A Vacation Rental in OBX
Updated: Sep 19
The Outer Banks have developed in leaps and bounds over the last few decades. From small beach box homes with miles of undeveloped land to a premier tourist attraction which gets millions of visitors a year. This area features luxury homes right on the ocean that can go for millions of dollars. I have been visiting OBX for almost 30 years and thought I would share my experience of recently building a vacation rental. My family rented a small 4-bedroom home in Waves, N.C. a little over 20 years ago, which back then had very little correlation when comparing to current times. As this area doesn't really focus on chain hotels, the choices with these types of venues are a bit limiting. Most people who visit the Outer Banks typically rent a home or condo. Many people prefer to enjoy vacations in this area without the hassles of home ownership. For those who are looking to take on the challenge of a rental, it can be very lucrative. Now don't be fooled, just because you own a beach home doesn't guarantee you can turn a profit on it. Being smart about the timing and the numbers can allow for a great opportunity as an investment. It can generate income as well as appreciate in value. When looking to build or buy a rental there are a few factors you must take into consideration. First and foremost is selecting the right area to buy or build. There are several Islands in the Outer Banks that can have an impact on rentals. If you’re renting on an island such as Ocracoke or Hatteras you have to expect a bit of a more limited market and a shorter rental season. These islands cater heavily towards renters who like water sports as well as less developed surroundings. Even though these islands have plenty to do, the towns are much more spread out with less restaurants and activities. Beaches within these towns are always highly ranked as some of the best in the country, especially near Ocracoke and Frisco. Keep in mind these areas can be more prone to flooding when there is heavy rain or large storms. Roanoke Island contains the town of Manteo as well as the village of Wanchese. Wanchese is more of a fisherman's town and not really ideal for a rental especially as an investment. Manteo tends to be a bit more residential and possibly better suited for a longer-term rental. They have developed the waterfront and built it up quite a bit over the years as well as some luxury waterfront properties which can strongly cater towards boaters as well as people interested in taking in the local history or enjoying a bed and breakfast. On the main island of the Outer Banks, you will travel up the main strip which is one of the more popular areas in OBX. The adjacent towns of Kitty Hawk, Kill Devil Hills and Nags Head cover a large portion of the main strip which is in the center of most of the action. This area is very popular as it is surrounded by an array of restaurants, activities such as mini golf, go karts and bowling as well as some top-notch golf courses and several piers. Even though each town has their own key attractions you're never far from any of the action as it’s a short trip anywhere up or down the strip. If you travel more to the northern part of the Outer Banks, you will run into a quiet town called Southern Shores. Still close to the action but with quiet surroundings and less storefronts and activities. Just a bit further up the road is another more populated area called Duck then Corolla with houses that can be in the center of the action or have complete privacy on a golf course such as the Currituck Club. This area also showcases large estate front property right on the water. The area is highly sought after and popular for vacationers with some truly high-end homes that can be great venues for weddings or events. The waterfront restaurants along the sound front docks as well as many shopping centers along the highway allow for plenty to do. It’s a bit less built up than in Kitty Hawk but you are not giving up anything vacationing in this area. These homes arguably has some of the highest rental rates throughout the Outer Banks. The choice to build in Kitty Hawk was to appeal to any type of renter along with its proximity to basically everything. Now when you’re looking for rental properties you typically have two options within these towns, selecting the ocean or sound front side. The width of the island can vary significantly but also certain areas are subject to more flooding. Choosing areas within walking distance of the sound or ocean are typically the most desirable but narrow area may increase your chance of being in a flood zone. Now figuring out the type of property you would be looking to get involved with can involve a few factors. If you’re looking to build new or purchase an existing property you will have to take into consideration all the costs. New builds can involve more permits, delays in being able to collect rent as well as unexpected construction costs. Even more so now than in the past due to the drastic market swings and supply chain issues. Purchasing an existing home may alleviate some of those concerns, but homes on the Outer Banks are subject to harsh weather, so unexpected and higher repair costs wouldn't be surprising especially in remodels. While considering what area and type of property may best suit your needs you should also look at what the potential income may be made off of your investment. As with many properties, the larger the home with more amenities may get higher rents. This is also at the expense of additional costs for the added amenities. Smaller condos or beach box homes that host 4 or 5 people can range in potential rental income from $1 - $2,000 per week in season. If you have a home that can hold more than one family typically for 8-10 people, these rentals can bring in anywhere from $4 - $6,000 per week. The large 12+ bedrooms homes which are popular for events and weddings can bring weekly rental incomes of over $20,000 per week. Now as exciting it looks to see some of these numbers understand, maintaining a property that hosts rentals with dozens of people to potentially events with over 100 people can definitely be more involved than some more basic rentals. The most important factor when building or buying a rental that is going to be profitable is rentability. You can have the nicest house around but if you are unable to rent it, you’re still responsible for its monthly expenses. I found over the years the small homes were popular when I started visiting the Outer Banks as that was all that existed. Over time massive homes built specifically for rentals started popping up and became popular for multiple families, weddings and event venues. Recently during Covid times the mid-size homes have become popular to have a bit more privacy and your own space. So, when you start looking into properties, understand the cost has obviously skyrocketed over the last few years. Finding bargains are far and few in between due to increased demand and limited supply. If you’re looking to buy an empty lot and build, these loans are much harder to come by as there are limited options to get financing around land only. Purchasing a property to renovate can be a better option to get around some of those headaches as well as turnkey options. So, what are key factors you must consider when looking for a rental? Proximity to the ocean and sound are obviously huge factors but amenities within the property are equally valuable. Pools, hot tubs and fire pits will increase your rentability tremendously. Also providing luxury amenities such as a game room or theatre room allow you to stand out from similar rentals. Many of these items may come with a significant cost, so you should strongly consider their benefits vs other potential options. The other topic that's underestimated is the ongoing maintenance costs on the property. This includes the lawn and pool maintenance along with wear and tear. The salt air and winds are very harsh on properties and make erosion with wear on your investment much more frequent. Adding Trex decking as well as Smart or Hardie siding can be significantly cheaper over time even though they cause higher upfront costs. Lets evaluate some of the costs associated with rental additions. Midrange hot tubs made for 6-8 people typically will run 6,000 to 7,000 dollars where if you’re installing a pool, we had to spend close to 50,000 for a 12*24 foot. A feature I never considered which we also chose to add was the heated pool. This adds about another 7,500 but can generate an extra potential 1,500+ monthly income. As for the fire pit, you can buy them for under 1,000 dollars in stores such as Home Depot or Lowes but if you want more of a permanent fixture, you’re looking to spend a minimum of 10,000 dollars. Below are the picture's on what the costs we just spoke about were able to purchase.
Now these costs were from a new build and an empty lot, with any renovation depending on the involvement it can drive up the costs even further. You must weigh the potential for these items to increase the attractiveness of renting your property vs the ongoing additional maintenance costs which can be upwards of 1,000 + monthly. Over time because more and more properties started adding these features, they have turned into a bit more of an expectation rather than an extra. Ocean front homes can avoid many of these additions as people rent those homes for easy access to the beach. If your property is a bit more inland, many of these features are highly desirable to have a successful rental. After the normal build costs came several unexpected expenses that caught me a bit off guard. You will need rental insurance which for a 2,000 square foot house can easily exceed $6,000 yearly. On top of that depending on if you're located in a flood zone you must consider wind, hurricane and flood insurance which can all be extra costs. Liability insurance as well if someone gets injured or you have any legal issues is very important. So, when considering the real costs in getting involved in a rental next would be furnishing the property. Obviously costs can vary based on the quality of items you're putting into the rental. I would categorize our 4 bedroom rental as above average with the quality of items as well as being very well furnished. So, when I talk about quality and quantity, having items that are going to hold up well and require little maintenance can definitely save you money long term but will have a higher upfront cost. Our property Stress Less was furnished with all wood furniture to hold up better over time, upgraded TV's and electronics to not be outdated quickly as well as upgraded outdoor furniture such as Trek Chairs and Loungers throughout the property as to minimize long term upkeep. The property is roughly 2,200 sq feet with about another 1,000 square feet of decking and a screened in porch. Low end estimated if you were buying the items to furnish a complete house from scratch would be roughly around 40,000 to 50,000 dollars where if you add many upgrades, you can easily drive the cost closer to 75,000 or higher. Understanding that renters typically may be a bit more physical with your items, anticipate some damage or repairs needed throughout the year. The higher quality items can lessen the frequency of of these repairs.
Next depending if this is your first or second home can have a significant impact on the amount you may have to put down on the property. As a secondary house most, lenders required around 25 percent down or higher where if you have pristine credit, it could be as low as 20 percent. Now unless you’re paying cash, any financing options typically are at a higher interest rate than a primary residence. As an example, I was able to refinance my current home at 2.375% where the rental rate at the same time was 4.25% since it was a rental. So even though different factors may allow you to get a better or worse rate financing expect these to be a bit higher than anticipated to make sure the costs would be affordable. As a new build you can also know exactly what is going into your property and typically can expect lower than average upkeep costs for the first two years. In our example even with some supply chain issues it took roughly 9 months from start to finish to complete and furnish the build. The reason that's important is your losing nearly a years’ worth of rental income while putting out quite a bit of money to fund the project. Now if this isn't a factor, I definitely think that was the way to go, but if you’re looking to offset your expenses and maximize rental income as soon as possible purchasing a turnkey house or one that is rental ready will be the best option. Many 4-bedroom rentals can fetch as high as 6 figures in rent a year or higher so it's a significant factor on how quickly you want to get a property on the market. Everyone enjoys giving advice and one of the concerns I ran into were people advising me to cater the rental too closely to an individuals personal taste. Appealing to a broad spectrum of renters forces you to take your personal preference and sideline it. Keeping cool colors with friendly bright coastal furniture will appeal to the widest range of renters. Sometimes you see rentals that stand out from the crowd with very modern finishes that picture well, but the functionality or resale can be affected by limiting who it appeals to. You also must consider how much involvement you want in renting as well as the upkeep of the property. I found getting the proper rental agency that can market your property effectively and be a resource to handle any issues especially if you’re not local is key. As I stated earlier during times of high demand you can pretty much rent out anything. On the flip side when you find the rental market cooling due to economic issues or other concerns you want to be in a position where you still rent out at a high level. Even losing one or two key months in a year can have a significant impact on your profits as nearly two thirds of your money is generated between the middle of May to the end of August. Now due to the mild weather and increased popularity the rental season has seemed to go longer than in prior years. It's important to make sure those key weeks are rented. I use a rental agency that has been around for years and had a good reputation for renting other homes in our development. I also paid to post on different sites such as VRBO and other rental sites with less success. Many people may avoid agents due to the commissions they charge but I found it well worth it especially as a nonresident to the rental. To put it in perspective most agencies I researched take between 15 to 20 percent of the rental rates which include services such as checking guests in, maintenance on the property as well as marketing and handling any issues in real time. How you choose to market yourself this is one of the biggest factors, as you only make money when your property is rented, and your expenses occur no matter what. Create a business plan, as too many people have unrealistic expectations of receiving big rental checks but fail to consider all the costs to maintain the rental. We are no longer in a society where people paying top dollar for vacations while settling for homes that have old torn up furniture, uncomfortable mattresses, or outdated items. People are buying an experience as much as they are paying for your property. Take that in consideration and invest in a professional photographer, furnish the house properly and try to add extras that will increase the chances of them renting from you again. it’s better to exceed someone’s expectations rather than disappoint and I promise you it’s a good business decision.
In closing, rentals are not for everyone but can be a nice alternative investment. The biggest thing is make sure you don't rush into something, and you have a good understanding of the costs and expenses associated with it. Lastly try to put yourself in the renters’ shoes, if you had a choice of a home that looks like it's well-maintained with many amenities or a house that just happens to be located near a beach, which would you choose? If you assume you don't have to market yourself as a good luxurious experience you may find yourself struggling to rent at a high level if at all.
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