3 Steps to Buy an Outer Banks Vacation Home

3 Steps to Buy an Outer Banks Vacation Home

Buying an Outer Banks vacation home is easier than you may imagine.  From Corolla to Hatteras and everywhere in between, we have all types of property available.  In fact, the Outer Banks of NC, affectionately called OBX, is one of the best values on the East Coast for vacation homes or investment properties.

Step 1 – Know what you are looking for

A one bedroom condo may be ideal for the retired couple who would like to travel to other locals throughout the year.  There are townhomes, small 2 bedroom beach bungalows and 23 bedroom “mini-hotels” and event locations.  These vacation rentals are perfect for destination weddings and corporate retreats and large extended families. 

One of the hardest steps to complete is to narrow your search and define what you are looking for and why.  This is one of the most important steps.  Without clearly defined goals and objectives there is just too many competing locations and properties.  The choices can prove to be over whelming if one does not have a clear check off of investment priorities.

Reason for Purchase

Your reason for purchasing an OBX home should drive the types of homes you consider. 

A second home only used by the immediate family will only need to include those items to appeal to the family.  Empty nesters may consider a smaller home that can also be used as their eventual retirement home.  An elevator or ground floor living may be desired for aging in place.

A second home used by multiple generations may include more amenities with wide appeal.  A private pool and hot tub may be a necessity in one family but a community pool available would be perfectly fine for another family. 

A legacy home for current and future generations to enjoy is another reason to purchase.  A home in this category is less about fads and amenities and more about family bonding experiences.  It is about quality materials that stand the test of time.  It is having something for each generation to create lasting memories from toddlerhood to grandparents.

An investment property, not intended for personal use, will require having the amenities in demand with vacationers.  It used to be that families came to the beach and creature comforts like air conditioning were not required. 

A game room, theater room, outdoor kitchen are other common amenities one should consider and rank prior to beginning your search.  Creating a list of must have items can reduce confusion after viewing multiple homes with lots of different features and amenities.

For many folks today, renting a vacation home allows them to enjoy comforts not afforded to them at home.  A private pool, hot tub, elevator, game room, outdoor kitchen and bar area at the pool and home theater are only a few of the luxuries sought after.  A modern kitchen with full appliances, washer/dryer, flat screen tv’s, video games are almost considered commodities these days.

Self-manage or hire property manager

The amenities included in your vacation home or investment property should be carefully considered.  Purchasing a home with added amenities not only has an upfront cost but has an additional weekly or annual cost for cleaning and maintenance.  As more amenities are added the complexity of self-managing increases especially if you live remotely. 

Even if you will hire a professional property manager to manage the home, the cost of additional features can negatively affect your bottom line.  One home, I recall, had such a sophisticated smart home system with all audio and visual electronics connected and multiple control points that is was overwhelming for most guests or visitors to operate.  The property management company received a call to re-set the system almost weekly and the home owner incurred higher costs without increased guest satisfaction.  Eventually, he “dumbed” the system down to make it easy for guests to understand and reduce maintenance costs.

Location, Location, Location

Most investors will want to select a location that is within a comfortable drive from their permanent home for their vacation home or investment property.  Locations within 3 – 5 hours are practical should you want to spontaneously visit or should something require your attention. 

For maximum appeal to potential renters or future buyers, look for a place within three hours’ drive of a major metropolitan area (and where you live).  Locations, like Ocracoke Island, that require a ferry to get to the island can limit your accessibility in bad weather or when ferry schedules are reduced.

It is helpful to be familiar with all the towns on the Outer Banks before narrowing down your location.  Each area has its own character and vibe.  The Outer Banks has areas that range from a small town with few vacationers to sleepy fishing village to resort with high end amenities; we have an area that will fit the vibe you are looking for. 

Consider how an area changes with the season

Keep in mind that each of these towns or areas can be very different in the summer compared to winter.  Some of our towns remain vibrant in the off season due to the number of year round residents.

While others can go from thousands of visitors in the summer to a few hundred residents in the winter.  As a result, restaurants do not remain open all season and even the grocery store may not be stocked with your favorite items.

Within each town are usually several environments.  On this barrier island that may only be a mile wide, there is the oceanfront, the sound front and in between. 

The area in between is usually sub-divided to east and west of route 158 or the by pass for locations in Kitty Hawk and South to Nags Head.  The homes located east of route 158, or “between the highways” are a short distance to the beach and a comfortable walk without crossing the highway.  Route 12 runs north to south along the ocean front in this area but is pedestrian friendly compared to the 5 lanes of route 158.

Hire a real estate agent and get out and talk to locals

One of the best ways to answer questions about location is your local real estate agent.  At Eillu, we have written blogs on the various locations in the Outer Banks to give you the inside scope.  You can call or chat with our agents’ real time to answer your questions or go out and visit the locations to compare for yourself. 

Get some unbiased insight from locals if you believe real estate agents just want to make a sale.  Even if you’ve been vacationing in the same area for years, venturing to other nearby towns may provide new alternatives.  Talk to residents while shopping, visiting restaurants to get to know the place from a locals point of view. What do they like about the area, how has it changed, what types of people are moving there and what it’s like off-season. Visit in the off-season and rent a home you are considering purchasing to “try it before you buy it”.  You should have a clear idea of how the area may change from season to season.

Step 2 – How much can you afford?  Get local financing

Financing is available for second home, vacation home and investment property purchases.  Some investors prefer the simplicity of a cash deal and a quick closing but a visit to a local mortgage lender will allow you to obtain a pre-approval and provide a second opinion of how much you can afford.

Typically, buyers will make between 20% to 50% down payment toward the real estate.  Debt payment for all mortgages should be less than 36% of your gross income.  However, rental income from the real estate being purchased can be included when calculating the ratio.

A local mortgage lender should be consulted as they are aware of market conditions, valuations and rental income estimates for the area.

Your Eillu agent will match what you are looking for to the best properties that fall within your budget. 

Understand cost to manage and maintain

Affordability does not only apply to the initial purchase of the home but also to the ongoing cost to maintain and manage the property. 

Make sure you have estimates from local providers for the following.  Do not base the cost of your home market for the same items as there can be significant differences in cost across geographic areas.

  • Utilities (water, sewer fees, cable, garbage, phone)
  • Property Taxes
  • Insurance (Homeowners, flood, wind & hail)
  • HOA fees
  • Winterization
  • Fees for Property Management (usually a percent of gross rentals) or VRBO / Airbnb listing fees
  • Fees for professional services like weekly cleaning, deep cleaning at beginning of season, pool and hot tub cleaning & maintenance
  • Security monitoring
  • Landscaping
  • property repairs and maintenance

The above expenses are deductible if you are renting the home out (your use is less than 14 days or 10% of rentals). 

You may also want to consider a new home.  A home warranty and increased energy efficiency will reduce you costs to manage and maintain while the newness will attract potential renters.

HOA

Understand the amenities offered and the particular rules for the HOA (Home Owners Association) for any vacation home under consideration.  Costs can vary dramatically from one community to the next and you want to make sure you are getting a good value and management team for your dues.  Take note of the condition of the property and ask about any special assessments that may be under discussion or recently approved.

The rules of the HOA will also impact your decision.  Some HOA’s have strict rules regarding materials or colors used when owners are maintaining or improving their home.  These rules can be advantageous to make sure homes conform to a look and style or, depending on your taste, a limit to expressing your personal style.  The rules of the HOA may also limit parking for boats, recreations vehicles and trailers on your property or on community property.  Understanding the HOA rules will let you know if the community is a good fit for you and your family.

Tax Planning – 14 day or 10% rule

You may rent your place for up to 14 days a year and pocket the rental income without having to declare it on your tax return. This is ideal if you want to allow immediate family to enjoy your vacation home and use it as a second home for your family.

If you rent out the home for more than 14 days a year, you must report the income, but you can deduct certain expenses.  You may also depreciate the real estate itself and a separate, accelerated depreciation of personal property such as furnishings.

If your personal use is more than 14 days a year or more than 10% of the time it is rented, whichever is greater, then the home is a personal residence.  If your use is less than 14 days or 10% then it is a rental property.  This distinction is important for tax considerations.

Collect the tax exclusion twice

Vacation home owners whom sell their primary residence can qualify for up to $250k (single) or $500k (married filing jointly) exemption from taxes on the profit from the sale. 

Next, if they make their vacation home their primary home or retirement home after the sale of their primary residence, they may collect the tax free profits again.  They are required to have the vacation home as their primary home for 2 of the 5 years before the sale and the sale must occur more than two years after they previously claimed the exemption.

Step 3 – Buy the best match

Get the Sale Comps and Rental History

Your Eillu real estate agent can provide listings for you to consider based on your investment criteria and your budget.  In addition, your agent can provide recent sales comps for you to compare to any properties you are considering purchasing to assess how good an investment it may be.  Vacation homes in a property management program typically have a rental history to provide an estimate of income and expenses for the property. 

Eillu has over a 20 year history of serving the Outer Banks market and will offer expert advice regarding which property should perform best over time and meet or exceed your investment criteria.

The location of your vacation home is the most important consideration for rental performance, long term appreciation and your families enjoyment.  The location counts more than any other single factor. A vacation home should be a special place with — a view of the ocean, a dock on the sound, or a peaceful deck with the smell of salt in the air.

The Outer Banks rental market continues to be strong to provide income from the investment and enjoyment for the family for years to come. The Outer Banks has been named a top beach destination every year.  For more information on buying Outer Banks Real Estate or to learn more about the Outer Banks in general, please contact us and check out our blog.  We are here to help you make your dreams come true.

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