Why do people buy beachfront properties despite the risks?

The number one reason many investors are drawn to beachfront properties is their potential to increase in value over time. The premium for beachfront properties was 76% in 2023 and 63% in 2022, highlighting the continued growth in value.

Beachfront properties outperform all kinds of properties. Globally, beachfront properties, of which beachfront real estate is a subset, generated a premium of 76% on average in 2023 over similar non-beachfront properties.

This figure is considerably higher than the premium for other waterfront real estate, which stood at circa 48% throughout 2023, making beachfront real estate a standout.

The major factors driving the premiums and value attached to beachfront properties include:

• Limited supply: Beachfront properties are scarce, particularly in the cities, creating a demand-driven market.
• High demand: There is enormous investor appetite for beachfront properties for many reasons, including being given priority as a second home option by investors.
• Strict building regulations: These waterfront locations often have very stringent building restrictions, limiting beachfront real estate stock availability.

Many factors that lead to beachfront property price increases also help retain its value during various market conditions, particularly in cities and popular tourist destinations, making them a valid option for those simply looking for capital preservation.

When adverse events happen, like the financial crisis of 2007-2009, waterfront properties are the first to bounce back and appreciate compared to similar homes inland.

One of the reasons for this is demand resilience. The appetite for beach houses by different cadres of investors hardly wanes, irrespective of the prevailing market conditions.

Granted, investors may pause more before making a purchase during these uncertain times, but that latent desirability makes beachfront homes a potential inflation hedge.

One of the most captivating aspects of beachfront living is the breathtaking views. No two days — or nights — are alike. One day, you’re waking up to the sound of waves crashing the shore, and on another, everywhere is so tranquil, with the sun shining so bright.

Beach properties are always in high demand, with above-average occupancy rates. Their rentability as vacation rentals offers significant potential for rental income, especially in popular coastal destinations, should the owner want to make the home available for rentals.

Coastal destinations:

• Are popular tourist destinations due to the views.
• Have proximity to the other luxurious amenities.
• Have direct beach access.

Coupled with limited supply, property owners can get premium rates for their beach houses.
Furthermore, beach property owners must get familiar with local laws and regulations regarding vacation rental properties. Other key considerations include marketing, advertising, and managing the seasonal fluctuations and occupancy rates to determine short-term and long-term strategies.

Of course, this may add to the owner’s headache. Still, investors can enjoy a seamless, lucrative rental income stream by outsourcing the process to a professional property management company.

Owning a beachfront property provides a perfect holiday home whenever you feel the urge for a getaway, whether the location is local or international.

Owners can significantly save on accommodation costs over time. Think about it: you can enjoy the luxury of taking spontaneous trips without worrying about booking in advance or dealing with the high prices of peak seasons.

There are ample recreational activities for you to do that require little to no planning. You can surf, swim, or take a peaceful walk along the shore whenever you like. You could also enjoy a good book while listening to the sound of the waves.

Beach properties also provide the perfect venue and backdrop for barbecues, evening bonfires, and picnics.

There are many ways a beach condo can offer tax respite. From home office deductions to mortgage interest deductions and the Augusta rule, potential tax benefits may help offset the costs of ownership and make the investment in buying a beach house more financially attractive.

For starters, you can deduct property taxes paid on a beachfront from your federal income taxes. Many states and local jurisdictions cap property taxes at $10,000 per tax return.

Similarly, if you take out a mortgage to purchase the beachfront property, you can deduct the interest paid on the loan from your taxable income.

Speaking of taxes, it’s also important to stress the importance of the 7-day and 14-day rules. These rules determine how the government categorizes your beach property as a personal residence or rental property.

The 7-day and 14-day rules

The 7-day rule helps determine whether your rental business is passive or not for tax purposes. If you rent out your beachfront property for seven days or less on average to each tenant, the IRS considers the income and deductions from the property as non-passive. This practically means that you’re eligible for tax-deductible losses.

The 14-day rule says that if you rent your beach house for 14 days or less for that year, you do not have to report that income to the IRS. The rule also says that the property is a personal residence if you “use the property yourself for more than 14 days or more than 10% of the days it’s rented out.”

Whether you’re looking at it from a wealth-building or income-making perspective, investing in a beach home is a great investment and smart portfolio diversification strategy.

We mentioned earlier how waterfront properties appreciate over time and outperform inland options, with beachfront homes being a standout performer. This feature makes them a solid long-term asset, providing capital gains if you choose to sell the property in the future.

In addition, beachfront property creates a potential income stream through vacation rentals. While the rental income may be seasonal and driven by tourism, the income can still be substantial, providing a cash flow stream that can supplement other income sources.

Are there potential health benefits to living close to the ocean? Some research suggests so.
A study found that people staying close to the coast self-reported better health than those living farther away. This remained true even after adjusting the results for other factors like age and socio-economic confounders.

Another study tracked over 15,000 people for approximately ten years. The researchers found that those who moved closer, within 5km of the sea, reported “being healthier and having less mental distress.” while those who relocated farther from the sea fared worse. More importantly, the result remained consistent among retirees and the working-class population.

The reason for this disparity is simple. According to research, people living close to the coast are more likely to meet the recommended levels of physical activity.

Also, just thinking about it logically adds bearing to these findings. From the calming effects of the water to improved air quality, it’s easy to see why people living near water bodies self-report good physical and mental well-being.

Beachfront properties are often located in areas with restricted access and/or private communities. This gives them an added sense of privacy and exclusivity.

Many beachfront properties feature spacious grounds, providing ample outdoor activities and relaxation space with little to no interference. If there is at all, it is usually mild interactions from your neighbors alone.

As we've pointed out multiple times, beachfront properties, especially those in prime locations, are inherently limited in number. This scarcity — and the high prices — create a sense of exclusivity. As such, owning such a property signifies prestige and a life of luxury.

Also, these neighborhoods are high-net-worth individual magnets, attracting celebrities and influential figures, adding to the sense of prestige it bestows on the owner.

Beachfront properties often have good resale value, making them attractive investments for short-term and long-term goals. Again, the lopsided supply-demand dynamics drive up property value over time.

This scarcity, combined with other factors such as unique location, natural beauty, and desirability, ensures beachfront properties at least retain their value over the short and medium term.

Of course, this asset class is not immune from wide-scale economic downturns. However, owing to the factors we mentioned above, beachfront properties quickly recover their value once market conditions improve.

By passing down a beachfront property to future generations, you can provide them with a valuable asset that can offer financial security and a sense of family heritage.

When rented out, the property can continue to be a source of income and cash flow for future generations. Or the family can sell the property to offset essential expenses.

Compared to consumable assets, beachfront properties rarely depreciate; they tend to retain or grow their value, meaning the wealth passed on is less likely to lose value over time.

The beachfront property can also hold a lot of history and memories as a family legacy, making it a place for future generations to gather, learn family history, and make their own memories.

Investing in beachfront property can be highly rewarding, but like any investment, it comes with its own set of risks. Some of these risks include:

Government policies and regulations

Changes in government policies, such as zoning regulations, tax laws, or environmental regulations, can sometimes make beachfront areas less attractive for investment and affect the value of beachfront properties.

For example, a law impacting the use of the property for vacation rentals may reduce your income potential and ultimately reduce the long-term value of the property as demand dwindles.

Some of the ways to mitigate this include:

• Carefully research current and upcoming government policies in the area.
• Before purchasing, ensure you engage a local real estate attorney and home inspector to ensure your property complies with all zoning laws and regulations.
• Avoid areas where there are pending disputes in court that may alter the future of the coastal area.

High maintenance costs

Beachfront properties tend to have higher maintenance costs than inland due to exposure to harsh elements like saltwater and humidity.

These elements can cause wear and tear on your property, leading to rust on metal surfaces, mold in damp areas, and faster deterioration of building materials.

In addition, managing beachfront property might require specialized care, such as employing managers familiar with coastal homes and paying considerable property management fees.

Our tips to reduce maintenance costs include:

• Schedule regular maintenance. Tackling minor problems early prevents them from becoming big problems, and you’ll most likely find issues early with scheduled maintenance.
• Work with professionals who understand the unique needs of beachfront properties.
• Vet guests that let your beachfront apartment to ensure they’re reasonable people and craft vacation rental rules, like not allowing parties, to protect your investment property.

Building and zoning regulations

Most coastal areas have complex and stringent zoning laws to prevent overdevelopment and protect the environment. These rules may limit the renovations or developments you can perform on your property.

Our recommendation is to:

• Understand the existing zoning laws and assess if your envisioned upgrades are allowed.
• If the property and area are your top choice, consider alternative upgrades that comply with local regulations.
• Always engage local professionals to get proper advice on your investments.

Challenges in securing insurance

Getting comprehensive insurance for beachfront property can be more difficult and expensive due to the higher risk of natural disasters like floods, storms, and erosion.

Many insurance companies charge higher premiums and have stricter underwriting standards in high-risk coastal areas.

We recommend consulting with multiple insurance agents experienced in beachfront properties to ensure you have the right coverage and get the most affordable rates.

Tourism declines

If the beachfront area is primarily a tourist hotspot, factors such as economic downturns or changes in tourist preferences can reduce the number of visitors and, hence, your rental income.

We recommend:

• Buying beachfront properties in areas with diverse attractions makes your income less reliant on regular tourism trends. For example, an area with loads of conference halls and event centers.
• Diversify your marketing strategy to attract long-term renters, like digital nomads, during off-peak seasons.