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Vacation Home as an Inflation Hedge?
Old 02-06-2010, 11:13 PM   #1
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Vacation Home as an Inflation Hedge?

I've been thinking for some time about purchasing a vacation home. I love to ski and have been following ski town real estate for over ten years. I currenty spend a significant portion of my vacation budget on lodging, and that would be enough to cover about 3 to 4 monthly mortage payments a year. Plus some tax benefits and rental income, I may be able to cover 8 to 9 of the monthly payments(maybe a rosy projection). My observation is that current mountain prices are down and the treasury is printing way too much fiat currency. What are your thoughts about real estate as an inflation hedge as well as debt as an inflation hedge. I don't think current mortage rates can hold much longer. If we are looking at 70s style stagflation, is real estate a good piggy bank to be storing the fruits of my l@b*r? At least if the market continues to be flat, this investment would allow me to get some skiing done. Thoughts?
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Old 02-07-2010, 12:34 AM   #2
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Beer man: Here is my perspective, as an owner of a small condominium in Park City, UT. It depends

In my case it has worked out OK, but not wonderful. I lived in Park City for two years, and liked it. I returned a couple of years later and bought a 1-bedroom unit about 200 yards from the lifts. It has been in the nightly 'rental pool' for 14 years now. The first 5 years I visited yearly for a week in Winter. Now, I visit in the Fall (no more skiing for this fat old man). I still enjoy it.

Given current prices in ski country, it might be a good time to buy, but definitely 'run the numbers' on any purchase you consider. I've provided mine, below to give you an idea (especially management fees for a nightly rental unit). As you know, yours will vary greatly with property type and location!

Average rentals of $12K/year (+-20%). Average expenses including debt service, management fee (40% of rentals!), maintenance, taxes, association fees, insurance, and utilities are about $14K. So, it costs me somewhere between $0 and $4K per year to own. With depreciation, it produces a tax loss (really a tax deferment. You get to pay it back when you sell). Appreciation has been about 80% (even after the crash of '08). I'm sure others have done better, and I know people who have done worse.
Hope that helps.

Steve
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Old 02-07-2010, 09:04 AM   #3
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As with rental real estate in general, I have no problem with having a second home that's often rented if it cash flows, if it's truly a long-term holding and if you can keep it rented out. Ignoring the bubble, this is what it takes for rental real estate to make sense. The days of assuming a rental property's negative cash flow will be more than offset by an increase in property value are over for a while. But if you put enough down enough on the purchase that whatever mortgage, taxes and insurance you have on it is more than covered by rents paid, it can be a good thing for building wealth.
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Old 02-07-2010, 09:11 AM   #4
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If you are not buying it because you want it first as a vacation home, then don't buy it for any tax or future appreciation you think you might receive. You have got to plan that you may not have it rented out at all or very minimally, if you are ok with paying all the mortgage, association fees, taxes etc out of pocket then go for it. Otherwise you will be disappointed later, when rents aren't what you expected, or assoc fees go up etc.
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Old 02-07-2010, 09:58 AM   #5
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I second what jimnjana said. Be clear on why you are purchasing a vacation property. If your goal is solely to make money on it, you will probably be disappointed, especially now that living standards and discretionary income are falling. However, if you calculate that you, yourself, will use it and enjoy it on a regular basis, and thereby avoid paying for other vacation accommodation, your vacation property has real econonic value to you.

I have a fractional ownership in a vacation property, which I use regularly. Its economic value to me is several thousand $ per year and the lifestyle value is priceless. But others who bought in the same complex for investment purposes are frustrated at their low ROI.
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Old 02-07-2010, 10:10 AM   #6
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I think it depends on your assessment of the broader economy as well. Second homes and vacations altogether are a whole lot less popular in a world of 10%+ unemployment, stagnant/declining wages, etc. If you see that improving dramatically, then maybe. But in general, "real estate" and "investment" should not be used in the same sentence:

home economics the hidden costs of the 'american dream': Tech Ticker, Yahoo! Finance
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Old 02-07-2010, 11:34 AM   #7
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We had a timeshare with fixed unit and fixed weeks. It never paid off but as a high cost accommodation for our use, it was priceless. We established some great friends with people from all over the US and Canada.

In 2003 we retired and so the 3-weeks were no longer enough so we topped up our stay with 5 or 6 weeks rental in other facilities in the area. After four years of renting, we bought a place that we now use for six or seven months a year. We do not rent it out. My advice would be to buy when you will use it and forget about renting.

Consider any rental income as gravy.
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Old 02-07-2010, 11:42 AM   #8
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We are also considering buying a vacation home or two, but more as a business than for pleasure. I think that if you commit to managing the business yourself and do your homework it can produce a modest income. Considering the RE market, you should be buying low right now and in the future you will also build equity. However, if you buy in a prime location you might be paying premium for the RE and if you use a management company, you could be looking at taking a loss. I agree, if its for pleasure, that might be acceptable, but if you are thinking of making money it is not. As far as a hedge against inflation, RE is always a good LONG TERM investment if you are willing to hold on to it for 10+ years. It should increase in value along with inflation helping to offset that. We are worried about the national issues (debt, inflation, deficits, etc.) that could depress the RE markets even further. We think this is the bottom or close to it, but what if its not?
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Old 02-07-2010, 01:49 PM   #9
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Originally Posted by flyfishnevada View Post
We are also considering buying a vacation home or two, but more as a business than for pleasure. I think that if you commit to managing the business yourself and do your homework it can produce a modest income. Considering the RE market, you should be buying low right now and in the future you will also build equity. However, if you buy in a prime location you might be paying premium for the RE and if you use a management company, you could be looking at taking a loss. I agree, if its for pleasure, that might be acceptable, but if you are thinking of making money it is not. As far as a hedge against inflation, RE is always a good LONG TERM investment if you are willing to hold on to it for 10+ years. It should increase in value along with inflation helping to offset that. We are worried about the national issues (debt, inflation, deficits, etc.) that could depress the RE markets even further. We think this is the bottom or close to it, but what if its not?
I agree if you are financially prepared to cover all the expenses with little rental income. There are some great deals right now, but many areas rents will not recover for years. Look for a well maintained rental with a strong rental history, with mostly repeat renters. Pay special attention to last three year rents...
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Old 02-07-2010, 02:39 PM   #10
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My thoughts are that I love to ski, my kids love to ski, my wife loves to ski, and my friends lov e to ski. Rather than throw money in that black hole known as the market, I can spend it on something I love. At the end of 15 years I will have something to show for it.
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Old 02-07-2010, 03:07 PM   #11
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Originally Posted by Beer man View Post
My thoughts are that I love to ski, my kids love to ski, my wife loves to ski, and my friends lov e to ski. Rather than throw money in that black hole known as the market, I can spend it on something I love. At the end of 15 years I will have something to show for it.
Go for it Beer man!
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