For Every Holiday-Home Fantasy, There Is a Harsh Financial Reality
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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.

Tue, Sep 13, 2022 11:25amGrey Clock 4 min

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 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 PhoenixNaples, 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:

Don’t bank on rental income.

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.

The lake house may start a family feud.

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.

Hidden costs lurk.

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.

Your return on investment isn’t guaranteed.

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.


Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’

Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual

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Capital cities lead the way as median home values see clear upswing

Thu, Jun 1, 2023 2 min

Home values continue their upwards trajectory, recording the strongest monthly growth in 18 months, CoreLogic data shows.

The property data provider reports that their Home Value Index has noted a third consecutive rise in values  in May, accelerating 1.2 percent over the past month. This is on the back of a 0.6 percent increase in March and 0.5 percent rise in April.

Sydney recorded the strongest results, up 1.8 percent, the highest recorded in the city since September 2021. The fall in Sydney’s home values bottomed in January but have since accelerated sharply by 4.8 percent, adding $48,390 to the median dwelling value.

Melbourne recorded more modest gains, with home values increasing by 0.9 percent, bringing the total rise this quarter to 1.6 percent. It was the smaller capitals of Brisbane (up 1.4 percent) and Perth (up 1.3 percent) that reported stronger gains.

CoreLogic research director Tim Lawless said the lack of housing stock was an obvious influence on the growing values.

 “Advertised listings trended lower through May with roughly 1,800 fewer capital city homes advertised for sale relative to the end of April. Inventory levels are -15.3 percent lower than they were at the same time last year and -24.4 percent below the previous five-year average for this time of year,” he said.

“With such a short supply of available housing stock, buyers are becoming more competitive and there’s an element of FOMO creeping into the market. 

“Amid increased competition, auction clearance rates have trended higher, holding at 70 percent or above over the past three weeks. For private treaty sales, homes are selling faster and with less vendor discounting.” 

Vendor discounting has been a feature in some parts of the country, particularly prestige regional areas that saw rapid price rises during the pandemic – and subsequent falls as people returned to the workplace in major centres.

The CoreLogic Home Value Index reports while prices appear to have found the floor in regional areas, the pace of recovery has been slower.

“Although regional home values are trending higher, the rate of gain hasn’t kept pace with the capitals. Over the past three months, growth in the combined capitals index was more than triple the pace of growth seen across the combined regionals at 2.8% and 0.8% respectively,” Mr Lawless said.

“Although advertised housing supply remains tight across regional Australia, demand from net overseas migration is less substantial. ABS data points to around 15% of Australia’s net overseas migration being centred in the regions each year. Additionally, a slowdown in internal migration rates across the regions has helped to ease the demand side pressures on housing.”



Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’

Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual

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