threshold to buy instead of rent winter place

[someguy]

specifics

Thought it might spur more specific commentary to post a specific possibility.

Using the NYT calc at http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html. Defaults are used when not specified. I'm assuming all growth percentages are nominal.

Price $500K; stay 10 yrs
4.0% home price growth (long-term avg is 5-6% depending on specific area)
4.0% rent growth
7.0% investment return
1.03% prop tax
36% marginal rate
$200 monthly utilities
$100 common fees

This returns $1,420/mo ($17K/year) and below as where to rent. We are spending $15-18K/year on rent for 6-8/weeks in the location now. And would like to spend more time (ie that 15-18K would go up). So if we could buy a $500K place that meets our needs--even if that price is lower than what the place we rent would sell for--why would we not? As I stated in an earlier post, the $500K place we might buy is more inland from the ocean but there aren't many/any short-term rentals in these more inland areas.

It seems the most obvious risk is the 4% appreciation (even though it's marked down 20% from historical). Each 1% below 4% increases the annual break even by $3,600/year.

 

[HadEnuff]

Thought it might spur more specific commentary to post a specific possibility.

Using the NYT calc at http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html. Defaults are used when not specified. I'm assuming all growth percentages are nominal.

Price $500K; stay 10 yrs
4.0% home price growth (long-term avg is 5-6% depending on specific area)
4.0% rent growth
7.0% investment return
1.03% prop tax
36% marginal rate
$200 monthly utilities
$100 common fees

This returns $1,420/mo ($17K/year) and below as where to rent. We are spending $15-18K/year on rent for 6-8/weeks in the location now. And would like to spend more time (ie that 15-18K would go up). So if we could buy a $500K place that meets our needs--even if that price is lower than what the place we rent would sell for--why would we not? As I stated in an earlier post, the $500K place we might buy is more inland from the ocean but there aren't many/any short-term rentals in these more inland areas.

It seems the most obvious risk is the 4% appreciation (even though it's marked down 20% from historical). Each 1% below 4% increases the annual break even by $3,600/year.

there is enough guesstimating in all of that , that it really comes down to "Are we close to breaking even?" and " What do we WANT to do?"

if you absolutely knew for a fact that it would be break-even deal in the long run, would you rather own a place (dealing with all of the pros and cons thereof), or would you rather rent (again dealing with the pros and the cons). If so, what if you got within a few thousand $/year? Then what?

 

[fritz]

So Fritz, a lot of your problems have to be location dependent as Florida might be the number one spot for snowbirds.

One thing I love about the HGTV show beach front bargain is the huge amount of lovely beachfront available in this country. Some areas in Texas look amazing.

The property tax situation is pretty normal, when we house shopped out West the agent would always give us the state resident primary home tax number, since it was so much more reasonable then the real number we would have to pay.

We always loved the St George corner of Utah since we couldn't Snowbird in the real sense and often go there for a month or so from mid Jan on. I can pick from dozens of rentals and get them all last minute for anywhere from one bedrooms for 60 a day to brand new 3 or 4 bedrooms homes for around a hundred a day.Of course it's not Florida but I have family close and we love the parks and such.

My working career gave us the opportunity to live in many areas of the country. We've bought/sold (8) homes so far (not counting previous 2nd home scenario), and have lived in the Midwest, West Coast, and South/Southwest areas. We've traveled fairly extensively as career perks allowed travel at little to no cost (busman's holiday so to say).

Looked over many areas to to rent (and to buy 2nd home), and find that when you get away from the touristy areas of the country - the rentals are expensive and not what we'd consider renting (if the room ain't nice, I ain't having fun as my brother always says). You wouldn't believe what people will consider putting out there as rentals. We've come across "casitas" in Tucson that are converted garages in people's backyards. Some actually rent out portions of their house and you'd share common areas with them - kitchen, front room (no thanks). One really nice rental in Savannah, GA advertised as a one bedroom - we figured out that the person was standing at the foot of the bed and carefully taking pictures to not show that it was actually a small studio (you really had to study the pictures to figure it out). You have to be careful when renting on these sites. Not saying that VRBO and sites like it don't offer value, but you have to look for it and read the fine print carefully. Best winter rental scenarios are in the touristy areas (and not the hot spots, as their rents are higher in winter for obvious reasons). This is probably an area that could be exploited by tourist style corporations, but the timeshare ugliness has put them at a disadvantage.

 

[pb4uski]

I had always been looking at property to buy while wintering in Florida, and we have friends who own and live there part-time and full-time. I had read an article sometime ago about the property tax scenario in Florida. Did a quick search and this is one article about it -

Florida Snowbirds Challenge Fairness Of Two-Tier Tax - WSJ

We gave up looking to buy in Florida, as wife (and I) haven't hit on anything there we liked, and wife just doesn't care for Florida after looking around for 6 years now (too touristy, lack of city planning, and high crime rates). Granted we've been looking since we started wintering in retirement, and the economy in Florida was hit particularly hard in the last recession, but we felt that a lot of the areas lacked a sense of community, as beach property seemed to be "for sale" or owners had them "for rent" on VRBO. Also depending on the location - hurricane and flood insurance rates can be prohibitively expensive (and based on the construction/style of the house or condo. Some of our friends with homes take the risk and don't carry flood insurance.

That article is over 10 years old! But I concede that if the disparities are as extreme as noted in the article then it would be unfair and I guess it could get that extreme for someone who was a longtime homeowner living next to a non-resident but such cases would be anomalies. I'l look into it more when I get down there. For now, the taxes on our condo are very reasonable and actually much lower that for our house in New England even after adjusting for the relative value of the two properties.

 

[omni550]

....but we felt that a lot of the areas lacked a sense of community....

In the 6 months I've been there, I've met, befriended, and been invited to social events with more of my neighbors in my small condo complex (168 units) in FL than I have in my lovely suburban neighborhood in MI where I have lived in a 3BR house for 26 years. (In defense of my MI location, I live in a neighborhood mostly filled with working couples and their school-age children, all leading very busy lives).

In FL, I think the key is to get into a location where the HOA rules restrict the quantity and length of time for rentals. Some condo complexes (much like timeshares) are filled with transient guests, as they allow rentals of a few days or a week. (I've heard this also may lead to poor behavior on the part of the renters (noise, less care for keeping the place looking nice as the guests may be in "get in, party, get out" mode)). Finding places that have a 30-day minimum rental period attracts more of the seasonal snowbird crowd...typically older, quieter, with deeper pockets, and more interested in developing friendships within the community. For example, my condo assoc has 30-day minimum rental period AND also restricts owners to renting their units up to 3 times per year...so it incentivizes owners who wish to rent out their units to look for longer-term/seasonal renters.

I've been to some FL beaches with condos nearby. For amusement, I've counted the number of condos that are obviously empty (hurricane shutters in place)...and thought it must be like a ghost town for the few occupants....which may be good or bad depending on if you are seeking others to hang out with or if you prefer solitude. But certainly lacking a sense of community if more than 50% of the units are empty, I'd guess.

omni

 

[fritz]

That article is over 10 years old! But I concede that if the disparities are as extreme as noted in the article then it would be unfair and I guess it could get that extreme for someone who was a longtime homeowner living next to a non-resident but such cases would be anomalies. I'l look into it more when I get down there. For now, the taxes on our condo are very reasonable and actually much lower that for our house in New England even after adjusting for the relative value of the two properties.

We also live in one of the highest property tax (and sales tax) areas in the country (New Jersey beats us out). Everywhere we've looked - we are surprised by the property taxes (realizing that most places we've looked would be higher for non-resident). It's when you consider living in your 2nd home full time time, that the scenario can change. We thought of flip-flopping legal domicile as have some of our neighbors, but goofy things will pop up. As an example - Florida Medicare supplements are priced so that you always pay a constant rate and not one based on your age. The insurance companies have compensated for this regulation and Floridians pay Medicare rates of age 80, from the age of 65. We'd also lose any property tax exemptions on current home.

 

[fritz]

In the 6 months I've been there, I've met, befriended, and been invited to social events with more of my neighbors in my small condo complex (168 units) in FL than I have in my lovely suburban neighborhood in MI where I have lived in a 3BR house for 26 years. (In defense of my MI location, I live in a neighborhood mostly filled with working couples and their school-age children, all leading very busy lives).

In FL, I think the key is to get into a location where the HOA rules restrict the quantity and length of time for rentals. Some condo complexes (much like timeshares) are filled with transient guests, as they allow rentals of a few days or a week. (I've heard this also may lead to poor behavior on the part of the renters (noise, less care for keeping the place looking nice as the guests may be in "get in, party, get out" mode)). Finding places that have a 30-day minimum rental period attracts more of the seasonal snowbird crowd...typically older, quieter, with deeper pockets, and more interested in developing friendships within the community. For example, my condo assoc has 30-day minimum rental period AND also restricts owners to renting their units up to 3 times per year...so it incentivizes owners who wish to rent out their units to look for longer-term/seasonal renters.

I've been to some FL beaches with condos nearby. For amusement, I've counted the number of condos that are obviously empty (hurricane shutters in place)...and thought it must be like a ghost town for the few occupants....which may be good or bad depending on if you are seeking others to hang out with or if you prefer solitude. But certainly lacking a sense of community if more than 50% of the units are empty, I'd guess.

omni

We found that age restricted communities were the best for the scenario you described, but a lot of them were the highest in HOAs and property values. We live in a 55+ gated community SFH, and have mixed feelings about picking another. FYI - You live in a state I'm very fond of - I'm originally from the Grand Rapids area, and have family/friends all across the state.

 

[pb4uski]

We also live in one of the highest property tax (and sales tax) areas in the country (New Jersey beats us out). Everywhere we've looked - we are surprised by the property taxes (realizing that most places we've looked would be higher for non-resident). It's when you consider living in your 2nd home full time time, that the scenario can change. We thought of flip-flopping legal domicile as have some of our neighbors, but goofy things will pop up. As an example - Florida Medicare supplements are priced so that you always pay a constant rate and not one based on your age. The insurance companies have compensated for this regulation and Floridians pay Medicare rates of age 80, from the age of 65. We'd also lose any property tax exemptions on current home.

Agreed... since we have bought in Florida we considered changing and becoming residents, but health insurance is much higher ($1,000/month) and the savings in state income taxes and adjusting for homesteading in each state makes it unattractive for us.

 

[shortstop14]

Has anyone set up a deal with rental property owner to have a standing reservation of 2-5 winter months? I guess with at least smallish items (like nice road bikes) one could get a storage unit near the rental. If the relationship with the owner/manager was good, could also work out some way to have a small work space or two.

We've done this the last few years for a couple of months in the Phoenix area. Although this year the owners have moved in themselves, so we've found a different place.

But since we drive down and mountain bike along the way, bringing bikes and other stuff isn't a problem - and we can bring the dog along, too. It would be different if you fly to get there.

Since we go in the fall shoulder season rather than winter, the rent is way cheaper than what you're looking at - so buying wouldn't come close to penciling out, or worth the hassle of owning another home.

 

[48Fire]

We have a second home, and in my opinion, the trade-off for owning vs. renting is a consideration after 2 months. It all depends on your area, and all of the cost factors, then weighing the other factors. For some, it's not the finances that drives them.

And after doing the VRBO's and hotels over the years, my wife has grown weary of sleeping in someone else's bed. We have had various poor experiences, including finding dirty socks, beds without mattress pads, arriving at the unit when it is trashed from previous tenants, etc.

The flexibility of owning your place means that you can just decide whenever you want to go there as well. We usually drive, so we often just load the car and go. And with both places now fully equipped, including clothes, so I just need a toothbrush an overnight bag to go.

Our second home has evolved into our primary home over the years. As we approach the 2 - 3 month break-even point from the other side, my wife is ready to sell it. I argue that it is a cheap storage unit

So I think part of the trade off is do you expect the time in the second home to grow over the years? If not, and life changes start to reduce your time there, you may end up regretting it.

 

[HadEnuff]

We have a second home, and in my opinion, the trade-off for owning vs. renting is a consideration after 2 months. It all depends on your area, and all of the cost factors, then weighing the other factors. For some, it's not the finances that drives them.

And after doing the VRBO's and hotels over the years, my wife has grown weary of sleeping in someone else's bed. We have had various poor experiences, including finding dirty socks, beds without mattress pads, arriving at the unit when it is trashed from previous tenants, etc.

The flexibility of owning your place means that you can just decide whenever you want to go there as well. We usually drive, so we often just load the car and go. And with both places now fully equipped, including clothes, so I just need a toothbrush an overnight bag to go.

Our second home has evolved into our primary home over the years. As we approach the 2 - 3 month break-even point from the other side, my wife is ready to sell it. I argue that it is a cheap storage unit

So I think part of the trade off is do you expect the time in the second home to grow over the years? If not, and life changes start to reduce your time there, you may end up regretting it.

Are you saying that your 2nd home has now become your primary home, and DW wants to sell it, or she wants to sell the home that used to be the primary home?
I ask because we are sort of approaching this scenario with our lake house. When my DW retires we may move there for the bulk of the year and find another place to live during the coldest months.
Our current home is not worth a lot on the market due to local economics, and I too have thought of it as "cheap storage", although the reality is, keeping it really just saves me from the painful process of downsizing.

 

[someguy]

We have a second home, and in my opinion, the trade-off for owning vs. renting is a consideration after 2 months. It all depends on your area, and all of the cost factors, then weighing the other factors. For some, it's not the finances that drives them.

And after doing the VRBO's and hotels over the years, my wife has grown weary of sleeping in someone else's bed. We have had various poor experiences, including finding dirty socks, beds without mattress pads, arriving at the unit when it is trashed from previous tenants, etc.

The flexibility of owning your place means that you can just decide whenever you want to go there as well. We usually drive, so we often just load the car and go. And with both places now fully equipped, including clothes, so I just need a toothbrush an overnight bag to go.

Our second home has evolved into our primary home over the years. As we approach the 2 - 3 month break-even point from the other side, my wife is ready to sell it. I argue that it is a cheap storage unit

So I think part of the trade off is do you expect the time in the second home to grow over the years? If not, and life changes start to reduce your time there, you may end up regretting it.

Thanks -- this is really helpful! We, too, get tired of the VRBO thing. Thankfully, we've never had a complete disaster like having an owner taking our money and running, bed bugs, or arriving to find the place has been double booked. But we've had plenty of minor to major issues over the years.

Also having our own stuff, especially work and health (cooking and exercising) would be really nice. Being able to not have to find and commit to a specific time frame well in advance would also be a huge benefit. In a given month, we can almost always find at least a week or two, but it's nearly impossible to know it the six months out or more that is required since the area is popular.

We want to spend more and more time there, with an eye toward eventually being there full time. We would consider just up and moving there now, but a) state income tax differences mean that our current place is "free" as long as we maintain tax residency here and b) my income pipeline is somewhat dependent on being here at least some of the time. So the general plan is to "tip" the residency over when I retire, or when we are solidly FI and I'm continuing to work because it's easy gravy.

 

[48Fire]

Are you saying that your 2nd home has now become your primary home, and DW wants to sell it, or she wants to sell the home that used to be the primary home?
I ask because we are sort of approaching this scenario with our lake house. When my DW retires we may move there for the bulk of the year and find another place to live during the coldest months.
Our current home is not worth a lot on the market due to local economics, and I too have thought of it as "cheap storage", although the reality is, keeping it really just saves me from the painful process of downsizing.

She wants to sell the home that used to be our primary home. We never intended a life of two homes, but the pendulum never swung fully either way. It started as six months/six months deal, which I think is solidly in the middle of the break even.

 

[48Fire]

Thanks -- this is really helpful! We, too, get tired of the VRBO thing. Thankfully, we've never had a complete disaster like having an owner taking our money and running, bed bugs, or arriving to find the place has been double booked. But we've had plenty of minor to major issues over the years.

Also having our own stuff, especially work and health (cooking and exercising) would be really nice. Being able to not have to find and commit to a specific time frame well in advance would also be a huge benefit. In a given month, we can almost always find at least a week or two, but it's nearly impossible to know it the six months out or more that is required since the area is popular.

We want to spend more and more time there, with an eye toward eventually being there full time. We would consider just up and moving there now, but a) state income tax differences mean that our current place is "free" as long as we maintain tax residency here and b) my income pipeline is somewhat dependent on being here at least some of the time. So the general plan is to "tip" the residency over when I retire, or when we are solidly FI and I'm continuing to work because it's easy gravy.

I did some of the "gravy" work, too, and that is another reason we have kept the former primary home. But I think the gravy train is making it's last stop soon

 

[Looking4Ward]

One thing I love about the HGTV show beach front bargain is the huge amount of lovely beachfront available in this country. Some areas in Texas look amazing.

They do look amazing but much of that has to do with the magic of video editing. I've been scouring many of those same areas of the Texas gulf coast and those "bargains". Like Fritz has found the VRBO listings to be somewhat misleading, those areas are much different in person.

 

[ivinsfan]

Yes, I was talking about trying for a long term rental down in that area instead of FL. But I know nothing about the VRBO properties down there. Everyone on the East Coast wants to go to Florida for the winter.

 

[someguy]

I did some of the "gravy" work, too, and that is another reason we have kept the former primary home. But I think the gravy train is making it's last stop soon

Congrats!

 

[fritz]

Originally Posted by ivinsfan
One thing I love about the HGTV show beach front bargain is the huge amount of lovely beachfront available in this country. Some areas in Texas look amazing.

They do look amazing but much of that has to do with the magic of video editing. I've been scouring many of those same areas of the Texas gulf coast and those "bargains". Like Fritz has found the VRBO listings to be somewhat misleading, those areas are much different in person.

We searched a couple of areas of the Texas coastline early on in our efforts for a possible 2nd location. We rented a VRBO from a professional management company in Galveston (was rented as one would a hotel room). Boasted ocean view. Actually was tiny condos +/- 500/600 sqft in two large buildings that faced each other across the street from the gulf. The condos in the buildings were angled at 45 degree so that if you stood out on the small balcony and craned your neck to the left/(right) as you hung over the rail - you could see the ocean down the tunnel between the two buildings (otherwise you stared out at the building across the tarred parking lot entrance). Stayed one night.. Checked out a classic 100 year old hotel in the area (took a pass - it was definitely old). Ended up enjoying the rest of our our stay at the San Luis Hotel - which also has one wing devoted to an owner arrangement.

Also went down to South Padre Island, and rented in an option to buy scenario hotel/condo building. Moved rooms twice as they had issues (including non-functioning toilets, and plugged drains in bathrooms).

You learn to review very carefully when you first start VRBO-ing....


Edit/Add: Our very 1st Florida VRBO choice for wintering in retirement was a freshly remodeled condo and the pictures looked great. Never got a chance to stay there for the two months, as the owners informed us after we worked it out with them - that they were renting it to someone who wanted it for a longer time frame (3 mos). It turned out in our favor as we ended up with one in that same building where we stayed for 5 years. It was a larger one bedroom 45 degree angle corner unit at the same price (theirs was the typical tunnel unit - 12-15' wide by +/- 40 feet long with 8' sliders for light and bunks in the hallways). Over the 5 years we rented that unit - we noticed the other unit appeared empty.

 

[Danmar]

Although the financials usually suggest renting is the better decision, it will often come down to the competing objectives of control vs flexibility. Ownership usually costs more but does bestow the advantages of controlling your decor, allowing you to leave all your own stuff there, car in the garage, ability to loan out to friends, etc. We find this important, but I can see how others would not. I would find the hassle of having to deal with landlords a real put off, as I don't like people telling me what to do. Likewise I would hate to deal with renters, so I would never rent our Arizona place out.

Everybody is different, but financial considerations, although important, would not necessarily be the deciding factor.

 

[pb4uski]

+1 with Danmar on ownership benefits, plus I think buying will be a better financial decision for us.

Rough numbers.. 1,450sf 2 bedroom + den cost $175k furnished. Annual costs (HOA fees, property taxes, insurance, electricity, off-season monitoring, etc.) ~$7,500. Paid cash, so if I assume my opportunity cost of funds is 5.5% and the annual appreciation is 2.5% then my annual net opportunity cost is ~3% or $5,250. So my total annual cost is $12,750.

Similar units rent in season for a 3 month minimum for ~$3,000/month plus 10% tax or $3,300/month so my breakeven is ~4 months plus I have certainty about getting a place, can leave my stuff there, etc. We plan to use it 4-5 months a year so I think financially we'll come out a little ahead.

I think over time inflation of rent rates will exceed inflation in my annual costs.

 

[someguy]

+1 with Danmar on ownership benefits, plus I think buying will be a better financial decision for us.

Rough numbers.. 1,450sf 2 bedroom + den cost $175k furnished. Annual costs (HOA fees, property taxes, insurance, electricity, off-season monitoring, etc.) ~$7,500. Paid cash, so if I assume my opportunity cost of funds is 5.5% and the annual appreciation is 2.5% then my annual net opportunity cost is ~3% or $5,250. So my total annual cost is $12,750.

Can you describe the off-season monitoring--what is the cost and what does it give you?

Are the opportunity cost (5.5%) and appreciation (2.5%) each real or nominal? I'm asking b/c it seems like the opportunity cost might be real while the appreciation is nominal?

 

[pb4uski]

Off-season monitoring is having someone (actually the association's maintenance man does it on the side) go in a few times a month and check that the AC is working, etc. and costs $30/month. I probably could go without it but it is good peace of mind for me to have someone trusted checking in on the place every so often.

The opportunity cost and appreciation are both nominal, and are both conservative. The 5.5% is what I use for retirement planning generally and the appreciation is probably on the low side as well but only time will tell. If I cared to I could always take a mortgage out on the condo and invest the proceeds which would reduce my opportunity cost while taking on some financial risk.

 

[someguy]

The opportunity cost and appreciation are both nominal, and are both conservative. The 5.5% is what I use for retirement planning generally and the appreciation is probably on the low side as well but only time will tell. If I cared to I could always take a mortgage out on the condo and invest the proceeds which would reduce my opportunity cost while taking on some financial risk.

I'm having a total senior moment -- can you help me with what the opportunity cost reduction math/analysis is? Say, taking out a mortgage of 80% of value at 3.7% APR?

 

[pb4uski]

Right now I have taken $175k out of investments to buy the property. Let's say the I would have earned 5.5% on that $175k so I'm earning $9.6k less as a result of having paid cash for the property.

If I finance it 80% at 3.7%, then I only have 20%/$35k invested so my opportunity cost is now $1.9k plus interest on the mortgage of $5.2k so a total of $7.1k (rather than $9.6k).

 

[brucethebroker]

We have owned two condos in FL, one in Bonita Springs (which we sold) and one in Ft. Myers. We rented out the Bonita condo for 5 years during winter months, and the rent paid about 50% of our total costs (it was mortgaged). We then used it as a "quickie" get away the rest of the year.
We do not rent out the current condo (Ft. Myers). Mortgage free, about $7k a year in taxes, HOA, utilities, etc. We spend Jan-March there and "quickie" vacations during the year.
We looked into getting a place that was more expensive, and trying to rent it out during the other 9 months. A local realtor told us that was very difficult unless you can walk to the beach from your unit. It seems the beach front hotels give great deals in the summer to stay full. Hard to compete with that.

We purchased our current condo as an investment, having bought a foreclosure. If the return on cash ever improves, we would consider selling and renting a winter place. But for now, with the "cash is trash" economy, owning the condo seems like a pretty good deal.