Even though I'm subsidizing it, I still view it as an investment. I purchase commercial real estate properties also. Whenever I calculate the cap rate for a prospective property purchase, I don't include my loan cost. Since I don't pay myself anything from the properties, the most important factors to me are the strength of the investment as a resale property, the strength of the tenant, and if the income is enough to pay the loan and repairs. The cap rate on the beach condo is 6.4%. For this particular purchase, I didn't pay anything down, so a cap rate that low doesn't bring in enough income to pay the note. Other commercial properties that I have bought average cap rates around 10%. I'm sure residential properties are even higher, but my small amount of experience in the residential rental market was not enjoyable.

I like the thought of owning beach condos for a couple of reasons. First, I must admit that I love the novelty of owning property in Gulf Shores / Orange Beach. Secondly, it is a balance to my portfolio. While commercial property has a higher rate of return, there is always the possibility that a lease will not be renewed. I currently have that fear with a Dollar General that I own. Every 5 years when the leases are up for renewal, there is always the possibility that one of my DG's will not renew. Then you are faced with having an empty $800K metal building. I've tried to position myself in reserves that I can handle the outstanding loans, etc. in the event I have a lease not renew. The beauty of vacation condo is, excluding a brief period due to the after math of a hurricane, there will always be rent coming in. No leases to expire. You don't have to worry about rent not being paid and any property damage is automatically charged to the renter's credit card. The compromise is a lower cap rate.

I've learned a lot after buying my first condo and have done enough research in the area to identify the complexes and sizes that have higher rates of return. There are some condos that have cap rates above 7.5%.

So while I do use in in the off season for weekend getaways, it is still a fairly decent investment. There are plenty of commercial properties for sale that advertise a similar asking cap rate.

This post was edited on 8/9/15 at 9:25 pm