Which to Buy: Stocks or Vacation House?

[David.]

I am 40 and married with two young kids (5 & 7).

We have some extra cash to invest and we intend to (A) put it in the stock market or (B) use it as a 20% down payment on a vacation house/condo (in San Francisco, in case that's relevant).

How do you feel about rates of return on stocks as compared with real estate in SF over the next 5-10-15 years?

Thank you.

 

[Sandhog]

I don't even know what would happen tomorrow let alone what's going to happen 5-10-15 years down the road.

If I were you, I would invest in fixed income for now or dividend stock(s) and use the proceed for vacation rental.

 

[foxfirev5]

To me it is two separate issues. Have you met your savings and investment objectives otherwise? While I own REIT's this is not the same as an illiquid vacation property. If your looking at physical RE as an investment to fund college or retirement I wouldn't put a very big allocation of my investing funds into it. My DW and I own a second lake house but do not even consider this part of our investment assets.

 

[chinaco]

The question I am hearing is: Should I save or spend?


What is your goal?

1. Invest (e.g., for retirement)
2. Leisure (i.e., vacation)

IMO a personal home (2nd or otherwise) is an expense (ongoing expense). Now real estate prices may go up or down which would yield either a gain or loss against the original price paid... You might rent it while you are not using it to defray ongoing costs..... But I would not consider it an investment.... it is a lifestyle expense.

 

[MichaelB]

Houses are not investments, they are expenses. Second houses are both expensive and demanding.

 

[obgyn65]

I am pessimistic about rates of return on stocks and real estate over the next 10-15 years. I will keep buying CDs and municipal bonds.

How do you feel about rates of return on stocks as compared with real estate in SF over the next 5-10-15 years?

Thank you.

 

[Col. Klink]

Houses are not investments, they are expenses. Second houses are both expensive and demanding.

+1 on MichaelB's comment. Plus, you have to consider the taxes you definitely will pay for owning the property.

 

[Brett_Cameron]

Houses are not investments, they are expenses. Second houses are both expensive and demanding.

+1 Well said!

 

[l2ridehd]

Another view. I personally believe that today real estate is an excellent value. So buying at today's low prices and low interest rate is a good long term (5 to 10 years) strategy. Now a few must haves in that investment. Buy in an area that has good to excellent growth potential. Buy a property that you can rent enough to provide a positive cash flow. Even if very minor. Be ready to invest time. Renting, maintaining, managing and responding to problems.

I studied this potential a lot and made a decision to invest some of my portfolio in real estate directly as an owner. I bought two single family homes in a retirement community. Rentals have been excellent as people want to check out a community for a month or two before buying there. So my cash flow is positive. Demand will remain strong as baby boomers continue to reach retirement age. I am able to leverage low cost money in a tax deferred investment.

Now all that being said, I would not invest in a vacation home in San Francisco. There are many reasons why. City is on the verge of bankruptcy. State is as well. Do I believe they will work through those problems? Yes. Do I want to help pay them to correct their past over spending sins? No.

 

[REWahoo]

Disclaimer: I've never owned a vacation home that wasn't on wheels and I've never been a landlord.

I see a big difference in owning a rental property that generates income and may appreciate in value vs. owning a vacation home that generates expenses and may appreciate in value.

 

[Rambler]

I've thought about vacation property many many times, but I can't seem to make the numbers work. Too many expenses, not enough time to enjoy it. I can rent or even stay in a hotel for much less money. I wouldn't buy in SFO either...some for he reasons stated elsewhere, but also I have a hard time viewing SFO as a vacation destination I would visit year after year.

As someone else said, invest in dividend stock and use the dividends for vacations.

Fwiw, R

 

[Aiming_4_55]

A few questions....

Is your primary residence paid off?

Do you vacation in SF regularly to support/off set the monthly payments and associated expenses?

Will your family vacation plans/locations change over the years?

Will you be able to rent it out while your family is not using it?

Personally, if I was in the market for a vacation place, I would look closer to home, say 2 - 4 hour driving distance.

I thought about a vacation home and opted for a timeshare purchased via resale (never buy from the developer). A variety of locations (a few resorts within 3 hours from home) and sizes ( 1br - 3br depending on need). We've owned it for 3 years now and enjoy it. It works for us.

 

[arebelspy]

I see a big difference in owning a rental property that generates income and may appreciate in value vs. owning a vacation home that generates expenses and may appreciate in value.

Well said. This is /exactly/ what I was thinking.

 

[Brat]

The writer from Virginia who is predicting financial implosion of San Francisco and the state of California knows not of what he speaks. That is like predicting the financial implosion of New York City in the 70s. Yes, there will be a lot of tough choices but that may be the time to invest in their market. I wish I had purchased a condo in NYC when they were in the throws of their challenges.

If the OP has a circle of family/friends who are willing to help with the cost of the condo in exchange for its use it might be viable. However, most of the condo associations enforce their covenants and if they preclude short term rentals there may be problems. Entering into an ownership sharing arrangement may have its own issues as the partner's personal and financial issues may come in to play in the future.

I do know an executive in the Silicon Valley who owned a condo in down town San Francisco so she didn't need to drive home after the theater. She owned it for about 10 years and it was a break even sale after the re implosion. However, all but the most attractive locations in the Bay Area have participated in the re decline.

There are a couple of time share buildings in San Francisco. I know nothing of them individually. IMHO the only time share to own is a resale in San Francisco or Manhattan.

Again, real estate is an expense.. rarely an investment unless it generates income IMHO.

 

[l2ridehd]

Brat

The writer from Virginia never said anything about a financial implosion. I said "City is on the verge of bankruptcy. The state is as well" Also said I thought they would solve those problems. If you go look at the 10 worst states for financial problems, California is number 2 and look at cities and San Francisco is number 4. The people in California and San Francisco will end up paying for those problems. I don't want to be one of them. If you do, go for it.

So yes I do know of what I speak.

 

[calmloki]

OP is from Phoenix. Makes SFO a decent choice for summer, though San Diego would be handier for driving. San Diego 355 miles vs. 750. The two cities have different attractions though, think SFO is part of NorCal (marijuana), while San Diego is SoCal (meth). We bought a winter home in La Quinta (meth) and I anticipate property appreciation, but travel (1050 miles for us) is an issue, as is remote care and, recently, theft.

 

[jimnjana]

I am 40 and married with two young kids (5 & 7).

We have some extra cash to invest and we intend to (A) put it in the stock market or (B) use it as a 20% down payment on a vacation house/condo (in San Francisco, in case that's relevant).

How do you feel about rates of return on stocks as compared with real estate in SF over the next 5-10-15 years?

Thank you.

I wouldn't buy a vacation home with 20% down. I have two of them, one was planned and is paid for, the other is because we didn't want to dump our old primary residence in a bad sellers market. While you may be able to afford the payments, the gotchas are what getcha. In SF I'd be concerned with high cost of doing business (maintenance, cleaning, property management) and taxes.

 

[Brat]

I consider bankruptsy a financial implosion. I will call your claim to street cred and raise you one I2ridehd. My daughter lives in the Bay Area, is a CFO in the sillicon valley, and makes substantial contributions to their taxing agencies. She is a part of the economy that is helping to remedy the problem.

Personally I wouldn't have a vacation home in San Francisco because of the cost, but not everyone has my modest resources. The other complicating factor owning a vacation home there is that if you buy in a condo building are CCNRs that are designed to preclude use by others.

The cost of housing, even condos, in the Bay area is so high a vacation home there doesn't make financial sense to me.

 

[haha]

The cost of housing, even condos, in the Bay area is so high a vacation home there doesn't make financial sense to me.

Also, OP has 2 little kids. Would they enjoy a summer at the beach or at bars in North Beach?

If you want a vacation home, everything argues for Orange or San Diego County very close to beach.

Ha

 

[FreeAtLast]

I think that your vacation destinations will change as your children grow and their interests develop. You may want to travel to other places.

You can go without a vacation in a financially difficult year. You can't stop the expenses of a vacation home.

You can't sell part of it to pay for college or some unexpected large expense.

 

[Brat]

Actually my kids loved going to San Francisco for vacation. There is a lot for them to do and see. We didn't go near the bar and bath house streets.

I remember taking them, when quite young, to San Francisco. On the flight back I asked each what they liked best. My son shouted, "The cable cars!" Daughter simply clearly stated, "The shopping!" She loved Ghirardelli Square. We laugh at that comment even today.

 

[Bestwifeever]

I don't even know what would happen tomorrow let alone what's going to happen 5-10-15 years down the road.

If I were you, I would invest in fixed income for now or dividend stock(s) and use the proceed for vacation rental.

Me too.

 

[Brat]

I think dividend stocks are the way to go too.

 

[traineeinvestor]

I've looked at "investing" in a holiday home/second home several times.

From a financial perspective, whether it makes sense or not depends on the specifics of the property you are looking at and a number of future assumptions relating to the property value, its outgoings, the cost of alternative short term renting, interest rates, return on whatever you invest in instead of the property. I usually end up concluding that not buying the property is better.

There are also two other factors against buying a second home:

1. the time needed to look after the property (or pay someone else to do it for you)

2. the loss of flexibilty in planning future vacations - how often do you want to go to the same holiday destination?

 

[calmloki]

....

There are also two other factors against buying a second home:

1. the time needed to look after the property (or pay someone else to do it for you)

2. the loss of flexibilty in planning future vacations - how often do you want to go to the same holiday destination?

Vacation home contra to flexibility: ease and comfort of sleeping in your own bed, having your own stuff around you beyond what you can get in carry-on. Cue the motor-home crowd.