My Negative Cash Flow Journey

You've crunched the numbers, and your vacation rental property looks like a golden goose promising steady passive income. But reality can hit hard. Roof leaks, broken appliances, and unruly tenants can quickly turn that dream into a headache. While rental properties can be profitable, unexpected expenses can make sustainable cash flow a challenge. If you're looking for a simpler, potentially more lucrative investment, consider land—virtually expense-free, offering tax savings, and far less stressful than managing tenants and property upkeep.

Over the last year, I invested in two properties that were close to the same purchase price: (1) a vacation rental near the beach and (2)?agriculturally exempt land. Despite projections and a 25% down payment, the vacation rental failed to be profitable due to unexpected expenses like plumbing repairs, drywall, repainting, and rising insurance costs. This raises a question: if you're comfortable with minimal or neutral cash flow, why not consider land?

My Vacation Rental vs. Land: An Expense Comparison

Vacation Rental: Total Annual Expenses of $38K (excluding major repairs)

• Property taxes= $10K: The amount of property tax you pay will depend on the property's assessed value and local tax rates.??
• Property insurance= $5K: The cost of insurance will depend on factors such as the property's location, age, and coverage limits.
• HOA Fees= $5K: The vacation rental has beautiful amenities including pools, private beach access, a gym, and tennis/pickleball courts. However, these amenities come at a price.
• Utilities= $6K: Water, sewer, electricity, and internet.
• Maintenance= $5K: As a general rule, it's often recommended to budget 1-2% of a home's value annually for maintenance. Beach properties are closer to 3-4%.
• Management fees= $7K: If you hire a property management company, you'll need to pay a fee for their services.? I pay 15% of gross rental revenue for a full service management company.

Land: Total Annual Expenses of $250

• Property taxes= $250: Even though the land is 137 acres, the agriculturally exempt status means the tax bill is low.
• Property insurance= $0: While you can purchase crop insurance, my land is all native grasses with no structures on it. Therefore, insurance is not necessary.
• Utilities= $0: While there is electricity on the land, I have not tapped into it. This means there isn’t a utility bill.
• Maintenance= $0: Unlike a house with a leaky roof or busted pipes, raw land maintenance is virtually nothing.
• Management fees= $0: Unless you have a complex farming or ranching operation, management is not necessary.

Conclusion

For the beach vacation rental, annual expenses start at $38K, with a projected $52K in gross revenue, netting $14K—excluding major repairs. In 2024, my major repair costs significantly exceeded $14K, resulting in a loss. Comparatively, while the land doesn't generate cash flow, it has virtually no expenses and, with conservative appreciation, is likely to outperform the vacation rental over the next two years. Moreover, land often appreciates over time, especially in growing areas, leading to significant gains when sold—and a 1031 exchange can defer capital gains. Every investment is different, but this comparison highlights why vacation rental cash flow can be a challenging endeavor and the potential benefits of investing in land.?

These blogs are educational and designed to bring awareness to investing in real estate and land. They are not meant to be financial advice.