September 11, 2017
One measure of wealth in America is the number of homes per family. As wealth accumulates there is often an increasing desire to buy a “second home”. Lively family debates then take place over whether the right location is the lake, beach, or the mountains. Whatever the location, the aspiration to own a second home is common across the nation.
There is one aspect of the decision making process on second homes which is often overlooked. There frequently seems to be an assumption that the purchase will be a long term “investment”. In fact, just like a stock or a bond, homes can, and will, go down in value. A true investment should involve spending capital with at least one of two objectives, provide income or grow value. In most cases, the reasons for owning a second home do not include either of these two objectives. Of course there is nothing wrong with owning a second, or even a third, home. However such ownership should be recognized as having a “lifestyle asset”. In other words the purpose is for recreation and fun. A second home might generate some income if it is rented out, but in most cases there are only costs to pay. These costs of upkeep and maintenance can be high. The range of cost varies but is usually somewhere between $30,000 and $60,000 per year. If the cost of ownership is at the top of this range, and the home was purchased for $1,000,000, the “total return” from the property has to be 6% per year just to cover the cost of holding the asset.
When considering buying a second home it is also important to bear in mind that there is usually a less liquid market for such homes as compared with more typical residential properties. For example, only about 10% of Americans have second homes. Past experience shows than when the market gets soft for beautiful, well located recreational properties, it can stay soft for a very long time. We have seen situations where clients have sought to sell second homes for years before being successful.
Second and vacation home ownership is rising across the US. This is no surprise. The strong stock market is a driver of people’s perception of wealth, and as noted above, rising wealth means that more and more people are thinking about owning second properties. Some baby boomers are even acquiring property in anticipation of their retirement downsizing event.
This weekly was not meant to be a killjoy. Owning a property for fun can be a wonderful thing! However, we do want people to be careful when buying an extra home. The universe of second home buyers is much smaller than primary home buyers, and that means the liquidity can be quite limited. We prefer not to have to share the disappointment over how long it took to sell a property, or about the final price achieved.