Vacation Home vs. Renting Hotel

[Toddtheformeraccountant]

Issue: Buying a vacation home vs. just staying at hotels. Obviously it depends upon how often you stay at the vacation home....but the longer you stay at the vacation home, the more it's really a home home and not a vacation home.

Without an analysis, intuitively you would have to know that the value of a vacation home purchase is directly proportional to the amount of time you plan on spending in it...duh...but this kind of calculates that breakeven point. Qualitatively hotel gives you more flexibility...go wherever you want...where with your vacation home you're stuck going there or you lose the value.

So I geeked out and did a little math, saying, hey, what's the breakeven point in terms of number of nights renting a hotel for a 20 year period vs. buying a vacation home.

Here's the scenario:

Compare buying a home for $650,000, paying the property taxes and paying the expenses, as compared to just investing the $650,000 and then paying for a hotel.

Assuming a) property taxes are 1.25% of value and go up 1% (we're in California), b) expenses of vacation home are about $4,300 a year, c) we earn 4% annualized net of tax return (fairly modest, frankly), d) the cost of a hotel room is $250 per night and e) the hotel cost, vacation home value, expenses, increase at 3% per year....all for a 20 year hold, selling the vacation home in year 20...

the breakeven number of nights per year we could rent a hotel room and not spend the money vs. buying the vacation home is 75. Meaning, we could just invest the money, pay for a hotel room for 75 nights a year, and be equal to buying the vacation home.

I've made some simplifying assumptions of course....but hey I'm just a humble beancounter, not a rocket scientist. I also assumed that it wasn't rented out at all....I personally wouldn't rent a $650,000 place out to strangers for sure, I think the risk of someone destroying the place is too high. Maybe I'm too conservative.

Any holes that anybody sees in my analysis? I attached it in case anybody is bored and wants to see the spreadsheet.

Obviously a million other qualitative factors we could discuss.

UPDATE: Thank you all for your replies and I think I'm realizing that I'm looking at this as a beancounter rather than a human. It's not just dollars/cents it is the utility and lifestyle benefit of a place. Thank you for teaching me to not think like a beancounter!!!!

[pb4uski]

The biggest hole that I see is that I highly doubt that you could rent a property that costs $650,000 for $250/night... so it seems like you are comparing apples-to-oranges.

Now what I can tell you that the operating costs for our 1,450 sf winter condo are about $8,500/year (condo fees, property taxes, insurance, electricity, etc)... add in the opportunity cost of money at 4% net of appreciation at 3% and it would be about $10,500/year.... or about 42 nights at $250/night. We spend about 6 months a year there.

Our condo is probably a lot closer to $250/night than a $650,000 condo would be.

[kgtest]

1500 nights in a hotel(over 20 years) @250/nt = $375,000 or $18,750/yr

Of course inflation... that $250 hotel today won't be the same hotel in 20 years @ 250...
You gave a good buffer for inflation.

I feel like if you were to rent for a month to month lease... fully furnished you might be better off? Usually it's cheaper to rent monthly, but requires a larger deposit.

[ivinsfan]

Quote:

Originally Posted by pb4uski The biggest hole that I see is that I highly doubt that you could rent a property that costs $650,000 for $250/night... so it seems like you are comparing apples-to-oranges. Now what I can tell you that the operating costs for our 1,450 sf winter condo are about $8,500/year (condo fees, property taxes, insurance, electricity, etc)... add in the opportunity cost of money at 4% net of appreciation at 3% and it would be about $10,500/year.... or about 42 nights at $250/night. We spend about 6 months a year there. Our condo is probably a lot close to $250/night than a $650,000 condo would be.

Well hold on, it depends on the area and the season and the length of your rental. We rented in a brand new development a 2 year owner rental and cost to build would be in the high 300s maybe touching 400 since it had a few upgrades. Total cost for 30 night including cleaning fees, no taxes since it was considered long term and the mandatory renter damage insurance the owner wanted for around 2400 bucks. Included HI speed internet, pool complexes cable on 5 TV's.

I think it's all about location and certainly in some areas renting is a way better deal. So you don't even have to "downgrade" to a hotel if you don't want to.

[pb4uski]

You hold on... you're saying that you can rent a $300-400k property for $30/night? That sounds like nonsense. Where is that? $30/night * 365 nights is $10,950....I'll take it!

[Toddtheformeraccountant]

You bring up a good point...but this is actually in the range of reality. A condo that I would buy in any reasonable beach area in california is going to be in the $500K - $750K range. Alternatively, renting a hotel (it would be a smaller hotel room at a embassy suites style level, not five star) would cost in the neighborhood of $250 a night, particularly on a week day when rates are lower, and have the same utility as the condo. It's kind of the perverse nature of real estate in California.

As for expenses, property taxes are basically 1.25% of the cost of the property...that alone is $8,100 per year....add insurance, repairs, some utilities, homeowners, you're easily up at that level of annual outflow to own the darned thing.

Quote:

Originally Posted by pb4uski The biggest hole that I see is that I highly doubt that you could rent a property that costs $650,000 for $250/night... so it seems like you are comparing apples-to-oranges. Now what I can tell you that the operating costs for our 1,450 sf winter condo are about $8,500/year (condo fees, property taxes, insurance, electricity, etc)... add in the opportunity cost of money at 4% net of appreciation at 3% and it would be about $10,500/year.... or about 42 nights at $250/night. We spend about 6 months a year there. Our condo is probably a lot closer to $250/night than a $650,000 condo would be.

[ivinsfan]

Quote:

Originally Posted by pb4uski You hold on... you're saying that you can rent a $300-400k property for $30/night? That sounds like nonsense. Where is that? $30/night * 365 nights is $10,950....I'll take it!

No it was around 80 dollars a night which is still a bargain, but I did say it was about location and season ....prime season you will pay considerable more per night. In this area I would say prime is from around mid-March until Aug 1 with another rush of business in Sept-Oct

I see Todd added a comment about a beach area in Cali, so your comment about 250 night being too cheap is spot on.

[RunningBum]

Looks like you missed insurance for owning a home, since your $4300 in expenses is broken out into utilities and repairs. There are also transaction costs in buying and selling a home.

Is it valid to assume a $250 hotel is equivalent to that home? For a couple a hotel may work, but a family probably wants more room to spread out and have privacy. Presumably a home has a regular kitchen, but a hotel room may not, so there is savings on eating in vs dining out. You could compare it to an airbnb rental of a similar house, then it's just a minor savings of keeping some staples in your own house.

If I really did want to go to the same place that often, if it was at all close to breakeven I'd go with the house, because of the flexibility. Always available to me, even at the last minute, no worry about check out times, my familiar stuff, I know exactly what I have to cook with, and so on.

I live in a place where a lot of people have their second homes. Some use theirs quite often, and probably do use it 75 days, and there are perks to home ownership like early ski slope hours. Others found that once their kids moved out, they used it much less often, but just can't get motivated to sell. They probably got 10 good years out of it, and now each year they have money tied up in the house with the expenses and very little usage.

[OldShooter]

I think you have an apples-and-oranges scenario for another reason: The choice is not only between buying and staying in a hotel. In addition to VRBO and AirBNB, any winter vacation area has private rentals available. If you're willing to rent for a few months, too, the rates will be cheaper than if you just want a few weeks. Every year you can go someplace different, too.

FWIW we consider nights we have to stay in a hotel as bad luck. Even for a day or two stay, we head for https://www.airbnb.com/ I can't imagine living in a small box for weeks at a time. Ack!

Re your analysis, you don't consider food expense. With a hotel you are eating in restaurants at a cost the is probably triple or more what you'd spend living in a rental or your own home. Wine is usually at least quadruple if you're into that.

[Toddtheformeraccountant]

Ha yeah $30/night is pretty low. That would pay the nighly "resort fee" or parking in this area

Quote:

Originally Posted by pb4uski You hold on... you're saying that you can rent a $300-400k property for $30/night? That sounds like nonsense. Where is that? $30/night * 365 nights is $10,950....I'll take it!

[ivinsfan]

Quote:

Originally Posted by Toddtheaccountant You bring up a good point...but this is actually in the range of reality. A condo that I would buy in any reasonable beach area in california is going to be in the $500K - $750K range. Alternatively, renting a hotel (it would be a smaller hotel room at a embassy suites style level, not five star) would cost in the neighborhood of $250 a night, particularly on a week day when rates are lower, and have the same utility as the condo. It's kind of the perverse nature of real estate in California. As for expenses, property taxes are basically 1.25% of the cost of the property...that alone is $8,100 per year....add insurance, repairs, some utilities, homeowners, you're easily up at that level of annual outflow to own the darned thing.

And it depends if you want to go somewhere and settle in for 30-60 days or if you want to come and go for a night or two.

[ivinsfan]

Quote:

Originally Posted by Toddtheaccountant Ha yeah $30/night is pretty low. That would pay the nighly "resort fee" or parking in this area

2400 dollars/30 nights 80 bucks still cheap but not 30..

[Toddtheformeraccountant]

Thank you old shooter...those are great comments. Food! Forgot that, duh. While microwave cup a noodles for lunch and dinner might fit the bill, yeah, that's no good. And yes...AIRBNB might be alot cheaper than a hotel and better, and take advantage of the poor schmuck paying $650,000 for the condo who is futilely trying to make his investment pencil!

Quote:

Originally Posted by OldShooter I think you have an apples-and-oranges scenario for another reason: The choice is not only between buying and staying in a hotel. In addition to VRBO and AirBNB, any winter vacation area has private rentals available. If you're willing to rent for a few months, too, the rates will be cheaper than if you just want a few weeks. Every year you can go someplace different, too. FWIW we consider nights we have to stay in a hotel as bad luck. Even for a day or two stay, we head for https://www.airbnb.com/ I can't imagine living in a small box for weeks at a time. Ack! Re your analysis, you don't consider food expense. With a hotel you are eating in restaurants at a cost the is probably triple or more what you'd spend living in a rental or your own home. Wine is usually at least quadruple if you're into that.

[Toddtheformeraccountant]

Yep..missed insurance. Correct! And spot on about the food thing. And clearly, if you go quite often, there is a definite advantage to owning the place...you just go and are there. No check-in etc...however on the other hand you have to clean it, with a hotel room, you just throw your towels on the ground in the bathroom and go.

It's frankly the thing you raise in your last paragraph that concerns me the most....will we use it? The flexibility of just paying for where you want to go, no investment, no commitment, is pretty awesome...just like our swimming pool that we "invested" in that the kids swam in for about a year and for the last 10 years hasn't seen a human body in it...utility is very important.

Quote:

Originally Posted by RunningBum Looks like you missed insurance for owning a home, since your $4300 in expenses is broken out into utilities and repairs. There are also transaction costs in buying and selling a home. Is it valid to assume a $250 hotel is equivalent to that home? For a couple a hotel may work, but a family probably wants more room to spread out and have privacy. Presumably a home has a regular kitchen, but a hotel room may not, so there is savings on eating in vs dining out. You could compare it to an airbnb rental of a similar house, then it's just a minor savings of keeping some staples in your own house. If I really did want to go to the same place that often, if it was at all close to breakeven I'd go with the house, because of the flexibility. Always available to me, even at the last minute, no worry about check out times, my familiar stuff, I know exactly what I have to cook with, and so on. I live in a place where a lot of people have their second homes. Some use theirs quite often, and probably do use it 75 days, and there are perks to home ownership like early ski slope hours. Others found that once their kids moved out, they used it much less often, but just can't get motivated to sell. They probably got 10 good years out of it, and now each year they have money tied up in the house with the expenses and very little usage.

[kcowan]

Quote:

Originally Posted by OldShooter Re your analysis, you don't consider food expense. With a hotel you are eating in restaurants at a cost the is probably triple or more what you'd spend living in a rental or your own home. Wine is usually at least quadruple if you're into that.

Yes that is a huge factor. Plus the inconvenience of going out for 3 meals.

We have two places and we consider them to be lifestyle expenses rather than investments. If they end up valuable, our heirs will benefit.

[pb4uski]

Quote:

Originally Posted by Toddtheformeraccountant .... It's frankly the thing you raise in your last paragraph that concerns me the most....will we use it? The flexibility of just paying for where you want to go, no investment, no commitment, is pretty awesome...just like our swimming pool that we "invested" in that the kids swam in for about a year and for the last 10 years hasn't seen a human body in it...utility is very important.

I can see this but our experience was the opposite.

We ended up buying our winter condo when we had a hard time finding a easonal rental in the area we wanted and an opportunity to buy popped up out of nowhere.

If we had found a suitable rental, we probably would have rented year after year for the season (Jan-Mar or Apr).... but since we own we had slipped into using it almost 6 months a year (Nov to May).

It's there and we are paying for it so we might as well use it.

[brett]

We would (and have) view a second snowbird home purely as a lifestyle cost.

We would look at the long term rentals vs ownership in the target area. Hotels, etc. would not enter our decision making process.

[BeachOrCity]

Quote:

Originally Posted by kcowan We have two places and we consider them to be lifestyle expenses rather than investments. If they end up valuable, our heirs will benefit.

^^^. This

Todd, you have amassed a fair amount of wealth. As a 20 yr plus second home owner I can tell you that with your assets this should be more about lifestyle than about which option has an edge financially.

Some life style factors to think of
— meals out. But when you want to cook at home your house has a stocked pantry and you only have to shop for your fresh goods. Not packing or buying mayo every time you head there
—- your clothes are there waiting for you minimal packing.
— your friends and family decide to come every year and the value of time together at YOUR PLACE is priceless.

If I were in your situation I would rent one place for a season or full year to decide how much you like it and will use it.

Use that time to study the market and understand what you want. What you want will most likely change a bit after you retire also.

If after renting your decide you like it and will use it. Buy a place. Factor in that when you sell you may loose money, but that’s ok if that cost was lifestyle and happiness.

[Toddtheformeraccountant]

Wow, beachorcity....that's some great advice, thank you thank you! I am looking at it like too much of an accountant. You're right, there are huge lifestyle benefits, all of which you mention below....

I guess what we really need to do is, like you suggest, try out some areas, make darned sure that's where we would want to vacation, and THEN buy a place, that would reduce our chance of making a dumb buy for a place that we end up not using enough.

Awesome!

Quote:

Originally Posted by BeachOrCity ^^^. This Todd, you have amassed a fair amount of wealth. As a 20 yr plus second home owner I can tell you that with your assets this should be more about lifestyle than about which option has an edge financially. Some life style factors to think of — meals out. But when you want to cook at home your house has a stocked pantry and you only have to shop for your fresh goods. Not packing or buying mayo every time you head there —- your clothes are there waiting for you minimal packing. — your friends and family decide to come every year and the value of time together at YOUR PLACE is priceless. If I were in your situation I would rent one place for a season or full year to decide how much you like it and will use it. Use that time to study the market and understand what you want. What you want will most likely change a bit after you retire also. If after renting your decide you like it and will use it. Buy a place. Factor in that when you sell you may loose money, but that’s ok if that cost was lifestyle and happiness.

[JDARNELL]

I have some experience in this area. Well at least 8 months. We purchased a vacation home in a tourist area last December. Reason we purchased it is that we have a family commitment in the area for the next 4 years during mostly the offseason and also did not want to stay in transient places when we were there. Based on the rental numbers that I saw and what I have seen we purchased it is feasible to ROE unleveraged of 7-8% excluding appreciation per year and have a management company handle everything. More with leverage. If I was in the area taking care of everything myself the numbers could be much higher however that defeats my purpose.

Now will I see this ROE? NOPE because I intend to use it 60 -90 nights a year and maybe more if I slide in there last minute during vacant times.. The issue is though that I “can’t afford” to use it during PRIME times. The month of July it was rented 28 of 31 days. For me though I really don’t want to be there in July but I do want to be there over spring break. I anticipate I will get a ROE of 4-5% and have all my lodging covered when it is all said and done. I am working on my nightly cost to and I will have better numbers for the year Dec 1. I am keeping a detailed spreadsheet on everything to include the breakeven rental nights per year. We will sale in 5 yrs and even if we love the area I would not live in this property.

I have no emotional attachment to the place and have only stayed 1 night. Wife and girlfriends stayed a week and we will be staying there in a few days. I cant even tell you what color the appliances are at this point LOL.