Author Topic: The Black Hole Second Home?  (Read 4227 times)

dinotank

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The Black Hole Second Home?
« on: August 30, 2013, 02:58:55 AM »
Hi MMM Forum
I tried posting this in the comments but didn't get any response so I decided to try here.
I was very interested when I saw the article about "The Black Hole Second Home" since this is a subject I often discuss with myself. I live together with my so and at the moment we live in a nice apartment. As I see the future we would want to either buy a house or keep living in our cheep apartment and the get a vacation house. I find that houses are really expensive where we live but that a vacation house is rather cheap. Our apartment is cheap to live in. Wouldn’t it make sense then to stay in the cheap apartment and buy a not to expensive vacation house? We would use the vacation home for holidays and for weekends to get away from the city (where we work).
I am really looking forward to your insight!
Some background: we’re around 30, live in Scandinavia. We don’t own a car and would buy a vacation house where we can take the train.

ioseftavi

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Re: The Black Hole Second Home?
« Reply #1 on: August 30, 2013, 09:01:28 AM »
...I find that houses are really expensive where we live but that a vacation house is rather cheap. Our apartment is cheap to live in. Wouldn’t it make sense then to stay in the cheap apartment and buy a not to expensive vacation house? We would use the vacation home for holidays and for weekends to get away from the city (where we work).

No.  If vacation houses are cheap, then the rents in that area are probably reasonably cheap too.  Why not just save your money (and avoid debt, investment concentration, and a massive increase in your fixed expenses) by just renting a nice place in the vacation town when you need it?

Buying a place means you will possibly get slightly cheaper expenses, but only during the months (maybe only a few weeks?) that you actually reside in the vacation home.  The flip side of that is that your fixed monthly expenses will increase a lot, your personal leverage will increase a lot, your debt will increase a lot, your cash will go down by the amount of the down payment, your investment mix will be skewed towards non-diversified real estate, and you will own a property with a vacancy rate that is probably north of 80% (assuming you can live in the place for perhaps 2 months per year and don't plan on renting it out).

You might say "BUT WHAT ABOUT THE POTENTIAL APPRECIATION OF THE VACATION HOUSE!?!?!"  Don't say that - it shouldn't be a big factor in your decision.  Buy rental properties if they produce cashflow or you can fix them to produce cashflow and earn more than your fixing costs.  Buying properties because you think they are going to appreciate at a really high rate in the short/medium term is nearly always a bad move.

If you have extra money, there are way better uses than a vacation house.  If you want to do real estate, why not buy an apartment in the town or city you live in and rent that out?  That is likely to be a way better investment, provided you're a discerning buyer and can keep it occupied with good tenants.

StarryC

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Re: The Black Hole Second Home?
« Reply #2 on: August 30, 2013, 10:59:09 AM »
Why do you want to buy a house or vacation house?

I don't know about Scandinavia, but in the US there are a few commonly stated reasons: 1) It shows the world/parents/yourself that you are "grown up" and settled down.  "Everyone" does it.  You can't raise a kid in a rental!  2) Paying rent "feels" like throwing money away because you don't build equity.  3) There are tax and credit score benefits for owning a home 4) You like to remodel, landscape, or do other work that a rental doesn't allow.

The #1 reason is worthless.  You can raise kids and be a grownup in a rental.  Everyone doesn't do it, and if they did you still shouldn't do it for that reason alone.

The #2 reason makes sense only if it makes financial sense.  For the place you are purchasing, would your annual rent for a similar unit be more than the annual mortgage interest, taxes, and insurance?  Are you confident the value of the property will go up?  Often, in the US this can be found for a primary residence.  It's very rarely true that you'll find a vacation property where your annual rental expenditures for the time at a similar property would exceed the interest, taxes, and insurance.

The #3 reason makes the #2 reason make more sense, but saving $2,000 on taxes/ other interest rates does not make spending $4,000 per year on interest for a mortgage/insurance/ taxes suddenly "worth it" in and of itself. 

The #4 reason makes sense, to me, in so far as the unit you buy actually or nearly meets #2, or you so enjoy working that you can find a unit in such bad shape, that within a year or two of work, you can get it to meet #2.  But then you are spending money on a hobby, hoping you might break even or make money.  I'd suggest being very careful taking on a lot of debt to fund your hobby, unless you can also live in your hobby year round. 

dinotank

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Re: The Black Hole Second Home?
« Reply #3 on: August 31, 2013, 01:04:51 AM »
Thank you so much for your input.

@StarryC
For me the interesting thing about money is that it often reflects on your priorities. The fact is that I would be happy to move outside the city while my so would very much like to stay. The reason I want a vacation house is simply to get away from the city. I fell that staying in a cheap city apartment and buying a vacation home would be a really nice compromise. I also feel like it is either a house or the apartment AND the vacation house.
#1 not the reason
#2 I don't mind rent if it is cheap #3
#3 Is also a small part of it
#4 I really like the idea of coming back to your own place and be able to leave stuff a the vacation house. Being able to do something in the garden - stuff like that.

SnackDog

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Re: The Black Hole Second Home?
« Reply #4 on: August 31, 2013, 02:48:16 AM »
Many Scandinavians and most Nordics have a most weekend place in the country. I see nothing wrong with it if you are fully aware of all the costs involved, can afford it, and are ok with the trade offs on future savings. Unlike Americans I don't see you needing to save nearly as much as You already have a fabulous lifestyle, work life balance, and paid healthcare and retirement. Enjoy life!

MKinVA

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Re: The Black Hole Second Home?
« Reply #5 on: September 02, 2013, 04:41:29 PM »
We have a second home and have to say sometimes its a delight and sometimes it's a burden. Make sure you can afford it comfortably even in a change of circumstances or you can move to it full time if necessary. Ours is rented when we are not using it and so most years pays for itself. But there is always the worry that it won't or that it will be damaged by weather when we aren't there, etc.  also hoping it will increase in value over the years, but if not, we don't believe we will lose money on it. At the very least we have vacationed for free for years!

dragoncar

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Re: The Black Hole Second Home?
« Reply #6 on: September 03, 2013, 03:05:21 AM »
Hi MMM Forum
I tried posting this in the comments but didn't get any response so I decided to try here.
I was very interested when I saw the article about "The Black Hole Second Home" since this is a subject I often discuss with myself. I live together with my so and at the moment we live in a nice apartment. As I see the future we would want to either buy a house or keep living in our cheep apartment and the get a vacation house. I find that houses are really expensive where we live but that a vacation house is rather cheap. Our apartment is cheap to live in. Wouldn’t it make sense then to stay in the cheap apartment and buy a not to expensive vacation house? We would use the vacation home for holidays and for weekends to get away from the city (where we work).
I am really looking forward to your insight!
Some background: we’re around 30, live in Scandinavia. We don’t own a car and would buy a vacation house where we can take the train.

I too have had the same though (I rent in SF and have consider buying in Sonoma/Napa).  I came to the same conclusion as ioseftavi -- it's just not worth it.  I think I just enjoy the idea of "owning," which I'm sure many here can relate to or even accord independent value over purely financial considerations.

I do, however, worry about price appreciation right here in SF.  Home prices here appreciated over 20% last year so I'm really feeling the "don't get priced out of the market" pitch.

SnackDog

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Re: The Black Hole Second Home?
« Reply #7 on: September 09, 2013, 08:25:39 AM »
i think the trap people fall into is trying to buy a second home which is too fancy.   Following the principles of frugality, one should go for something a grade or two up from camping - a rustic cottage.  The many families we have know with such summer cottages have used them for decades at minimal cost. In fact, they could even be considered frugal in terms of savings on expensive vacations with air travel and hotel.  They can be fairly cheap to purchase and maintain.

chasesfish

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Re: The Black Hole Second Home?
« Reply #8 on: September 11, 2013, 04:19:57 AM »
I missed this thread.

I see clients all the time with vacation homes.  The only ones that "work" financially seem to be the ones bought in times of really, really deep recessions.  Then those properties either provide a marginal return after management fees or nice returns if self managed. 

I live in Atlanta and I know people who bought 3-8 gulf coast condos in the depths of the recessions, put electronic locks on the doors, and manage the rentals from Atlanta.   They pay a cleaning service and always have their cell phone on with the list of vendors they call if something goes wrong.  The returns were surprisingly good. 

Outside of those times, Vacation homes are usually a black hole.  The underlying land is always expensive and the prices are highly cyclical.