Posted on 03/02/2006 3:52:01 PM PST by ex-Texan
One of my fantasies is to have a second home near a Vermont ski resort. As impractical as this is, I've watched the for-sale listings on Realtor.com and seen some appealing properties languish for months. And a buddy of mine complains that he couldn't possibly sell his Vermont home for as much as he paid five or six years ago.
It seems like the real estate market has cooled - not just in Vermont but also in many parts of the country. Maybe it's turning into a buyers' market.
So is this a good time to shop for that second home you've wanted?
Perhaps - but only if you expect to keep the second home for many years and view it as an indulgence rather than an investment. The days of flipping second homes for quick profit appear to be over, for now at least.
While the median home price was 11.6 percent higher in January than a year earlier, the National Association of Realtors reported Tuesday that sales of existing homes fell 2.8 percent from December to January, the fifth straight month of declining sales. January sales were 5.2 percent below those of January 2005.
The Northeast was particularly hard hit, with sales off 10 percent from December to January and down 13.2 percent since January 2005.
Condos and co-ops go cold
While sales of single-family homes dropped only 1.5 percent from December to January, condo and co-op sales dropped a whopping 10.6 percent. Previously, this was one of the hottest markets, as buyers gobbled up second homes as investments.
The falling sales confirm stories about investment properties sitting empty while speculators who had hoped for quick turnarounds slash prices in the absence of buyers.
Second homes and investment properties are hit hardest in a cooling market because people do not need them. Sales of primary homes are always bolstered to some extent by first-time buyers and people who for one reason or another have to move.
Anyone who has read this column for long knows that I have a glass-is-half-empty outlook on second homes. As investments, they are illiquid: You can't get your money out with the click of a mouse, as with a stock or mutual fund.
Expenses of maintaining and running a second home can be offset by renting it part of the time, but to get the biggest tax benefit on a rental, you have to severely limit your own use. Also, dealing with renters can be a terrible headache - or a big expense if you hire a manager.
But what about a second home acquired primarily or exclusively for your own use? That's like any indulgence - if it makes you happy and you have the money, go for it.
Costs count, too
But study the numbers. With real estate, many people focus on purchase price and sale price, figuring that if the second figure is bigger, they've made a profit. To be accurate, you should look at all the costs.
Say you bought a place for $300,000, borrowing $240,000 at 6 percent. Suppose the property appreciated 6 percent a year - about double the inflation rate.
After five years, the property would be worth just over $400,000, for a $100,000 "profit" on the $60,000 initially invested as the down payment. But interest would have cost about $70,000, reducing the profit to $30,000.
A $30,000 gain on a $60,000 investment over five years is an annual return of about 8 percent, which is nothing special.
But you might also have paid $5,000 a year in real estate taxes, and an additional $1,000 a year in homeowner's insurance. That's $30,000 over five years - wiping out your profit.
If you pay a standard 6 percent Realtor's commission to sell the property, you'd be $24,000 in the hole.
And we haven't considered maintenance, utilities and furnishings, and the cost of traveling to the property. Sure, some people make money on second homes, but I bet many are making less than they think. Best see that dream home for what it is: an extravagance, not a moneymaker.
It's easy. Yes, if you;
1. Want the house.
2. Pay at least 30 to 40 percent down.
3. Have enough socked away to pay taxes, insurance and payments for three years, above and beyond your normal living expenses.
If you don't meet the above qualifications, stop f*cking talking about stuff you can't afford.
Sounds like a very good plan to me.
I'll sell you mine.
It's within 45 minutes of 4-5 major Vermont ski resorts and offers 4 season fun, recreation and is a great investment too.
Close to charming restaurants, cloying tourist traps and offers easy access to Howard Dean.You'll hate yourself tomorrow if you don't buy my Vermont paradise today.
Sleeps 12, 4 baths, 150 acres, taxes suck.
Personally, I'd stay away from Vermont real estate. Vermont relies heavily on real estate tax to raise money for schools and the schools have pretty much a blank check when it comes to spending. Out of state owners are a prime target when it comes to raising taxes.
4.) You could also get lucky! I bought a chalet on 10 acres in northern Michigan over ten years ago for a song because the owners needed to sell it to get another mortgage in another state. The mineral rights passed to me and within a couple of years they were drilling for natural gas everywhere in the area. I get gas royalty checks every month that far exceed any mortgage, taxes, and utilities combined, not including real estate appreciation.
If you want a deal (an "investment") in a falling real estate market, wait, wait, wait, and then wait some more. Wait way beyond the point where you think the prices can't possibly fall any further. Finally, after you have done that, start looking for deals. If the market is cooling, this is way too early to look.
I assume here we are talking about a second home bought as an actual second home. You should never expect such a thing to be a "great investment". If, however you're buying and intending to significantly improve the property and/or rent the property out, you have purchased an "investment". But you can't expect it to just sit there and earn you money while you visit it twice a year to ski. That's a fools hope.
veddy interesting
Very good point. And another place for a "deal" is foreclosures, though personally I consider that like selling your soul... Just not good karma to profit on other people's misfortune.
I doubt if most people buy second homes for investment purposes. There are investment properties for that.
Besides the tax rules have changed over the years making rental income from vacation homes almost a liability, no longer much tax deduction for renting vacation homes out short term. Still, the second home market has boomed.
Did the author calculate the fact that mortgage interest and property taxes are deductible for second homes as well as primary ones? Or that many boomer buyers plan to move into their vacation homes in their future retirement? Making their fears of, or risks from a "bubble" - meaningless. Most people who can afford to do so and who yearn for an escape from their daily grind.. buy two homes.... not two "investments".
Nice as a big fat mutual fund may be, even if you can assure an 8% appreciation rate, you can't use it to kick off your ski boots and sit in front of a roaring fire drinking wine and playing checkers with the kids after a day on the slopes. Or to sit with family and crack crabs after a day on the beach or clean trout after a day by the lake in the woods.
Vacation/second homes are definitely a luxury item, not an investment in material wealth, but in pleasure. You cannot assess an economic value to that, this author did not try.
LOL! Did you and billorites coordinate your posts?
You couldn't have asked for a better, corroborating, preceding post.
Just kidding.
LOL! Nope. I'm a former Vermonter but still own some land there. After almost 30 years there, I just couldn't take the climate (political and weather) any more.
More holy shi'ite from a wall street stock and bond shill.
"Don't buy that great waterfront property that you absolutely love, can afford with low interest rates, and that you will someday retire to! No, don't buy it! Buy another dot com. Buy WorldCom. Buy a 'no-load' mutual fund with plenty of hidden load. Please, will somebody just invest in wall street so I can pay my own mortgage!"
No, thanks! I will continue to buy undervalued properties and I will continue to make money.
"Oh, but there was a bust in Kalifornika in the 1980s!"
Yeah, and what are those homes worth now? Hmmm? You think the Dow Jones average comes close?
Frankly, the real estate pros know full well that you don't need a crazy real estate market to make a fortune. For those that don't understand that, please feel free to invest in whatever fad wall street is serving up this week.
You may have fewer pieces to pick from.
I agree with you on waiting if you are looking to buy in a market that has been 'hot' in recent years. This is especially necessary since there is a pending bolus of 5 yr adjustable rate mortgages which will likely readjust upward. I suspect that alot of people have priced themselves to perfection and will not be prepared for their new higher mortgage rate.
I agree with you on waiting if you are looking to buy in a market that has been 'hot' in recent years. This is especially necessary since there is a pending bolus of 5 yr adjustable rate mortgages which will likely readjust upward. I suspect that alot of people have priced themselves to perfection and will not be prepared for their new higher mortgage rate.
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