guesses with bits of factual data.

e.g
- selling price for a waterfront suite at sapphire beach resort.
- actual rates for per night stays for in-season off-season best and worst accomadations.
- rental rate by the month.
- occupancy rates from a recent article

"She then added that the tax was included in an economic package the governor submitted last July, which included numerous taxes, surcharges and fees to balance the fiscal year 2004 budget.
Berry said, "In St. Thomas, where hotel occupancy rates were averaging a decent 65 percent, hoteliers indicated that new tax would be problematic."

And pray tell SA, WHY could one not rent for one week blocks during peak season, and one month blocks during off season?

I suspect you're so firmly stuck "in the box", that you can't perceive of doing things any other way then the way you've always done them. If so, go rain on somebody elses parade. If not, please cite specifics. Using worst on worst analysis, the numbers work on 50% occupancy. Best on best would probably work on 30% or so.