For Every Holiday-Home Fantasy, There Is a Harsh Financial Reality
Higher mortgage rates are just one factor raising the price of owning a second home.
Higher mortgage rates are just one factor raising the price of owning a second home.
As mortgage rates rise and the housing market cools, financial advisers say it is critical for buyers to weigh the unexpected costs and pitfalls that come with that beach house.
The largest share of holiday-home purchases close from the fall to early in the new year, which is typically the offseason for primary home buying, said Danielle Hale, chief economist at Realtor.com. For instance, in the Lake Tahoe area, August and September are traditionally two of the busiest months of the year as buyers dream about spending the winter holidays in a new home, and sellers look to avoid having to maintain the property during the winter months, said Brit Crezee, a Realtor who specializes in that region.
Home prices soared during the pandemic in second-home markets such as Phoenix, Naples, Fla., Myrtle Beach, S.C., and Las Vegas, even more than the rest of the country. The typical property in second-home markets sold for $516,423 in April, up 19.9% from a year earlier, according to the latest data available from Redfin.
The beach house bonanza appears to be ending, many economists said. Sales of second homes are way down from last year’s boom, dipping below prepandemic levels (February 2020) for the first time in two years, due in part to high prices and rising mortgage rates, said Daryl Fairweather, chief economist at Redfin.
Many Americans still envision a second home as a source of family memories, wealth, rental income and tax benefits, if everything goes to plan. These buyers don’t always grasp the risks such as trouble renting the home, family squabbles over the property and unexpected costs.
“Holiday homes can quickly turn into nightmares if you don’t know how to properly manage them,” said Tony Robinson, a short-term rental investor and the co-host of BiggerPockets’ “Real Estate Rookie,” a podcast about real-estate investing for beginners.
Here are four of the biggest risks of buying a holiday home:
Tim Bauer said he quickly learned to prepare for the unexpected after he bought a ski cabin in Red Lodge, Mont., that he planned to rent out when he wasn’t using it to offset the costs.
While 2021 was a stellar year for rentals thanks to the pent-up demand due to the pandemic and remote-work arrangements, this year a massive flood in the region led to the cancellation of nearly all of the cabin’s bookings for June and July.
He lost about 20% of the annual revenue for the two-bedroom cabin that he rents for, on average, about $215 a night.
“It’s important to have a buffer of cash to be prepared for the slow times and unexpected events which can cause demand to slow down or even stop completely,” he said.
Mr. Bauer, a financial planner, keeps a separate checking account for the cabin with a cushion of about three to four months of expenses.
Relying on the rental income to pay mortgage and other costs can be risky for other reasons, too. Local rules for short-term rentals can change. Darin Eppich, a real-estate agent in Los Angeles, recently had a client decide against purchasing a holiday home in Palm Desert, Calif., when he learned the city had strict rules limiting short-term rentals.
Many holiday homeowners want the property to remain in the family for generations and picture scenes of relatives coming together at the house long after Mom and Dad are gone.
But not all family members feel equally invested in that vision and they may have no interest in keeping the property, said Pam Lucina, chief fiduciary officer for Northern Trust Wealth Management.
Ms. Lucina has clients where family members debate about how to share expenses and who gets to stay in the house during the prime weeks of the season.
“This becomes a huge source of conflict,” she said.
Create guidelines before there is tension, including a plan for how the property will be managed after the original buyers pass away, said Ms. Lucina. Ask your intended beneficiaries if they want the property and if they have the resources to pay for maintenance, taxes and other costs, she said.
Always budget for surprise expenses.
Jeff Barens has owned holiday homes for the past decade with his wife, Kristi Barens. The couple bought a rental house in Jackson Hole, Wyo., last summer. A few days before closing, they learned that to qualify for fire insurance, they’d need to make expensive changes to the home including a new roof and improved landscaping.
“It’s the things you can’t control that can have a significant impact,” he said.
Jamie Lane, vice president of research at holiday -rental research company AirDNA, typically recommends that hosts reserve 5% to 10% of the home’s annual rental revenue for unexpected expenses, which can include pipes, water damage and new roof. The percentage they need to save typically depends on the age of the property, he said.
Karen Altfest, a financial planner in New York City, recommends clients spend no more than 15% of their net worth on the value of a holiday property to help reduce their financial stress.
Sam Dogen, creator of the Financial Samurai website and author of “Buy This, Not That,” said people need to understand that their property may not appreciate as much as they expect, especially in the current market, where some experts expect prices to slide.
Mr. Dogen bought a two-bedroom condo in Lake Tahoe for about $715,000 in 2007. The asking price was $810,000, so he thought he was getting a deal. However, the property ended up plummeting in value by about 40% over the next several years due to the financial crisis.
Today, the property is still worth less than what he purchased it for, he said.
“It was a poor investment,” he said.
Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: September 11, 2022.
This stylish family home combines a classic palette and finishes with a flexible floorplan
Just 55 minutes from Sydney, make this your creative getaway located in the majestic Hawkesbury region.
The four-bedroom home “blends historic architecture, soaring open-plan living spaces and every possible contemporary comfort”
A unique home on the outskirts of London within a former chapel that had a starring role in the hit TV series “Call the Midwife” is on the rental market for £39,000 (US$48,568) per month.
The four-bedroom home was carved out of St Joseph’s Missionary College, which, founded in 1871, trained young Catholic priests to work as missionaries abroad, according to listing agency Dexters.
Before its conversion to a lavish private residence, the college’s chapel had a starring role as nursing convent Nonnatus House in the first two seasons of the feel-good BBC show, which focuses on a church-funded midwifery in the 1950s and 1960s, based on the bestselling memoirs of Jennifer Worth, a former London nurse.
When the historic college was sold for redevelopment in 2013, and production of “Call The Midwife” transferred to a studio set, the chapel—along with the rest of the building—was born again.
Still going by the apt moniker of the Chapel, the home is the centrepiece of the site, which is now a gated development known as St Joseph’s Gate, said Dexters, which brought the home to the market in late February.
The home spans almost 10,000 square feet and “blends historic architecture, soaring open plan living spaces and every possible contemporary comfort,” said Andy Christophi, director of Dexters Finchley.
The chapel’s nave is now the dramatic heart of the home, complete with a 45-foot high vaulted timber ceiling.
The vast open-plan area—which also has columns and gothic-style arches—has a handcrafted kitchen, temperature-controlled wine storage, a curved living area with Victorian windows and enough space to easily host 30 at a dinner table, the listing said.
Above, a mezzanine bedroom has been constructed to appear as though floating above the main living area below.
The home also has a gym, a spa area with a sauna and steam room, and a media room.
“Perfect for a family that loves to entertain, its use as a filming location…makes it particularly iconic, and means you’ll never run out of dinner party conversation,” Christophi said.
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This stylish family home combines a classic palette and finishes with a flexible floorplan