Most buyers fall in love with the balcony view before they look at a spreadsheet. I understand why, since the view is the reason this market exists. It won’t tell you whether you’re buying an asset or an expensive hobby, though.
Plenty of Gulf Shores condos for sale and Orange Beach condos for sale can pay for themselves. Short-term rentals are legal and well established along this part of the Alabama coast, and many units cover the mortgage, dues, taxes, insurance, and management fee with money left over each month.
You can’t tell which units do that from the gross rental figure in a listing. Below is the math I run on a condo before a client writes an offer. If you’re earlier in the process, start with our guide to buying a condo in Gulf Shores or Orange Beach.
What Makes a Gulf Coast Condo a Good Investment
People tend to lump three different numbers together when they talk about condo returns.
1. Monthly Cash Flow
Cash flow is what’s left after every bill is paid, including the mortgage. Positive cash flow means the condo pays for itself. Negative cash flow means you write a check every month and count on appreciation to make up for it.
2. Cash-on-Cash Return
Cash-on-cash return is your annual cash flow divided by the money you put in, which includes the down payment, closing costs, and furnishings. It lets you compare a condo with an index fund or a rental house inland. While you collect that return, rental income is also paying down your loan.
3. Appreciation and Personal Use
Both have value, and I don’t count on either one to make a deal work. Every week you block off for yourself is a week the unit doesn’t earn, and summer weeks earn the most. Decide on your personal weeks up front and include them in the projection.
The short version
A Gulf Coast condo is a good investment when realistic rental income covers every operating cost and the mortgage, with money left over.
Start with an Honest Gross Rental Income Number
Ask for actual owner statements from the last two or three years. A projection or pro forma isn’t enough. If the unit is in a rental program, those statements exist and the seller can get them.
If the unit has never been rented, compare it with other units in the same complex that have the same bedroom count, a similar floor, and the same view. A direct Gulf-front unit and a side-angle unit in the same building can earn thousands of dollars apart each year with identical square footage.
Watch for two other problems:
- Projections built on 2021 and 2022. Rental demand on this coast was unusually strong in those years, so ask for the trailing twelve months too.
- Treating gross income as yours. The management commission and cleaning fees come out first. In the example below, they take $20,000 out of $80,000 before any other bill gets paid.
Every Expense That Comes with a Rental Condo
These are the recurring costs on a Gulf Coast investment condo. If you leave one out, the projection will be wrong.
- Management commission. A percentage of gross rental income. Rates vary between companies, and the difference comes straight out of your cash flow.
- Cleaning fees. About 10% of gross in the example below. Short-term rentals turn over often, so cleaning is a steady cost.
- HOA dues. Gulf-front towers pay for pools, elevators, security, exterior maintenance, and the master insurance policy out of dues. The example unit’s dues are $700 a month.
- Property taxes. Alabama’s property taxes are low. Rental property is assessed at twice the rate of an owner-occupied home, so don’t budget from the current owner’s bill if they lived there.
- HO6 insurance. Your policy for the inside of the unit, separate from the building’s master policy.
- Insurance assessment. Many coastal associations add a separate monthly charge to cover rising wind and hail premiums. Ask whether one is in place and how much it costs.
- Utilities. Usually modest in Gulf-front buildings, because the dues cover several services. Confirm what’s included.
- Maintenance reserve. Plan on about 3% of gross rental income. Vacation guests wear out furniture, paint, appliances, and HVAC faster than long-term tenants.
- Mortgage. Principal and interest. Loans on second homes and investment property cost more than loans on a primary residence.
A $600,000 Two-Bedroom, Line by Line
These numbers come from a projection I built for a client on a 2-bedroom, 2-bath, 1,056-square-foot Gulf-front condo. The purchase price was $600,000, financed at 5.63% over 30 years with 25% down.
| Line item | Rate | Annual |
|---|---|---|
| Projected gross rental income | $80,000 | |
| Management commission | 15% | −$12,000 |
| Cleaning fees | 10% | −$8,000 |
| Net rental income | $60,000 |
The $80,000 gross turns into $60,000 before the first bill is paid. Here are the bills.
| Expense | Basis | Annual |
|---|---|---|
| HOA dues | $700 / month | $8,400 |
| Utilities | $140 / month | $1,680 |
| Maintenance reserve | 3% of gross | $2,400 |
| Property tax | $3,900 | |
| HO6 insurance | $1,700 | |
| Insurance assessment | $150 / month | $1,800 |
| Mortgage (P&I) | $2,591.87 / month | $31,102 |
| Total fixed expenses | $50,982 | |
| Annual cash flow | $60,000 − $50,982 | $9,018 |
That works out to about $751 a month after the mortgage. The condo covers its own costs, and the owner keeps the difference while rental income pays down a $450,000 loan.
| Item | Detail | Amount |
|---|---|---|
| Down payment | 25% | $150,000 |
| Closing costs (est.) | $18,000 | |
| Furnishing / improvements | $7,000 | |
| Total initial investment | $175,000 | |
| Cash-on-cash return | $9,018 ÷ $175,000 | 5.2% |
That’s a 5.2% cash-on-cash return. The loan balance also drops by about $5,900 in the first year, the property may appreciate, and the owner gets to use the unit. The deal works because the purchase price made sense against the rental income.
How Your Property Management Company Changes the Return
Most lines in that expense table are set by someone else. The association sets the dues, the county sets the taxes, and the mortgage payment stays the same. You choose the management company, and that choice moves your cash flow more than any other line.
Commission Rate
On $80,000 gross, going from a 15% commission to 20% costs $4,000 a year. That cuts the example’s $9,018 cash flow to $5,018, a 44% drop from one number in the management contract.
Booking Performance
Booking performance doesn’t appear on a fee schedule. Managers price, market, and fill the slower months differently. If a manager books the same unit 15% better, $80,000 in gross rent becomes $92,000.
After commission and cleaning, that leaves $69,000. Maintenance rises to $2,760 and total expenses come to $51,342, so annual cash flow is about $17,658, or $1,472 a month. Cash-on-cash return goes from 5.2% to about 10.1%.
The same condo, three outcomes
- 20% commission, same bookings: $5,018 a year (2.9% cash-on-cash)
- 15% commission, same bookings: $9,018 a year (5.2% cash-on-cash)
- 15% commission, 15% better bookings: $17,658 a year (10.1% cash-on-cash)
The unit and purchase price are identical in all three. Give the management decision the same diligence you give the condo.
Questions to Ask a Management Company
- What is your commission, and what costs are billed separately?
- Can I see trailing twelve-month revenue for three units like mine in this complex?
- What is your average occupancy from October through February?
- Who sets nightly rates, and how often do they change?
- How do you handle maintenance calls, and do you mark up vendor invoices?
- How far ahead do I need to block dates for my own use?
- Can I talk with two current owners in this building?
7 Signs a Condo Will Cash Flow
When I screen condos for investor clients, I look for these:
- Real rental history. Two or more years of owner statements tell you more than any projection.
- Dues the income can support. In the example, $8,400 in annual dues is 10.5% of gross rental income. Run that comparison on every unit you consider.
- Healthy reserves. Buildings with thin reserves pass repair costs to owners through special assessments. Read the budget and the past year of meeting minutes.
- Amenities guests book for, such as a lazy river, an indoor pool, or covered parking. They help fill the fall, winter, and spring months.
- A price that matches the view. Direct Gulf-front units earn more than side-angle units, so a side-angle unit priced like Gulf-front is overpriced.
- A building lenders will finance. Some complexes are non-warrantable, which limits your loan options and the buyers you can sell to later.
- Room to improve. A dated unit in good condition is priced for how it looks today, and updates can raise what it earns.
How We Find Condos That Pencil Out
Cam Baker and the Foote Real Estate Group specialize in finding Gulf Shores and Orange Beach condos with net-positive ROI potential. Before you write an offer on a unit you’re serious about, we build a projection like the one above from real owner statements and the association’s budget. Plenty of units don’t pass.
We’re also partnered with several boutique property management groups on this coast that have historically outperformed the larger companies. In the example above, a better manager added thousands of dollars a year. Taking $10,000 off the purchase price would lower the mortgage by about $500 a year.
A Gulf Shores AL Realtor or Orange Beach AL Realtor who runs these numbers can show you a unit’s likely cash flow before you sign a contract. If you’re comparing Gulf Shores condos for sale or Orange Beach condos for sale, send us an address or building name and we’ll build the projection.
Common Questions
Are Gulf Shores and Orange Beach condos a good investment?
Many of them are. Both cities are established short-term rental markets, and a well-chosen condo can cover its mortgage, HOA dues, taxes, insurance, and management fees with positive cash flow left over. Results depend mostly on the purchase price compared with realistic rental income, the size of the HOA dues, and the property management company you hire.
How much rental income does a Gulf Shores condo generate per year?
It depends on the unit’s size, view, and building amenities. The 2-bedroom Gulf-front condo in this guide projected $80,000 in gross rental income. Ask for actual owner statements from the past two or three years, and compare them with units in the same complex that have the same bedroom count and view.
What expenses come with owning a rental condo in Orange Beach?
Plan for management commission, cleaning fees, HOA dues, property taxes at Alabama’s rental property rate, an HO6 policy, any insurance assessment from the association, utilities, a maintenance reserve of about 3% of gross rental income, and your mortgage.
On the $600,000 example in this guide, the costs after commission and cleaning came to $50,982 a year.
Does the property management company really change my ROI?
Yes. In this guide’s example, raising the commission from 15% to 20% cut annual cash flow from $9,018 to $5,018. A manager who booked the same unit 15% better raised cash flow to about $17,658. Boutique management groups in Gulf Shores and Orange Beach have often outperformed the larger companies on both rates and bookings.
How much money do I need to buy an investment condo on the Alabama Gulf Coast?
Investment property loans usually require 15% to 25% down. The $600,000 example in this guide used 25% down, which meant $150,000 down, about $18,000 in closing costs, and $7,000 in furnishings and improvements, for $175,000 total.
Some Gulf-front buildings are non-warrantable, so confirm financing on the specific building early.
About these numbers. The figures above come from an actual ROI projection built for a client. They estimate what the unit could earn in a year based on its past rental history, comparable units in the same complex, and current trends in the local vacation rental market. They are not a guarantee of future performance. Rental income, insurance, HOA dues, tax assessments, and interest rates all change. Cam Baker is a licensed Alabama real estate agent, not a financial advisor, CPA, or attorney. Talk with your own tax and legal professionals before you buy.