One of the notable trends during COVID was the deployment of capital into secondary homes. People didn’t have to go into work, so they could work from anywhere. In addition, the baby boomers had enough of work and retired to buy a home in the mountains or the beach. The idea was to use it for your vacation and lease it out the balance of the year via Airbnb or VRBO. Great idea! You have a great place to escape to and get cashflow from others wanting what you have!! An investment property!!! Oh, the challenges.
Our family goes through the same exercise every few years and have come to the conclusion that owning second property is not for everyone.
THE GOOD
1. It’s your place, and you can escape there anytime you wish.
2. It produces income that offsets costs and, in some cases, gives you positive cashflow.
3. Appreciation – over time the asset value will go up, and the property purchased 20 years ago could be worth a fortune!
4. It can be your future retirement destination.
THE BAD
1. Rental Time - Even the best of properties will only rent during the high seasons. The time you really want to be there…family fun or investment income? Can your property cashflow with income renting from June – August only?
2. Competitive Rents – While you feel your property is better than the next, the house down the beach rents out for $2,000 less a week than yours does…how can that be? Maybe your competitor bought a house at a lower price, or maybe they inherited it so they have no cost basis.
3. Time Consuming- You are now a landlord, and you have a business that may competing with your day job or other things you may want to do…this is a very difficult to job to automate. During hurricane season, my friends are glued to The Weather Channel praying that isn’t their dream house floating down the river or they escape major damage….do you know what insurance costs even if you can get it?
THE UGLY
1. Maintenance – Beach properties have wear and tear from salt water in the air…rotting wood, and exploding water pipes in the winter when the sudden freeze blew up your water pipes before you could drain the pipes or put in anti-freeze…it will be a maintenance challenge.
2. Bad Renters – There is a certain cavalier attitude among vacationers if you are renting and don’t own a property…. leaving the HVAC on 65 degrees all day long with the windows open. The parent who allows the high school graduation party to occur and someone trashed the sofa and breaks most of the glasses…the items that disappear at the end of the week?
3. Midnight Calls – The HVAC will break; the toilet will clog or the coffee machine isn’t working…people will call at all hours for the oddest reasons, because they are paying good money for your place.
CONCLUSION
I have many friends with second homes, and it’s “their thing.” They have large families, and they’re creating etched memories at the lake house. At the same time, the feeling of having to go to the lake house because it’s not being used is there, and it haunts them from a trip to the Amalfi coast or a ski trip to Colorado. As I run the numbers, I’ve concluded:
- My time is better utilized focusing on investment real estate whose sole purpose is providing a return on my investment.
- Second properties rarely cashflow positive and appreciation comes with huge offsets due to capital maintenance.
- The time that I could spend vacationing at a second home may be 6 weeks a year and the cost of owing second home (assuming no renters) is more than 6 weeks at the best Four Seasons around the world. I would rather be in Nevis watching someone else’s soffit rot!
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