Final Stages of 2nd home purchase-Need Input

[tryan]

Here's a few hard numbers on our lake front vacation rental:

gross rent: 37k

maintenance : 12% (of gross rent)

Utilities : 15% (winters are harsh)

management (cleaning / linens mainly): 10% (use homeaway and vrbo to rent ourselves)

taxes (property and state hotel tax): 29% (ouch!)

Doesn't leave a whole lot to pay a mortgage. We've been doing this 5 years. Haven't made a penny. But it carried itself last year (for the first time). And we enjoy dual season (ski in the winter, lake in the summer). So it works for us.

[sheehs1]

Wow tyron...those property taxes are indeed high!

Running percentages on my estimates things look like:

Gross Rents = $36,000

Property Taxes = 10.2%
Homeowners Insurance = 7.1%
Mortgage = 46.8%
Water Expense = 2.2%
Utilities = 10.0% (and I calculated higher than what the seller had)
HOA Fee = 0.7%
TVInternet/Phone = 4.8%
Pool Maint = 3%
Yearly Repairs = 6.6%
Yearly Supplies = 3.3%
Total = 84.8% If I don't rent

Property Management Fee = 18% (cleaning is included in %)
Total = 102.7% If I do rent


In order to get these percentages I'm going to have to put more down on it ...more like 44.2% down....rather than the original 25%. Still trying to decide.

There was a really good article on the link Hobo gave me...on how to identify whether the price is a good price for purchase with rental in mind.
annual rent / purchase price = 3% means do not buy, prices are too high
annual rent / purchase price = 6% means borderline
annual rent / purchase price = 9% means ok to buy, prices are reasonable

I'm at 6.9% ....so...borderline......
Yes...want it for qualify of life...but also don't want to overpay....

[Hobo]

I had a house near the beach years ago and tried to rental it out as a serviced vacation rental. It required more management effort on my part than I ever managed. You are running it like like business, so you need some maid service and gardening service. Management agency to keep tract of the comings and of guest. You must have someone be available to make emergency repairs such as if a tree falls on the driveway and takes down some overhead wires with it.

I came to the conclusion that I would be far better off to have 3 rental units each 1/3 the size of the house. In other words, cut my house into thirds. I had a full array of services for one unit. The total rent would have been much greater with 3 units and my expenses of my house would be less overwhelming. I thought a long time how to do that, but it was not possible to split it up like a bed and breakfast. But now I have a much better idea why a two or three units are so much more profitable.

[LightningDawg]

We too had rental condos. One in a college town and one at our local beach. The college condo was rented out full time. The beach condo was rented out most of the time. We used it approximately 2 weeks a year.

It turned out to be more hassle than it was worth. We couldn't just go to the beach condo whenever we wanted to. Invariably, we got called because something broke or something was missing or whatever. And the real estate taxes were high.

We decided to sell both, and pay off our primary home. If we decide to go to the beach for a vacation, we can always find a place to rent. This works for us.

[sheehs1]

LightningDawg...your post made me remember why I sold out a 25% interest in an ocean front beach cottage back in 2003/2004. Not only did multiple ownership not work but...it either just barely or didn't pay for itself. A lot of work for a week at the beach and didn't seem to justify having that asset sitting there subject to hurricanes...etc.
Every summer...I get that wistful...desire to have a place at the beach. With our children all out on their on....I'm now wanting a place I can get away to and take my animals etc.
Still I'm cognizant ....that ..it wil take some time to pay down the mortgage, and by then, if not before, it will need a new roof, 2 new heat pumps...etc. and that it will take time and effort to manage.
Hobo...I too see why 2 and 3 units under the same roof would be more profitable.

[Hobo]

The thought came to me that this is a very expensive second home/tranquility house. A second home in the Outter Banks is just about as "Great Gatsby-ish" as you can get - very opulent purchase.

Even if you have the income and savings to allow you to do this, I wonder if this house might be pushing you financially a little too close to the edge? Maybe you feel you must justify your purchase with a little extra income. That, you feel, would justify the purchase... but in your heart you know that renting it may cause you more headaches than profit.

So you are stuck, going round and round caught in a circle. It's a dream house, no it's a rental, no it's an investment, no its all three - but that doesn't work either. Okay, its a dream I have always wanted. You have expensive dreams! It's a problem that only 1% of the people in America have... but $700,000 is a very expensive second home. Unless of course, you are like my high school friend, Hank Paulson. He doesn't rent out his million dollar vacation home.

[sheehs1]

Hobo...it wasn't $700K, final contract price was $520K but your point is still well taken.
After...filtering out everyone else's wants, I finally got to the place...of determining my comfort level. Have canceled everything as of 30 minutes ago. Wan't excited about it...particularly of having to spend pretty big bucks to refurbish it. Decision made on this particular property. Relief.....
To everyone that posted...thank you for your thoughts and comments. Much appreciated

[Hobo]

Good decision. You weren't comfortable with the decision. You can always buy a different house in the future. But you can't always easily sell a house that you are unhappy with. Next time you will be a lot wiser about what to look for - so your dream doesn't turn into a night mare.

[W2R]

Good decision, though I know you must feel so upset at this point. Seems like closing on a home is always such a stressful and miserable experience, and not closing on one sounds even worse.

[sheehs1]

Thanks Hobo and W2R2. It is the right decision at this point. The seller has the right to try to get his price ...but a buyer has the right to only offer what they are willing to pay.
It's been an interesting experience in real estate purchase. Seller trying to sell an "as is" house he has not maintained for 15 years while trying to get pretty close to fair market value. Who can blame him...right? When I offered him my "as is" price..I could tell I made him mad...as he shot it back my way with a $70K difference and instructed his listing agent that if I didn't take it to take the property off the market. Then after I agreed to that....he went "out of pocket" for further negotiations and can't be reached. Just wasn't feeling good about it. Heck...we could not even agree on all of what needed fixing. For ex: The fiberglass deck on the main floor needed to be reworked and resloped as water was puddling and wicking up the cedar shakes contributing to moisture problems (according to my contractor and an appraiser). His solution...that he put back in writing to me? "Go sweep it off" (as if I was going to be there every day which I'm not).
I'm the second buyer....who has walked away from this house. One walked away in March and now me.

[Brat]

I think you did the right thing. There will be another, better house, when the time is right for you.

There are a lot of sellers with unrealistic expectations out there. The seller just wasn't committed to the sale. If I was his realtor I would discharge this client.

[sheehs1]

Thank you Brat. I feel relieved so ..that tells me a lot!

[ivinsfan]

Many thanks to sheehs1 and hobo for their comments on this thread.
I think it brings up the number one question people have about owning a second home, will it be a blessing or a burden in my life. The answer is different for everyone.
Discussions like this help everyone who is thinking about purchasing another home. This board really does put a "different" spin on many questions about retired life.

[MasterBlaster]

Quote:

Originally Posted by Hobo I don't need that kind of information. The price speaks for itself. Personally, I would prefer a grumpy seller who stays out of the way. I can't imagine what he can pull on you. Real estate is highly regulated and you have done inspections to make sure you are aware of any the physical problems - like leaky roof, failed septic tank, etc. Your real estate agent is crying because (from what I read) he/she is missing out on quite a large commission during hard times for a RE agent. I think your agent was just trying to start a conversation to find the details of the deal. It is kind of like wanting the hear the latest gossip. I don't care!

I suspect that the nosy realtor was just trying to size you up. They have to read the tea leaves to make sure that you will indeed qualify for a loan on the house. If your credit is marginal the down payment can make all the difference. They really don't have anything to go on except your word.

They hate it for a deal to fall apart after a months work due to someone being unqualified. The seller and the sellers agent hate you tying up their property for naught.

- Can you blame them ? Put yourself in their shoes.


Regarding vacation properties, I used to work with an older person who had owned a mountain cabin/chalet/house for decades. The thrill of going there was long past. Whenever he spoke of the house it was always of all the work that he needed to do on the house. Much of his vacation time was spent going there to work on the house. Evidently the thrill was gone.

So the moral is... Make sure that you really want this thing. Vacation homes can be difficult to sell. Also don't underestimate the maintenance on a home. You will then either have to pay someone to do it or do it yourself.

[sheehs1]

Quote:

Originally Posted by MasterBlaster I suspect that the nosy realtor was just trying to size you up. They have to read the tea leaves to make sure that you will indeed qualify for a loan on the house. If your credit is marginal the down payment can make all the difference. They really don't have anything to go on except your word. They hate it for a deal to fall apart after a months work due to someone being unqualified. The seller and the sellers agent hate you tying up their property for naught. - Can you blame them ? Put yourself in their shoes. Regarding vacation properties, I used to work with an older person who had owned a mountain cabin/chalet/house for decades. The thrill of going there was long past. Whenever he spoke of the house it was always of all the work that he needed to do on the house. Much of his vacation time was spent going there to work on the house. Evidently the thrill was gone. So the moral is... Make sure that you really want this thing. Vacation homes can be difficult to sell. Also don't underestimate the maintenance on a home. You will then either have to pay someone to do it or do it yourself.

Actually Mathblaster...my realtor ...had already received several pre-qualification letters from the bank with verification of funds on another property we had been interested in prior to this one. That's done fairly early in the process. She was trying to rush the appraisal process before due diligence ran out and to question the bank as to why it would take so long.
The moral of your other comments are very much spot on.

[tryan]

Quote:

Seller trying to sell an "as is" house he has not maintained for 15 years while trying to get pretty close to fair market value

Easy to see why there is defered maintenance. 36k of rents on anything north of half a million dollars will leave the owner straped (as you saw with your estimates).

Single season vacation rentals never made sense to me. You HAVE to give it up - rent it - the only time you REALLY want to be there.

[calmloki]

We went round and round on a second or different place. Ended up that we couldn't believe that owning a house and renting it out would work for us as a second home - we want our stuff in a place and don't want to move our stuff (cookware,furniture, bed, clothes, rugs, art, etc.) in and out of a place any time we want to visit. Visit. There's the point - we want to live in a place, not visit it. We considered having locked sections of a house or a duplex but ultimately went with a single family home that suits our desires without stretching our financial abilities.

It is 1100 miles from our other house - suspect the drive will get tedious - but it is a winter home - in the summer only golfers and madmen wander around down there. I have the idea that as we get more and more settled down there we will get to the point that we, well, I, will be able to get on a non-stop flight with not much more than a wallet and door key and be ready to live for a season in either place. Last move back north we also took a few computers and file drawers, it would be nice to trim that weight. Should adjust my desires though - while my vacation packing is of the paper grocery bag, toothbrush, 4 pairs socks, 4 t-shirts, 2 skivvies, done; SWMBO's planning is more reasoned and accounts for the possibility that we might take up scuba diving, State dinners, ballooning, ballroom dancing, and polar exploration. Must say that while I travel light and just hunker down when the freak snow storm blows in to the beach it has been much more comfortable sharing her space blanket that she just happened to bring with her.

[DAYDREAMER]

We bought a second home on the beach 2 years ago. It is 5 miles away from our 1st house. I knew the maintenance for 2 houses would be a hassle, and asked if my parents would be interested in living at the beach during their retirement, and just pay property taxes and keep the yard up. Our deal also included allowing us to come there anytime to enjoy the place.

So far-So good. We are there after work everyday to do our work out routine of rowing (sculling) and kayaking. Every weekend we have the boat on the bouy, and enjoying the place to its fullest.

Lessons learned-----Even with my convenient setup, I still incur alot of upkeep on the beach house. I am glad it is only 5 miles away, because some of the upkeep takes time. My real problem is finding time to work on my primary house because i'm always on the water playing.

[chinaco]

Quote:

Originally Posted by sheehs1 ... There was a really good article on the link Hobo gave me...on how to identify whether the price is a good price for purchase with rental in mind. annual rent / purchase price = 3% means do not buy, prices are too high annual rent / purchase price = 6% means borderline annual rent / purchase price = 9% means ok to buy, prices are reasonable I'm at 6.9% ....so...borderline...... Yes...want it for qualify of life...but also don't want to overpay....

In Berstein's Investor Manifesto, he indicates that a home is probably over priced if it costs more than 15x the yearly cost of rent for the same home.... which is 6.7% of the cost of the house. He further states that this would be 3.7% after all expenses (maint, tax, etc). Although I think his context is the price of the home one intends to live in... when trying to determine if one should buy or rent (for their personal use).... not a piece of property to be used as a rental in a business.

http://books.google.com/books?id=WVe...page&q&f=false

[sheehs1]

Quote:

Originally Posted by calmloki we want our stuff in a place and don't want to move our stuff (cookware,furniture, bed, clothes, rugs, art, etc.) in and out of a place any time we want to visit. Visit. There's the point - we want to live in a place, not visit it. We considered having locked sections of a house or a duplex but ultimately went with a single family home that suits our desires without stretching our financial abilities. I struggled with that also calmloki. The only place I could lock off with any space would have been 1 of the 2 garages...but there was humidity control issue with that. Must say that while I travel light and just hunker down when the freak snow storm blows in to the beach it has been much more comfortable sharing her space blanket that she just happened to bring with her.

I tend to take everything for every one's needs including my own. Need nail clippers (I got em), scissors (got those too), food to snack on (yep)...