Is a Vacation Home Still a Good Investment?
an article by Wall Street Journal's Brett Arends
The real estate crash in certain parts of the country raises a question: Does it even make sense for most Americans to own a vacation home anymore?
The answers are going to vary, of course, from person to person.
But the slump in places like Florida and Arizona has badly knocked the idea that your long-term capital gains are going to offset the costs.
"Don't think about calling a second home an investment," warns financial planner Sean Sebold. "You are paying for the luxury of having your own place." He says clients frequently underestimate the costs involved. From a financial perspective, he adds, you're probably "better off putting your money in an S&P index fund and staying at the Four Seasons isntead."
Before you make the move, it's worth doing some rough math on the back of an envelope.
On the cost side, property taxes, plus condo fees, or maintenance and insurance on a house, can easily add up to 5% of the home's value every year. An 80% mortgage for thirty years at 6.3% will cost another 5%. And the cost of your down payment is probably about another 1% in foregone interest. (If you weren't using it as a down payment, you could put it in the bank). Total cost: About 11%.
If you itemize your deductions you can get a break on the property tax and mortgage interest. It will vary with your tax bracket, but that can bring the effective after-tax cost down to about 9%.
Some caveats: States may hike property taxes on second-home owners. And the rise of the alternative minimum tax, and other tax changes, may also cut some deductions or end them altogether.
You can play with these numbers. I have never known anyone say their costs came out less than expected.
On the positive side, real estate does tend to grow in value over time. But the recent crash has shown that this can be pretty rocky on occasion.
The average annual gain over the past 40 years has only been about 6.4% nationwide, says the National Association of Realtors. (That only beat inflation by 1.8% a year).
If you spend 9% a year and get long-term gains of 6.4%, that leaves a 2.6% gap. That's the true cost of owning your own vacation home, and a number to compare to the cost of renting a place instead.
Of course we're not even counting the cost of furnishings and incidentals. But then a rental is rarely as pleasant as your own place. They are also harder to get in peak season, or at short notice.
