Wall Street Journal article about buying a second home
Not a bad article in my opion. Given the way our second home market has weathered this storm very well speaks well for the Lake of the Ozarks as an investment that you and your family can enjoy while building wealth. One problem with the article is that the 5% for taxes and insurance every year is very high for our area - Missouri is a very low tax State. This is his main basis for stating that real estate is a bad investment, and his 40 year national average appreciation rate of 6.4% is pretty light considering we are talking about second home markets.
Would the stock market perform better the next decade? Maybe, maybe not, but how much fun can the family get out of owning Microsoft stock?
Yes, you can take a swipe at real estate in general right now as an investment, especially with many markets such as Florida, Nevada and California taking big hits in value. But the very slight dip in Lake real estate values bodes well for our future and for the sustainability of this market as one of the premier vacation and second home markets in the Midwest.
The answers are going to vary, of course, from person to person.
But the slump in places like Florida and Arizona has badly knocked the idea that your long-term capital gains are going to offset the costs.
“Don’t think about calling a second home an investment.,” warns financial planner Sean Sebold. “You are paying for the luxury of having your own place.” He says clients frequently underestimate the costs involved. From a financial perspective, he adds, you’re probably “better off putting your money in an S&P index fund and staying at the Four Seasons instead.”
Before you make the move, it’s worth doing the some rough math on the back of an envelope.
On the cost side, property taxes, plus condo fees, or maintenance and insurance on a house, can easily add up to 5% of the home’s value every year. An 80% mortgage for thirty years at 6.3% will cost another 5%. And the cost of your down payment is probably about another 1% in foregone interest. (If you weren’t using it as a downpayment, you could put it in the bank). Total cost: About 11%.
If you itemize your deductions you can get a break on the property tax and mortgage interest. It will vary with your tax bracket, but that can bring the effective after-tax cost down to about 9%.
Some caveats: States may hike property taxes on second-home owners. And the rise of the alternative minimum tax, and other tax changes, may also cut some deductions or end them altogether.
You can play with these numbers. I have never known anyone say their costs came out less than expected.
On the positive side, real estate does tend to grow in value over time. But the recent crash has shown that this can be pretty rocky on occasion.
The average annual gain over the past 40 years has only been about 6.4% nationwide, says the National Association of Realtors. (That only beat inflation by 1.8% a year.)
If you spend 9% a year and get long-term gains of 6.4%, that leaves a 2.6% gap. That’s the true cost of owning your own vacation home, and a number to compare to the cost of renting a place instead.
Of course we’re not even counting the cost of furnishings and incidentals. But then a rental is rarely as pleasant as your own place. They are also harder to get in peak season, or at short notice.
Write to Brett Arends at brett.arends@wsj.com
You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.
