Buying property vs renting for longer term stays

[Dogbowl]

I know many Americans and some Canadians own property in Coz. I’m curious to know what factors prompted people to buy property vs long term rental? How does buying property work in Coz for foreigners? I saw some listings online and saw prices around 500k USD for a house. That seems expensive to me but is that the market rate? How about location? Which area is sought after? Should I expect a capital gain over several years or are property prices pretty flat in the long run?

 

[mi000ke]

Just posted something along these lines in the Cayman forum

Purchasing Property on the Sister Islands

 

[deepsea21]

I think everyone who travels and has the financial means gets tempted to own real estate in the islands. I've known several people who gave into that temptation, did all their research, ran all the #'s, everything seemed to make sense and then they later regretted it when reality came home to roost. At the end of the day (and during the best of times), if one is lucky their property can carry itself at about break-even while offering the owners a place to vacation during the off-season. If you have the capital to buy it and keep the property for your exclusive use that's a different story but if you going to rely on rental income to help carry the property that has its own story.

Common problems I can think of that I've heard:

1) They wanted to stay at their island residences during the same peak season all vacationers want to rent them so when they stayed there it cost them that high season rental income... income that was greater than they would spend to stay elsewhere so they ended up visiting the island and staying at a hotel during peak season. Their visit to their island home during peak season was limited to checking on the place between renter turnover. Of course, they could stay there about all they wanted during the slow season.

2) Realtor commissions consumed a huge percentage of gross rental income. VRBO websites and such just didn't cut it for consistent rentals and maximizing rental income... Their properties had to be listed with a vacation rental realtor to realize maximum rental income and deal with all the incidentals from linens, cleaning, trash, turnover, and on-call addressing of issues raised by renters.

3) Repairs, maintenance, and furnishing. The problem with generating the highest rental income over the greatest number of weeks is you need to have a premium property with premium offerings - great furniture, appliances, cable TV, A/C, washer/dryer, pool, fully furnished and then you get renters in who beat the heck out of everything. The realtor addresses all issues, charges their fee to deal with every issue from replacing a light bulb to calling in the HVAC service techs every other week. For some reason renters love to leave all the doors open with the A/C set to 60 degrees which causes constant compressor ice-ups that requires endless HVAC tech calls who cut power to the unit and inform the renters they'll have A/C restored as soon as the igloo of ice around the condenser melts - they'll be back to turn it on in a few hours Cha-ching for the HVAC contractor every time that happens. Every 6 months to a year there will be some major costly repair that needs performed whether it really needs it or not. What is the owner gonna do about it from 2000 miles away? Pay the bill... It's a wealthy gringo's cost of island ownership according to them.

4) Utility costs. Anyone who thinks they have a high electric bill in the states can triple that bill in the islands where power costs a fortune and renters could care less about it.

5) Theft. If it's not bolted down and it can be carried out, expect to replace it at some point. Expect to replace absolutely everything in the place in a worst case scenario and, of course, no one saw anything... Just another absentee gringo's home got emptied.

6) Opportunity cost. The cost of having their own place limited their travel to just that place and after a few years they wanted to visit and stay other places but that wasn't an option with one white elephant on their back.

7) The greatest risk? When the U.S. economy sneezes, the islands may as well develop cancer. How deep are your pockets and can you carry the place longer than the recession lasts? If not, you'll be trying to sell it at the same time everyone else is scrambling to sell their island investment properties. That's when the real financial hits are taken.

Long story short from what I have been told by those who have done it - It is far better to rent than own and let someone else have all the headaches and take on all the risk. An island property isn't an "investment" although that's all you'll hear it referred to - a great "investment opportunity". It sounds prestigious to say you own one for a while but when the reality sets in it is really just a big stress inducing PITA according to the few I've known who have done it. Of course, your mileage may vary.

 

[mi000ke]

We purchased on Grand Cayman a few years ago, and confronted all of the issues raised by @deepsea21. We did extensive analysis of the financials of all the properties we looked at (this is absolutely required), and in our case even though we are using the property for 3 months in the high season and a few other weeks of the year, and accounting for all of the costs (commission, maintenance, insurance, capital expenditures, utilities, condo fees, etc.) we have covered 100% of our out of pocket costs via rental, and the appreciation we have realized (we have actual offers to gauge this by) has offset the opportunity cost. We essentially have had a free place on Seven Mile Beach, so it can work. But you have to do your homework. And you have to look at it as a lifestyle decision, not an investment. We spent a lot of time working this to our advantage. But it was well worth the effort. Staying in one place also has some advantages - you get to know other people (especially dive buddies), the best places to eat, dive, and hang out. You can leave your stuff there and just jump on a plane with a backback almost at will. It has become the most stress-free vacation we've had, and after years of traveling the globe, we now just go home every winter. (I guess the one downside is that you will be contacted by every friend and relative you forgot you had )

 

[deepsea21]

@ mi000ke... The key words I picked up in your post were "condo fees". If one is going to make a purchase in the islands it absolutely should be a condominium in a condo complex - not a stand alone single family residence on its own parcel of land. I am pleased to hear your GC property on 7 mile beach is working for you. I've just heard so many horror stories over the years that perhaps I am jaded but if done right it can work. Still, if I'm gonna travel to GC I'd gladly pay your realtor, stay in your place, enjoy all it has to offer and then close the door, grab a cab to the airport and walk away. Yes, I do shut off the A/C upon my departure!

 

[mi000ke]

@ mi000ke... The key words I picked up in your post were "condo fees". If one is going to make a purchase in the islands it absolutely should be a condominium in a condo complex - not a stand alone single family residence on its own parcel of land. I am pleased to hear your GC property on 7 mile beach is working for you. I've just heard so many horror stories over the years that perhaps I am jaded but if done right it can work. Still, if I'm gonna travel to GC I'd gladly pay your realtor, stay in your place, enjoy all it has to offer and then close the door, grab a cab to the airport and walk away. Yes, I do shut off the A/C upon my departure!

Yeah - we wanted someone to be watching out for the property when we were not there, so a condo. Our management team is fantastic (another thing to research before buying). They handle all of the rental marketing and guest services, and the place is always in better shape when we return than when we left it. Purchasing made sense to us only because we finally retired and could now stay somewhere for more than a couple of weeks at time. Before that we only considered renting. My wife now refuses to spend another winter in New England (and with our temps in single digits this past week and a blizzard coming in a couple of days, I'm on board as well.)

 

[Dogbowl]

Maybe that’s why I created this post. I just came back from Coz to -25 C weather. The sunshine and warm weather makes me physically and mentally better. However, I guess it doesn’t really make sense unless we’re retired.

 

[Schwob]

@Dogbowl : good, interesting thread!

@mi000ke : hi old friend...
... kust kidding...
thanks for portraying your experience.

@deepsea21 : thanks for portraying yours...

 

[mi000ke]

I guess it doesn’t really make sense unless we’re retired.

Well, depending on your tolerance for risk and the amount of free capital you have to invest, owning a vacation property can be a good investment even before you retire. When we were looking on Grand Cayman, several of the properties (especially the newer ones) were being marketed primarily as investments. In our building, several of the owners own multiple units - one primarily for themselves and the rest as investments. A couple of them did this many years ago, and over the years they have essentially paid for their places via rental income, especially by renting it out during the high season when rates are double. Some bought before they retired, rented for many years to pay for the place, and then started using it more or entirely for themselves after retirement. Our property used to be owed by someone who used it only a couple of weeks per year, and the revenue they generated was more than the total cost of ownership, including the opportunity cost of tying capital up in the property. Given the appreciation over the last 10-15 years, I wish I had purchased several. Another part of research, if you do intend to rent out when you are not there, is the demand for rentals and the growth trends in tourism. Grand Cayman has been growing in this regard for a few years, and the last couple of years have set records for short term stays, so it's been a good rental market. And if you are using it only a couple of weeks per year, you might be able to write off part of the trip as you are going down to view and manage your investment. Just wanted to add some thoughts to keep you up at night

 

[Dogbowl]

Well, depending on your tolerance for risk and the amount of free capital you have to invest, owning a vacation property can be a good investment even before you retire. When we were looking on Grand Cayman, several of the properties (especially the newer ones) were being marketed primarily as investments. In our building, several of the owners own multiple units - one primarily for themselves and the rest as investments. A couple of them did this many years ago, and over the years they have essentially paid for their places via rental income, especially by renting it out during the high season when rates are double. Some bought before they retired, rented for many years to pay for the place, and then started using it more or entirely for themselves after retirement. Our property used to be owed by someone who used it only a couple of weeks per year, and the revenue they generated was more than the total cost of ownership, including the opportunity cost of tying capital up in the property. Given the appreciation over the last 10-15 years, I wish I had purchased several. Another part of research, if you do intend to rent out when you are not there, is the demand for rentals and the growth trends in tourism. Grand Cayman has been growing in this regard for a few years, and the last couple of years have set records for short term stays, so it's been a good rental market. And if you are using it only a couple of weeks per year, you might be able to write off part of the trip as you are going down to view and manage your investment. Just wanted to add some thoughts to keep you up at night

Very interesting indeed! I’ve shied away from Grand Cayman because it’s always been so much more expensive than say Cozumel but if there’s growth involved, I should go where the growth is! Plus, Grand Cayman is a much more stable place to buy property. And the legal and financial system should be much more similar to what I’m used to in Canada. Thanks for keeping me up at night!