2nd house as an investment

[kuli48]

I have a second "lake house" that I consider an investment. When I look at all my other investments, how should I classify this 2nd house? If my other investments are, stocks, bonds,and cash, this is real estate. Should this "investment" influenence my other investments? I like to think about it as a bunch of money waiting for me to cash it in. It would be about 1/3 value as my other investments combined, approximately $400K.

Thanks

 

[MichaelB]

I have a second "lake house" that I consider an investment. When I look at all my other investments, how should I classify this 2nd house? If my other investments are, stocks, bonds,and cash, this is real estate. Should this "investment" influenence my other investments? I like to think about it as a bunch of money waiting for me to cash it in. It would be about 1/3 value as my other investments combined, approximately $400K.

Thanks

Theoretically a second house could be considered an illiquid real asset, which would be an uncorrelated asset class additional to the three you named. In my personal experience, however, a second house is more of an expense trap than anything else.

 

[kuli48]

Theoretically a second house could be considered an illiquid real asset, which would be an uncorrelated asset class additional to the three you named. In my personal experience, however, a second house is more of an expense trap than anything else.

Thanks Michael

It is an expense, but it has appreciated, and I use it often. I am 64, and in another 5 - 10 years I will sell it. Should it have any influence over my current investments and if it does how should I classify it. Should I consider it when I allocate my other investments?

Thanks

 

[teejayevans]

I would classify (the conservative estimate of equity in it) as real estate. I would not let it affect my other investments unless you plan on buying a REIT that invests in vacation property, then I would.
TJ

 

[rayvt]

Whether or not you consider it an investment, it's not.

A 2nd house on a lake is just like a 2nd car which is a BMW Z4 convertible.

It's a consumption item that may, in the fullnes of time, be sold for cash.

 

[donheff]

Whether or not you consider it an investment, it's not.

A 2nd house on a lake is just like a 2nd car which is a BMW Z4 convertible.

It's a consumption item that may, in the fullnes of time, be sold for cash.

If you plan to sell it I see no reason not to view it as an asset like any other. The cash it provides at sale is the same green stuff equities or bonds turn into when you sell them. Whether it has a good ROI as an investment is another issue.

 

[rayvt]

You're kidding, right?

You can convert a stock or bond or REIT into cash in one day. A piece of real-estate may take YEARS to sell. Every day I drive buy a nice house sitting just off the tee-box of the 10th hole of a golf course. This house has been for sale for TWO years and still has not been sold.

The OP can consider it as whatever part of his asset allocation he wants, but the danger is that it'll not actually fulfill the asset class that he calls it.
A REIT is in the real-estate investment asset class.
A specific house is just one illiquid thing that happens to be real-estate.

If you're wrong, you wind up fooling yourself, and putting yourelf at risk of having to re-enter the work force as a Walmart greeter, at age 75.

 

[ducky911]

I think that vacation homes do not move in value the same as residential property. People that own them can afford to not sell during a dip in price.

I bought a vacation home three years ago(after the big dip) and watching the ones for sale in the area I would say they are staying about the same at best. But near my full time home the prices are going up with very little on the market.

Just a guess but I say the dip on vacation homes was about half percentage wise as residential. So when they go back up I say it would follow suit.

 

[donheff]

You're kidding, right?

You can convert a stock or bond or REIT into cash in one day. A piece of real-estate may take YEARS to sell. Every day I drive buy a nice house sitting just off the tee-box of the 10th hole of a golf course. This house has been for sale for TWO years and still has not been sold.

Not kidding. You would have to be brain dead to view a house as being as quick to unload as stocks or bonds but then you wouldn't keep the darn thing if you needed instance cash from it. But, quickly unloading a huge block of stocks (which would be the equivalent of selling a vacation house) could be almost as troubling. If you wanted a fast $500K right after a 50% downturn in the market turning to your stocks would be problematic as well. Not so liquid in such circumstances and really no different than selling a paid off house at a 50% loss.

I have all I need to live the life I enjoy including maintaining and using a second home. But if the markets go terribly south as some are predicting I can always sell that second home, albeit with a potential wait or significant loss depending on the timing. Nut eEven at a drastically reduced price I would walk away with a big chunk of cash and a large reduction in taxes/maintenance. Do I consider that house an asset? You bet.

 

[Koolau]

I won't take "sides" on whether a second house is an investment (and especially whether it is a "good" investment.) I will say, that when WE owned a second house (which we rented out for many years) WE included its estimated value in our overall investment portfolio. Looking back, I'm certain we could have done better in other investments (stocks, bonds, etc.). BUT, owning the property did for us what we wanted. It held a place for us in paradise which moved with the local RE market. It more or less paid for itself through rents. So, whether it was a GOOD investment or BAD, it had additional virtues.

We have NEVER considered our PRIMARY residence as an investment, but one could make a case for that as well, I suppose. Just how you look at it and what makes you feel good enough to sleep at night. To the OP's original question, though: WE always avoided RE type investments (REITs, in particular) because we believed we had enough RE exposure already. As you have seen from other's comments, YMMV.

 

[mathjak107]

we sold our 2nd home in july after 5 years. its was nothing but a liability and not an asset in our eyes.

duplicate bills for everything ,even when we werent there, lost opportunity costs and the closing costs in and out were a big nut.

the house would have to have gone up 15% just to cover the closing costs.

i would never do it again.

 

[sheehs1]

I would consider it a hard non liquid asset much like your primary home. In that regard, I would not consider it the same as stocks, bonds or CD's, Bank accounts..etc.
Consider it a form of diversification as Michael B said non-correlated with stocks and bonds. What it will be worth versus what you paid for it and paid to maintain it remains to be seen.

Recently did a quick calculation on a 2nd home we too were interested in. Results of the calculation were: If I put 50% down due to expenses and mortgage I might be lucky to make 1% a year net positive cash flow. If or when I paid it off or if I paid full price cash I still would not have made but 2.8% a year on it based on the value of what I put in it. For the amount of money we are talking about, I could do better in the stock market with dividend paying stocks or bond funds...etc.
As I pointed out to my husband, one scenario eats money the other one makes us $30,000 a year (4%-5% divi or bond yields in stockmarket). This goes along the lines of what Michael B said.
We did not buy the 2nd home. We keep looking but I have not found the right scenario.

 

[mathjak107]

we paid cash for our 2nd home in the poconos. it ran us about 8-10k a year to keep going and i figure i lost another 10k in lost interest had i just bought a muni instead.

thats 20k a year ...

the worry during the winter when we would lose power or have storms really was the clincher. it is just to much worry to be worth it in my opinion.

between 5 years of ownership and closings costs on the buy and sell i figure that was 100k out the window overall.

in my book it gets logged on the liability side.

 

[rayvt]

After having owned a couple of timeshares for 20+ years, and having friends who had a vacation house, my opinion that vacation 2nd homes are generally a bad idea.

You go to the same dang place every year, and by the 5th time you have done & seen everything you want and it's just boring. Plus the continual on-going costs have to be paid, like an open wound, whether you go there or not.

Long run, it is much cheaper and better to rent a place wherever you want to go. Even $2000 for a week is cheaper overall than buying a place. And you can go to a different place every year.

 

[traineeinvestor]

If you plan to sell it I see no reason not to view it as an asset like any other. The cash it provides at sale is the same green stuff equities or bonds turn into when you sell them. Whether it has a good ROI as an investment is another issue.

+1

Real estate is an asset. It has value which can be realised (even if less liquid than some other asset classes).

Whether it is a good investment is a separate issue. In this case, since you use it yourself, ROI will be harder to calculate (personal utility should be taken into account). I would just think off it as a large illiquid store of uncertain value.

 

[mathjak107]

we found that with having a 2nd home we felt guilty about not getting there enough and it costing so much that we rarely went anywhere else.

we got bored too. after we saw it all and done it all it wasnt exciting anymore.

the clincher was when we realized we didnt want to live there full time after we retired.

the winters were brutual in the pocono mountains. there is no public transportation if you cant drive.

limited medical facilities .

limited things to do without driving an hour.

all in all once we realized the rural life wasnt really what we wanted we felt every bill we paid.

with little to no appreciation the last 5 years it was just one major liability.

i disagree with you on real estate being an asset as a general term ..

an asset should support itself or generate income or generate capital gains.

it did none of the above so until the day it does its nothing but a liability and i wont call it an asset.

anything that cost you more then it brings to the party is a liability not an asset..

even if its something thats worth more then i paid, if i have no intention of selling it then i consider it a consumption item.

the original art work i own falls in that catagory.

 

[sheehs1]

After having owned a couple of timeshares for 20+ years, and having friends who had a vacation house, my opinion that vacation 2nd homes are generally a bad idea.

You go to the same dang place every year, and by the 5th time you have done & seen everything you want and it's just boring. Plus the continual on-going costs have to be paid, like an open wound, whether you go there or not.

Long run, it is much cheaper and better to rent a place wherever you want to go. Even $2000 for a week is cheaper overall than buying a place. And you can go to a different place every year.

+1
That is always where I end up too rayvt.

 

[Purron]

All I can add is DH and I are so relieved to be rid our our second house. We've owned two houses for nearly 15 years and are happy to be down to one paid for place.

 

[MichaelB]

Thanks Michael

It is an expense, but it has appreciated, and I use it often. I am 64, and in another 5 - 10 years I will sell it. Should it have any influence over my current investments and if it does how should I classify it. Should I consider it when I allocate my other investments?

Thanks

My view - a second house is an asset and you can classify it as a real asset in your portfolio. Additional to stocks, bonds, cash, and REITS. It is not liquid but should increase in value more than inflation, the yield is negative, but it is still an asset. Can't say anything else because it depends totally on the local circumstances and market conditions, but it is uncorrelated to your other portfolio assets.

 

[Rich]

My wife and I own our home outright on Cape Cod. Since I retired we spend five months out of the year (Nov~May) in AZ. We have a long term rental in a very nice home. Much less expensive, much less hassle, than owning the place.

Everyone has different needs. YMMV

 

[MovingtotheCove]

2nd house is a real estate asset. Maybe or maybe not a good investment. Would not clasify it as an active investment in a portfolio if used vs. being a full 100% rental. If owned and managed for rental purposes, just as a duplex, four plex, or 8 plex it produces income/losses and truly has the purpose of not only being a vacation/2nd home. Again, even if a vacation/second home that is not rented it is an asset.

 

[mathjak107]

until the day comes that any of my real estate rental or not produced positive returns they are liabilities.

you can call anything an asset even your furniture but if its not adding to the pot and costing you money then its taking away and anything taking away is a liability.

 

[LakeTravis]

until the day comes that any of my real estate rental or not produced positive returns they are liabilities.

you can call anything an asset even your furniture but if its not adding to the pot and costing you money then its taking away and anything taking away is a liability.

My primary home - a waterfront 3/2 on Lake Travis - become my second home three years ago when we bought a bargain foreclosure near downtown Austin.

Since then, the lake has dried up, the dock is sitting on the ground, and thank goodness I was able to lease it out on a two year lease which is up at the end of this month but they want to continue month to month for awhile in hopes the water comes back........

My carrying costs on that property are about $25K a year. It's true market value hasn't changed much over the last several years, I still stand to gain a $225K-$275K profit when I sell it, but the window of sales opportunity on properties like this is very narrow. To put it in other terms - it is subject to the availability of "goofy" money. And right now, there isn't a large supply of "goofy" money available.

So I'll continue to sit on it, maintain it, pay the mortgage and property taxes on it, watch as certain outdoor areas I built myself deteriorate over time and need to be restored/maintained, and watch the market closely to determine when the G1 (goofy money index) increases.

My point is - it's both an asset AND a liability - just depends on the point in time you are considering.

 

[mathjak107]

If you can sell it for more and get some capital gains then its an asset.

in our case we sold at a loss, it was a liability.

it cost us money to keep it each month and it reaped no gains .

it was a consumption item . no different than jewelry or art that hangs on your wall that you will never part with.

 

[donheff]

until the day comes that any of my real estate rental or not produced positive returns they are liabilities.

you can call anything an asset even your furniture but if its not adding to the pot and costing you money then its taking away and anything taking away is a liability.

The mortgage (if any) and recurring expenses are liabilities. The equity is an asset (not necessarily precisely known until you go to sell). Describing it as anything else is just a personal definition of what it all means to us.