Vacation Home: Investment or Money Pit?

Hi BR I love your place. One reason we got the two smaller side-by-side cottages is that we could sell one if needed and still keep one - we'll see how the college bills go...

Thanks. Me, too. But if I could turn back time, I would have built something smaller.

You were wise in what you did. We weren't. Frankly we were like my Mom -- in denial (you know, a river in Egypt ) regarding ever getting old enough to think about retirement and beyond.

Thanks. Me, too. But if I could turn back time, I would have built something smaller.

You were wise in what you did. We weren't. Frankly we were like my Mom -- in denial (you know, a river in Egypt ) regarding ever getting old enough to think about retirement and beyond.

I'm a bit of a worrier so I always like to have a back-up plan (and a back-up plan to a back-up plan - all those back-up plans help me sleep better at night). Come and buy a place near me in SoWall (or buy two... an heir and a spare). Your place is lovely, though, as is your location, so I'm sure it would be hard to leave that place.

Renting vacation places is certainly a great way to build experiences. No need to have a vacation place of your own - or even travel at all - to do that. The great thing about experiences is that they are just as available for free if you notice them, create them, and enjoy them with others. Some people have beautiful places/vacation homes and don't enjoy them (or the places may have become a burden to them for one reason or another).

If you're financially in good shape and your accountant agrees that it's a decent decision, then it would be useful to consider "experiences that you can savor" into the equation. But owning a second home is definitely not for everyone (and can become a burden for many people).

For some people, setting down roots in a place and making it their home is part of the experience (I'm a "nester"). I know that my kids love coming to their second "home" in SoWal and just settling in, knowing that some of their stuff is there, enjoying dining off my mom's dining room table that I inherited that they ate at during holidays when they were little, using the table stand from my grandmother to store their popcorn while watching TV, and knowing that they'll be able to use the place with their families someday when they may not have the money to travel (and I get to enjoy the thought of watching future generations hang out in the place someday, but I hope that's not for a long time). And it does indeed make a difference that I hope to spend several months a year in SoWal, maybe even become a resident and make my current home the "second" home in the years to come (where we also have roots). I don't know if I would have bought a place if I didn't intend to partially live in it at some point. So, for me (and other "nesters"), the responsibilites and ups and downs of having second home are offset by these kinds of things.

Paula: absolutely agree with you. As with any major decision, the crucial question is "what is your goal?" Of course, having resources to own something on 30-a is an important step. After that, though, the question (as discussed in opportunity costs, ROI, ROE discussions above) becomes "what else would you do with those resources?" We have been so very happy with our decision to buy a home in sowal. One that I hadn't thought about before the purchase was the fact that with a 2nd home, came more pressure to actually use it and take some time away from work and bring the family to sowal. We used to take 1 or 2 weeks off a year, now significantly more, and in the end, will probably extend our working lives by years. Forming lasting relationships with others who have invested in a 2nd home also has generated some tangible financial (and more importantly non-financial) benfits as well. Having stayed in rental properties here for 30 or so summer weeks prior to decision to buy, the numerous "hidden" benefits of ownership clearly more than make up for "cash flow" of the property.

Quality time vs. dividends

I don't have the correct formulas or calculations as evidence, but IMO there are far better ways to make a profit than by buying a 2nd home/rental in Sowal. Insurance and maintenence alone are big deterrants.

On the other hand, I can definitively say that the antidote to video games/the internet/cell phones, the 21st century grind, boredom, and generational schisms is the outdoors, time spent together, and a severe lack of electronics.

I have a much better relationship w/ my grandparents as a result of a great deal of time spent w/ them in a remote and simple house that had limited space that threw us together, no tv, 2 radio stations (on a good day), decks of cards, and board games older than me.

If you want to make a profit, crunch the numbers and then go elsewhere, if you want to make memories, welcome to Sowal.

p.s. for best results turn off the damn phone/tv/computer for all generations

Paula: absolutely agree with you. As with any major decision, the crucial question is "what is your goal?" Of course, having resources to own something on 30-a is an important step. After that, though, the question (as discussed in opportunity costs, ROI, ROE discussions above) becomes "what else would you do with those resources?" We have been so very happy with our decision to buy a home in sowal. One that I hadn't thought about before the purchase was the fact that with a 2nd home, came more pressure to actually use it and take some time away from work and bring the family to sowal. We used to take 1 or 2 weeks off a year, now significantly more, and in the end, will probably extend our working lives by years. Forming lasting relationships with others who have invested in a 2nd home also has generated some tangible financial (and more importantly non-financial) benfits as well. Having stayed in rental properties here for 30 or so summer weeks prior to decision to buy, the numerous "hidden" benefits of ownership clearly more than make up for "cash flow" of the property.

Definitely, the "what is your goal" question is critical, along with "can you afford to buy it and still sleep at night in good and bad times" and "am I diversified?". In the years that I bought the cottages, I've seen them go from fantastic investments, to not-that-great investments, to good investments (given the stock market tanking). Also, one of my goals was "forced savings" - If I didn't have the SoWal mortgages, I know I would have been tempted to spend more money on things that wouldn't have brought me (and future generations) as much happiness as vacations in my own home in SoWal. For example, cars don't excite me at all, so I drive old cars (one is proudly going on 10 years old and I'm getting it tuned up for the next hundred thousand miles). I'm not doing a big upgrade in the old kitchen in my primary home though it really needs a lot of work - I'm just making inexpensive surface changes - maybe even a formica counter top and linoleum floor. Having the extra mortgage and wanting to keep the SoWal places makes me think carefully before I spend on anything - It's all about trade-offs and understanding what brings you lasting joy. I have several friends who paid quite a bit to completely redo their kitchens and they're very happy with that choice (and their kitchens are indeed beautiful and well-designed). For the same amount of money, I'm paying for 1/4 of a place to call my own in SoWal. It's about knowing your goals (as you said), making mindful choices, figuring out the trade-offs, and thinking about what will make you happy in the short and long-term. Not surprisingly (and thankfully), everyone has different answers to these questions.

Definitely, the "what is your goal" question is critical, along with "can you afford to buy it and still sleep at night in good and bad times" and "am I diversified?". In the years that I bought the cottages, I've seen them go from fantastic investments, to not-that-great investments, to good investments (given the stock market tanking). Also, one of my goals was "forced savings" - If I didn't have the SoWal mortgages, I know I would have been tempted to spend more money on things that wouldn't have brought me (and future generations) as much happiness as vacations in my own home in SoWal. For example, cars don't excite me at all, so I drive old cars (one is proudly going on 10 years old and I'm getting it tuned up for the next hundred thousand miles). I'm not doing a big upgrade in the old kitchen in my primary home though it really needs a lot of work - I'm just making inexpensive surface changes - maybe even a formica counter top and linoleum floor. Having the extra mortgage and wanting to keep the SoWal places makes me think carefully before I spend on anything - It's all about trade-offs and understanding what brings you lasting joy. I have several friends who paid quite a bit to completely redo their kitchens and they're very happy with that choice (and their kitchens are indeed beautiful and well-designed). For the same amount of money, I'm paying for 1/4 of a place to call my own in SoWal. It's about knowing your goals (as you said), making mindful choices, figuring out the trade-offs, and thinking about what will make you happy in the short and long-term. Not surprisingly (and thankfully), everyone has different answers to these questions.

Paula I totally agree. We have always dreamed of having a place at the beach someday, and when we came to SoWal for the first time we were hooked for life. Both of us are native Floridians and have been and continue to go to almost every coastal area in our state, and the only thing that compares in our mind is Sanibel/Captiva. If you want nightlife and celebs, SoWal is not really the place for you. But we like relative quiet and nice architecture and high elevations in addition to the gorgeous sand and water. When we bought, it was just our way of reserving our place at the beach.

So, it is emotional. I would say if it isn't emotional it is best to just not do it. Part of me would like to not have the hassle of managing a rental, but at the same time, the house is rarely empty for long and I know that the people who stay with us are enjoying it. It's a good trade-off.

The goal at this point is to get SoWal real estate into the hands of end users, and eventually they will filter in at the right price and stabilize this market. But I think most people deep down know if they want to make that leap or not.

Good thread, xaa. Thanks for starting it. We haven't had a discussion like this one in quite a while.

SJ - Fisher is using the GAAP (generally accepting accounting procedures) definition of ROE vs. ROI. While your definition makes "sense" in layman's terms and is helpful for decision making his version is the textbook method.

If all the people that bought investment property during the period 2002-2006 had used the "textbook" model versus the "layman's" model before buying real estate, we wouldn't be in the foreclosure/short sale nightmare situation we are in along 30A (or the rest of the country) right now.

Comparing total reward to only part of the risk makes for some really, really bad decsion making.

Paula I totally agree. We have always dreamed of having a place at the beach someday, and when we came to SoWal for the first time we were hooked for life. Both of us are native Floridians and have been and continue to go to almost every coastal area in our state, and the only thing that compares in our mind is Sanibel/Captiva. If you want nightlife and celebs, SoWal is not really the place for you. But we like relative quiet and nice architecture and high elevations in addition to the gorgeous sand and water. When we bought, it was just our way of reserving our place at the beach.

So, it is emotional. I would say if it isn't emotional it is best to just not do it. Part of me would like to not have the hassle of managing a rental, but at the same time, the house is rarely empty for long and I know that the people who stay with us are enjoying it. It's a good trade-off.

The goal at this point is to get SoWal real estate into the hands of end users, and eventually they will filter in at the right price and stabilize this market. But I think most people deep down know if they want to make that leap or not.

Good thread, xaa. Thanks for starting it. We haven't had a discussion like this one in quite a while.

Agree, agree! And the only other place we've loved in Florida is Sanibel as well - we've gone there for February winter break over the past two years because our cottages were booked, but we love the shelling and low key style of Sanibel. SoWal is home away from home, though.

OK, here goes ... please be gentle. Our first trip to SoWal was in 2005. It was love at first sight. Just for the fun of it, my husband and I would check out all the different neighborhoods and see how much homes and condos cost. We would pick up flyers and then try to guess how much was being asked for the property ... and then go into sticker shock. We're simple folks and easily amused. We discovered Magnolia Cottages by the Sea and just thought it was a wonderful community.

I monitored MC for 3 years and saw prices steadily decline. What was once a pipedream of owning a home along 30A was fast becoming a possibility. We finally pulled the trigger in late 2008 when one of the homes in MC went REO.

Cash flow? Absolutely not. We have put the house on a rental program and it's been a bit disappointing but we never counted on rental income to cover our expenses. Hopefully, rentals will pick up over time.

For us, it was mostly a decision to buy that came from the heart vs. the head. Sure, for the money that we've spent so far we could be renting really luxurious accomodations just about anywhere, but we derive a strong sense of satisfaction of knowing that we have rewarded ourselves for years of hard work by buying a little house by the beach. SoWal is not our primary vacation destination but we sure do enjoy spending a couple of weeks each year in this lovely area.

Has it been stressful? A little but you need to figure out what you can afford without becoming a slave to your mortgage. Do we expect to make money? That would be really nice but we're not counting on it. Maybe in a few years home values will go back up but that's not why we bought.

My advice if you're looking for a 2nd home:
1. Pick 1 or 2 neighborhoods that you absolutely love. Rent a home or condo in the neighborhood for a few days to get a good feel for the area.
2. Do your research. Waltonpa.com is an excellent research tool.
3. Follow the market in your neighborhood closely and watch for price changes.
4. Don't be afraid of an REO. Our transaction went very smoothly.
5. Do not count on rental income to cover your expenses.
6. Only buy what you can afford.
7. Do not expect home values to go up for a long, long time.

OK, here goes ... please be gentle. Our first trip to SoWal was in 2005. It was love at first sight. Just for the fun of it, my husband and I would check out all the different neighborhoods and see how much homes and condos cost. We would pick up flyers and then try to guess how much was being asked for the property ... and then go into sticker shock. We're simple folks and easily amused. We discovered Magnolia Cottages by the Sea and just thought it was a wonderful community.

I monitored MC for 3 years and saw prices steadily decline. What was once a pipedream of owning a home along 30A was fast becoming a possibility. We finally pulled the trigger in late 2008 when one of the homes in MC went REO.

Cash flow? Absolutely not. We have put the house on a rental program and it's been a bit disappointing but we never counted on rental income to cover our expenses. Hopefully, rentals will pick up over time.

For us, it was mostly a decision to buy that came from the heart vs. the head. Sure, for the money that we've spent so far we could be renting really luxurious accomodations just about anywhere, but we derive a strong sense of satisfaction of knowing that we have rewarded ourselves for years of hard work by buying a little house by the beach. SoWal is not our primary vacation destination but we sure do enjoy spending a couple of weeks each year in this lovely area.

Has it been stressful? A little but you need to figure out what you can afford without becoming a slave to your mortgage. Do we expect to make money? That would be really nice but we're not counting on it. Maybe in a few years home values will go back up but that's not why we bought.

My advice if you're looking for a 2nd home:
1. Pick 1 or 2 neighborhoods that you absolutely love. Rent a home or condo in the neighborhood for a few days to get a good feel for the area.
2. Do your research. Waltonpa.com is an excellent research tool.
3. Follow the market in your neighborhood closely and watch for price changes.
4. Don't be afraid of an REO. Our transaction went very smoothly.
5. Do not count on rental income to cover your expenses.
6. Only buy what you can afford.
7. Do not expect home values to go up for a long, long time.

Congrats and good advice. Good luck and hope you get many, many years of enjoyment out of the home at the beach.

If all the people that bought investment property during the period 2002-2006 had used the "textbook" model versus the "layman's" model before buying real estate, we wouldn't be in the foreclosure/short sale nightmare situation we are in along 30A (or the rest of the country) right now.

Comparing total reward to only part of the risk makes for some really, really bad decsion making.

Again, I disagree. If people would have used the "layman's model" when purchasing, they wouldn't have bought in 2002-2006, because the numbers wouldn't have crunched a positive cash flow. In 2002, for example, a new house in Pt Washington was running $100/sf, including the lot. eg - a 1600 sf home cost $160,000. If rented, it would have cost the renter about $900-$1000. The "layman's model" would have looked to receive $1,600 per month for rent, about 38% more than was achievable.

If that purchaser would have used the "layman's model," he or she would have put down 20% ($32,000), with a loan balance of 80% ($128,000). With a 6% fixed rate for 30years (which was the norm in 2002), the monthly principle and interest would be $768/ month. Add $200/mo for taxes, and $200/mo for insurance, and your total expense (not including repairs and general maintenance) equals $1168 per month. In the "layman's model," you would be renting it for $1600. mo, giving you a positive cash flow of $432/month. AND, guess what. That same house today, would rent for $1400-$1500 today, a reduced rate of return, but still a positive cash flow, and no mortgage problem, unless the owners had pulled out equity. The problem was that the property wasn't able to pull a rent of the amount needed in the "layman's model."

One last thing, that house would sell fairly quickly today for around $275,000, even in a down market. We haven't talked about the full possible reward vs risk, but since you want to bring up the "full risk," it is only fair that you bring up the full reward.

So, the layman's model isn't what got buyers into trouble.