Purchase a vacation home ?

[Floridatennisplayer]

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Originally Posted by wdberry62 To each his/her own, but if it were me, I'd save the money and the hassle and vacation wherever you want. These vacation homes tend to become a liability rather than an asset; a source of worry rather than enjoyment. I've seen that first-hand with both my parents and in-laws. I vowed never to make the same mistake.

Perhaps a stand alone house in a neighborhood. I would never attempt that.

But with a home or condo in a private gated country club worries like that have never crossed my mind.

[pb4uski]

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Originally Posted by HadEnuff Just curious, when did you buy? I don't have the cash handy for such a purchase, so I have to figure in the mortgage costs. I'm not too surprised to hear that without the mortgage interest, the right opportunity at the right price could bring the carrying costs down more to the 3 month in-season rate.

Au contraire... at least with the assumptions that I am using, a 4% mortgage with 20% down is only $500/year more. I'm assuming that the money that I tied up in the property would have earned 6% in my portfolio and that the property appreciates 3% a year (it has actually been a bit better).

We closed in June 2016 and a friend bought a similar condo in March 2018 (identical layout and floor) for 107.5% of what I paid.

[pb4uski]

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Originally Posted by omni550 I always leave a few beverages in the fridge. It's very nice to enjoy upon arrival. omni

+1

[Scuba]

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Originally Posted by pb4uski Au contraire... at least with the assumptions that I am using, a 4% mortgage with 20% down is only $500/year more. I'm assuming that the money that I tied up in the property would have earned 6% in my portfolio and that the property appreciates 3% a year (it has actually been a bit better). We closed in June 2016 and a friend bought a similar condo in March 2018 (identical layout and floor) for 107.5% of what I paid.

Not to be negative, but vacation home markets often don’t have steady appreciation. When real estate takes a dive, vacation homes are hit much harder because second home owners or investors will allow the vacation home to go into foreclosure long before primary homes. In many markets with a lot of vacation homes, property values decreased by 40-60% during the Great Recession, and values took much longer to recover than the financial markets did.

Not to say someone shouldn’t buy a vacation home if they enjoy the lifestyle and can afford it, but I would never count on appreciation or assume it when comparing cost of ownership to annual rental costs.

[ivinsfan]

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Originally Posted by Scuba Not to be negative, but vacation home markets often don’t have steady appreciation. When real estate takes a dive, vacation homes are hit much harder because second home owners or investors will allow the vacation home to go into foreclosure long before primary homes. In many markets with a lot of vacation homes, property values decreased by 40-60% during the Great Recession, and values took much longer to recover than the financial markets did. Not to say someone shouldn’t buy a vacation home if they enjoy the lifestyle and can afford it, but I would never count on appreciation or assume it when comparing cost of ownership to annual rental costs.

This and this again. Not all vacation homes are created equal. Beachfront nice weather will fare better then a lot of other vacation homes in a downturn. Other areas maybe not so much. In our favorite area of Southern Utah homeowners who bought at the peak are still far underwater. The builders went broke and gave their unfinished developments back to the lenders. After things started turning these same builders formed new companies and bought the developments back for pennies on the dollar. There is a never ending supply of new homes priced low enough to keep the 10 year old homes from ever appreciating.

Be cautious about assuming you will build equity in your vacation home.

[pb4uski]

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Originally Posted by Scuba Not to be negative, but vacation home markets often don’t have steady appreciation. When real estate takes a dive, vacation homes are hit much harder because second home owners or investors will allow the vacation home to go into foreclosure long before primary homes. In many markets with a lot of vacation homes, property values decreased by 40-60% during the Great Recession, and values took much longer to recover than the financial markets did. Not to say someone shouldn’t buy a vacation home if they enjoy the lifestyle and can afford it, but I would never count on appreciation or assume it when comparing cost of ownership to annual rental costs.

I agree... the 3% I assume is a long-term average. Values in the area of our winter condo are more volatile than at our main home but I went into that eyes wide open knowing the values will be more volatile... at the same time, our investment is about 8% of our investable assets so if it goes sideways it isn't going to ruin us.

[HadEnuff]

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Originally Posted by pb4uski I agree... the 3% I assume is a long-term average. Values in the area of our winter condo are more volatile than at our main home but I went into that eyes wide open knowing the values will be more volatile... at the same time, our investment is about 8% of our investable assets so if it goes sideways it isn't going to ruin us.

My uncle, who was mentor of mine in many ways, including financially, once told me that when considering things like this, imagine the worst case scenario and make sure you can survive that. He gave me this advice right after we listened to one of his best friends talking about a home in Myrtle Beach he was considering buying. He was making a lot of very rosie projections about appreciation, and rental income. My uncle's point being, of course, to make sure you are OK if all of those ideal situations don't pan out.

[pb4uski]

For us it was more a life-style decision than an investment decision. There was no question that we were going to spend at least 3-4 months each year in Florida... it was more whether we would rent or buy. So far, buying has turned out way better... since we own and are paying for it anyway we actually spend 5-6 months here so unless things went sideways in a big way it is still better than renting.

[HadEnuff]

in 1993 my recently retired parents bought a condo on Bonita Beach. It was a stretch for them, but in the 15 years they owned it, it tripled in value. Because it was on the beach. The hit that everything took in 2008 had an effect on the value of that place, but it was minimal and short lived. The places more inland took much bigger depreciation, and has taken a lot longer to recover, simply because those places can be duplicated, but as the saying goes, "they ain't building any more beaches", or something like that.

I have been an observer of the phenomenon in central Florida, known as The Villages, for about 12 years, ever since close friends of mine bought a place there pretty much on a whim while making a Christmas visit to a relative. What the locals call "drinking the kool-aid", they were swept away by the polished sales approach, including being told that the Baby Boomers will be retiring in droves, wanting to come down here, and that "build-out" was just around the corner.
Well, the first part was true, but the developer has continued to buy and develop, and the place is at least twice as big as it was when my friends bought. Adding to the glut of developer homes being built at a pace that would make your head spin, the natural attrition that occurs as old people get older, infirm, and die off provides a steady supply of resales.

The developer has also done a good job of learning what younger, newly retired, more affluent Baby Boomer retirees want in a home, and a neighborhood, and what is now being provided has more appeal to the newly retired than the "older" neighborhoods.

What this all means is that while properties have appreciated over the last 10 years, not much more than the wear and tear on the properties that occurs in the hot Florida climate, and the maintenance required to offset that wear and tear.

I am going to snowbird there this winter, for the first time (I've visited several times), and part of me has been intrigued by the prospect of ownership, but as far as real appreciation of the value of the property offsetting the carrying costs, I have my doubts, as I am on the tail end of the Baby Boomer (born in 1953) generation, and I have a suspicion that around the time I want to sell, or my progeny, there will be a reverse effect of so many Boomers wanting out, and no Boomers behind wanting in. It's just a theory, but I think it makes sense.

[HadEnuff]

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Originally Posted by pb4uski For us it was more a life-style decision than an investment decision. There was no question that we were going to spend at least 3-4 months each year in Florida... it was more whether we would rent or buy. So far, buying has turned out way better... since we own and are paying for it anyway we actually spend 5-6 months here so unless things went sideways in a big way it is still better than renting.

Absolutely, and that is a very important point. My folks weren't looking to make money, that was a bonus. It was how they wanted to spend their last decades. And they were the happiest years of their lives.

I was trying to compose a post making the point that "vacation home" might mean different things to different people. What you have done, and what my folks did, I would not say qualify as "vacation home" purchases, but maybe "lifestyle enhancement purchases" or something like that.

When I think of "vacation home" purchases, I think more of the person who is still working, has two weeks a year to spend in Hilton Head, and decides "hey, why pay rent on this place when I could buy a place, use it for free for two weeks, and rent it out the other 50 weeks and make money on it"...It sounds great, but often works out to be more of a drain on the finances rather than a boom.

[HadEnuff]

Getting back to my study of The Villages, they sell a "lifestyle", essentially, and when my friends first bought, I was still a decade from retirement, and so were they. I had the Kool-Aid half way down my gullet, myself, and I realized a couple of things that kept me from pulling the trigger.

1. Buying a place in a retirement village did not make me retired.
2. Buying it would likely delay my retirement because the rental market there is hot for January-March, lukewarm December and May, and pretty damn slow the rest of the year, and even if I were to rent it out, my rental income would not cover my carrying costs.

3. because of 1 and 2 above, I would essentially be subsidizing someone else retirement.

My friends are there now, and happy, but what I decided would happen to me did happen to them. Someone else used the place for the best months, and while the property seems to have had some appreciation, not anywhere close to the difference between what it cost them to own and what they brought in with rentals. And they had to work a few extra years. But they got the place they wanted, where they wanted, so from a lifestyle decision it worked. From an "investment" perspective, not so much.

[Scuba]

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Originally Posted by pb4uski For us it was more a life-style decision than an investment decision. There was no question that we were going to spend at least 3-4 months each year in Florida... it was more whether we would rent or buy. So far, buying has turned out way better... since we own and are paying for it anyway we actually spend 5-6 months here so unless things went sideways in a big way it is still better than renting.

You were able to pay cash for your second home, so I agree with you that even if the value dropped 50%+ for a few years, it wouldn’t really impact you as your holding costs aren’t substantial. The OP was suggesting taking a distribution from a Roth or using debt to finance their purchase because they didn’t have available cash to purchase it.

Quite a different situation. I think you and I are in agreement that potential appreciation really shouldn’t be used to justify a purchase, especially if debt-financed.

[bclover]

So two of my siblings are snow birds and have second homes. they absolutely love it.
So I asked their opinions.

1) as mentioned here usually they can be financially draining. My sister has a place in the Virgin Islands and my brother in Vegas.
2) they don't consider them "vacation" as most folks vacation for a few days then return to their "real" lives.
3) they love their second home places. they still go other places for short true vacations. they have not tired of them. My sister could very happily go the rest of her life without ever having to wear a winter coat. so she escapes the northeast from Thanksgiving to darn near June.
4) both could rent it out if they wanted to but they did not buy it for real estate investment.

I have a timeshare in Florida, I love, love, love it. I have yet to tire of it and have gone annually since 1999. that maybe an option

[Winemaker]

DW and I have been scouring the US looking for a place to snowbird to, and hopefully using a 1031 exchange as we have 3 rental properties. Many, many issues to consider, but right now none make any real sense. Snow bird properties in FL that are warm during Nov-Apr, are too darn hot May-Oct. BIL and SIL have a place near Ft. Myers, and we visit them 3x a year, but they come back to Ohio for summer months to visit grandkids and boat on Lake Erie because it's too hot. We want a place that is 1 plane ride away, and certainly Ft. Myers area fits. We love Hawaii, but it takes 12-16 hours to get there. Economically, a 1031 exchange starts the depreciation schedule all over again, but if we sell our oldest property, we get taxed at 25% on the depreciation recapture, but we're going to be in the 22% bracket now till we die. I think we are just going to rent for the winter and not burden anyone with any real estate issues when we resume room temperature.

[gerntz]

The concept of going to the same place for vacation over & over doesn't appeal. Feels like Ground Hog Day.

[bclover]

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Originally Posted by gerntz The concept of going to the same place for vacation over & over doesn't appeal. Feels like Ground Hog Day.

for most folks who do it, it's not the only place they go. We go to our timeshare annually. some times it's for a long weekend, some times I'll go by myself for weeks and I'm more like a resident. I love that feeling.

[Scuba]

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Originally Posted by bclover for most folks who do it, it's not the only place they go. We go to our timeshare annually. some times it's for a long weekend, some times I'll go by myself for weeks and I'm more like a resident. I love that feeling.

You can get that feeling by renting. We rented a place in the USVI for three months and absolutely loved the lifestyle there. Considered buying but SOOOO glad we didn’t. Hurricanes Irma and Maria hit 2 months after we left. We went down for another month to do disaster recovery work and were very grateful that we just walked away from our rental when time was up with no worries.

Earlier this year we thought about buying again, but prices for undamaged or lightly damaged properties were really high. We realized we value flexibility more than we value being able to return to the same home every year. Our primary residence is in So CA so we have no need to snowbird. Maybe we’d feel differently if we lived in a harsh winter climate area.

[mexexpat]

In 2008 (retired since 2003) we vacationed for the first time in Central Mexico. Fell in love with Mexico and bought a vacation home there, with the intention of using it for two weeks out of every quarter. After a few visits, the Mexican "vacation" home became our primary home and our US home was used less than 8 weeks a year.

Did this for 5 years until a parental eldercare issue brought us back to the US and we sold both of those homes and relocated nearer to my FIL.

Since my FIL's death, we bought another home in Mexico and again use our US house for only 8 weeks a year.

We use our Mexican home as a base to explore the rest of the Country and manage to vacation elsewhere in Mexico every 2 months. Having a 2nd home does not mean the end of vacations to other places.

Keep an open mind and open heart.....you never know what will happen!

[2018]

Interesting thread with the variety of replies. I think everyone dreams of "owning a 2nd home" at one time or another.


Just recently FIRED and enjoying my freedom. We own long term and vacation rental property now and I have been in the rentals business for almost 15 years. No debt on them and they generate a good cash flow.



In looking at vacation properties I held off for years as we couldn't justify paying money each month just to "own" a vacation place. We finally bought a place at Hilton Head and after completing a major rehab have been renting it as a vacation place during summer months. We could only do this because it's a 4 bedroom and I'm not competing with the 1000+ smaller villas on the VRBO market.


If you think you can cash flow a small 2-3 bedroom villa you're just kidding yourself. Unless it's in a premium location you will be part of a very crowded market. And then, you will need to plan for all cost associated with ownership. Mortgage, HOA dues, insurance, utilities, maintenance, and capital improvements.



So, when you think it's such a great idea to own a 2nd home you really just need to ask yourself if a 2nd home will impact your retirement plans.

I would personally never own ANY property (aside from personal home) that cost me money each month. That money could have been invested and allowed me to retire even earlier than I did.


With that said, I think everyone has different dreams and financial status in life.



Good luck ....

[capjak]

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Originally Posted by SmallCityDave Unlike most here(?) we went with a timeshare and we absolutely love it, when we purchased I thought we would regret it but it's been a great purchase (for us) and a good compromise.

+1 resale of course. No worries about having to do maintenance, always clean and 1000+ locations (e.g. Marriott/Starwood-Vistana/Hilton/Hyatt/Disney Vacation Club/Wyndham/Worldmark/Four Seasons/ et al. I own Marriott/Hilton/Westin/Disney.....

It does not suck.