Make a Killing on Rentals While you Chat With Interesting People by the Pool
Okay, so that title is a come on sort of like "Start Speaking a Foreign Language in 6 Days With my Scientifically Based New Method." It may be true, but it isn’t the whole truth. Read on for the bigger picture about rental property in southern Costa Rica.
A big percentage of our real estate clients who are looking at buying property in Costa Rica want to get some income from their property. There are different reasons for this: maybe they want to lock in a retirement home but they aren’t ready to retire yet. Maybe they have just enough money to get by and want to supplement that with some income. Maybe they are investors and want to broaden their portfolio to include international real estate.
Whatever the reason, we agents get the question very often: “What are my chances of renting this out and what kind of return might I expect?”
To be perfectly honest, we can’t answer that question perfectly honestly. But, we can give you some factors to consider.
1. When do you want to rent it? Here’s the catch: If you only plan to rent the home when you aren’t here, and you are only here during the high season to escape frigid temps in your home country, then you are cutting into your income in the most drastic kind of way. That happens pretty often and then people wonder why they aren’t making money on their investment. Highest rents come mid-December to the end of March, then more modest rents come in through mid August, and then things go pretty flat until mid December.
So if you want to be in your home during “green season”, meaning deluge season when no one else wants to be in it, you’re all set. Rent high, stay low. Rent low, stay high is a whole different ballgame. 2. Do you want to rent long-term or short-term? On a per-night basis, you get a lot more money from short-term vacation rentals, as in about as much in a week as you’d get in a month for longer term rentals. In addition, it allows you to block out times when you want to be here enjoying your home.
On the other hand, long term rentals are easier to manage because you don’t have constant turnover. They also provide more security because someone is consistently living there instead of having long gaps when the home is vacant.
Do the numbers and you may find that over the course of a year, long term rental income could be about the same as short-term rental income, but with the disadvantage of making the home unavailable to you when you want to use it.
3. Is it a good rental property? Almost any property will rent down here, but you have to define “good.” If you want higher rents in our part of the world, you need a view, a pool, up to date furnishings, air flow or A/C, and under 15-minute access to places of interest.
Let’s face it: there are fixed costs that are similar across a range of properties. The gardener, the house cleaner, the pool maintainer, neighborhood fees, ongoing maintenance, etc. If you have a humble home that rents for $500/month, or a more luxurious one that rents for $ 2,000 a month, you’ll have those costs either way, but your net income will be quite different all else being equal.
4. Who is going to manage the rental and the maintenance of the home? When we hear reports of very nice net income from rentals—say, net profit of $50,000 to $60,000—it is “almost always” because the property is being managed by the owners themselves.
It takes two types of managers to keep a rental property going: a property manager, and a rental manager. The property manager makes sure it is being maintained well, repairs are tended to immediately, the grounds are groomed, and so on. The rental manager markets the property, responds to inquiries, answers prospects’ dozens of questions, greets guests as they arrive, answers dozens more questions, and checks the guests out as they leave.
Sometimes, as in condos, the two functions can be performed by one manager, but they are quite different functions and you have to be sure you have the right person doing each. Fixing a clogged toilet is quite different from welcoming guests and making them feel special.
If you are here and you have the right temperament, you can perform both functions quite well and save a lot of money. How much? Well, rental managers typically get from 20-30% of the gross rental income, and property managers typically charge at least a hundred dollars a month. That’s not chicken feed on top of your other fixed costs. If your gross rents are $40,000 and you pay 25% of that to a manager, there goes $10,000 of profit. That’s not trivial. So there you have it. When real estate agents like me tell you, “Oh yeah, you can easily rent this house,” we are telling the truth. But when we tell you “Oh yeah, you can easily make good money off of the rentals,” be a little skeptical. Many people do make good money, for sure. But not all do, and you need to understand the reasons for the differences. It could be your lifestyle, or the home, or the management, or the collision of cosmic forces not under anyone’s control.