10 March 2019
Thinking of buying a Caribbean villa to generate an income stream? There is plenty to consider before you can sit back and collect the rent in the sun.
As a source of income, the overseas property market is an exciting option to consider as it can be used as a rental to generate cash and also enjoyed by you with friends and family. The Caribbean has a mature rental sector in the main islands and some emerging areas that are tipped to big in the future. Of course, you can’t buy anything, anywhere if you are relying on vacationers to rent it – the property needs to be finely tuned to match the needs of the self-catering holiday crowd.
It may seem strange to do this first, but consider the Exit Strategy from the start – you need to be confident what you plan to purchase can be sold if needed. Little use ploughing everything into a home in a location that could take forever to sell. You also need to consider the costs of insurance, to cover for all potential damages. Also the number of weeks, realistically, that your home is likely to generate any rental income – if it is a good 10 months then do plenty of research to establish what vacationers will pay for those 40 weeks and what type of property they favour. Be brutally honest with yourself and work on the worst case scenario: there can be dramatic seasonal fluctuations in tourists from various countries and rates will also vary.
If your funds allow you to build up a rental “empire” then you are likely to have the disposable income to fund your venture without the constraints of budgeting. If you are an ordinary investor, you will need to be certain the property you buy can earn you the money to repay any you have borrowed, or invested. There can be more costs in some islands than others, so it is important not to consider all the isles of The Caribbean as similar in this respect. Take the time to write up a full, critical list of pros and cons and then use that to guide your decision.
Advantages
Income
The biggest benefit of owning a rental property is that holidaymakers will provide you with a direct income stream. If you have bought wisely, the payments you receive will more than offsetting any expenses for the month. For example, if you own a villa that you rent out for $2,500 per week you could earn up to $100,000 a year, based on a 40-week rental window. To make the figures work, you will need to have costs well below this figure so that you make a profit with most, or all, of your direct income stream. Be certain to work to figures aren’t overly optimistic – if the island you buy on, has a 20-week holiday season then use this in your calculations. You may also be restricted on certain developments from renting out at all so be sure to check.
Income from Property Value Growth
In addition to the rental stream, your Caribbean home can also offer a value gain, through an increase in the property value over time. Changing demands in the area, or an island gaining in popularity can boost property values, even if the villa doesn’t undergo any changes at all. Price gains are a variable thing, as it depends heavily on the area where your rental property is situated. In some areas, the value may rise significantly over the course of a few years, while in other areas it may remain flat. Ideally, this value growth holds pace with inflation at a minimum. If you happen to be in an above average area, you might find that you can beat inflation; on the other hand, a really stagnant area may not yield a gain at all.
Sweat Equity
To keep your property rented out, you also need to factor in sweat equity to ensure you add additional value in terms of maintenance and upgrades. The Caribbean is synonymous with a certain lifestyle and your villa will need to offer this – how upmarket you go depends on the demands of the locale, but most places require a pool and a gorgeous tropical garden. Staying on top of this adds to your costs, of course, but it should pay this back in spades when you decide to sell.
The Disadvantages
Concentration of Assets
One drawback to investing in a rental property is that for most people, owning a rental property is a serious concentration of their assets. The problem with that concentration is that it’s not diversified at all – so if something impacts that investment it places you in a vulnerable position. Concentration of assets is not a wise investment strategy – although the Caribbean has performed well for millions of investors over the years. However, the more wealth you have, the less this becomes a factor and the more that property ownership becomes a tool for diversification rather than something you’re concentrated in.
Tenant Risk
Tenants aren’t guarantee to be house-proud, clean or honest so you will need to be vigilant when it comes to collecting deposits. Some vacationers will leave the place tidier than when they arrived, out of pride and respect. Others will feel that as they are on holiday, they don’t need to bother with emptying the bins, clearing up or washing the dishes. Rugs can get stained, no smoking signs ignored and bedding ruined. It pays to take a large security deposit, but there still could be a cost and a risk.
Taxes and Fees and Insurance
Regardless of whether you have holidaymakers in your villa or not, the cost of property taxes, insurance on the property, homeowners’ association fees and bills will apply regardless – so these need to be covered in your costs. It can be painful, as these outgoings cut into your profits if the property is empty and it is coming directly out of your pocket.
Active Involvement
Unless you appoint a managing agent to handle every aspect, your villa in the sun will require notable time to organise repairs, checks and handovers. Hiring a management company is essential if you are a remote landlord – but is another cost that will eat away at the profits from renting out.
Good luck with weighing up if Caribbean rental property ownership is the right move for you!
