Little-used second home: sell at a loss or rent?

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ensign
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Little-used second home: sell at a loss or rent?

Postby ensign » Wed Aug 17, 2016 1:06 pm

Six years ago my wife and I bought a vacation home located about 200 miles from our primary residence in the Midwest. The attraction of the vacation home was proximity to our several siblings and the option of moving there in retirement.

For a variety of reasons, including changing family dynamics, we don't get there more than a few times a year and don't wish to retire there. We are both 60. I am recently retired, she will be in 1-2 years.

We paid $160k for it and spent about $100k on improvements, including a high-end kitchen and new master bath.

Sadly, we overspent on the reno and figure we can only net $220k on a sale if we're lucky, so would lose $40k on the transaction. My question for bogleheads: Should we sell it at a loss or rent it?

The house is quite nice so we are reluctant to rent to anyone other than a respected family member (we also own a rental property and have seen the wear and tear that sometimes occurs from our tenants, and our rental is nowhere near as nice as the vacation home). However, we also both know through experience how tricky money matters can be with family.

The house is paid off and we could rent it for $900-$1,000 a month. Taxes and insurance are $4k a year, and we spend another $4k for utilities and maintenance.

We don't need to sell now but I am concerned about carrying it when my wife retires. We have $2m in investment accounts (70% of that in retirement accounts) and a $300k mortgage at 3.5% on our primary residence. No other debt. Selling the vacation home would pay off 75% of our mortgage.

Appreciate any feedback!

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dm200
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Re: Little-used second home: sell at a loss or rent?

Postby dm200 » Wed Aug 17, 2016 1:14 pm

ensign wrote:Six years ago my wife and I bought a vacation home located about 200 miles from our primary residence in the Midwest. The attraction of the vacation home was proximity to our several siblings and the option of moving there in retirement.
For a variety of reasons, including changing family dynamics, we don't get there more than a few times a year and don't wish to retire there. We are both 60. I am recently retired, she will be in 1-2 years.
We paid $160k for it and spent about $100k on improvements, including a high-end kitchen and new master bath.
Sadly, we overspent on the reno and figure we can only net $220k on a sale if we're lucky, so would lose $40k on the transaction. My question for bogleheads: Should we sell it at a loss or rent it?
The house is quite nice so we are reluctant to rent to anyone other than a respected family member (we also own a rental property and have seen the wear and tear that sometimes occurs from our tenants, and our rental is nowhere near as nice as the vacation home). However, we also both know through experience how tricky money matters can be with family.
The house is paid off and we could rent it for $900-$1,000 a month. Taxes and insurance are $4k a year, and we spend another $4k for utilities and maintenance.
We don't need to sell now but I am concerned about carrying it when my wife retires. We have $2m in investment accounts (70% of that in retirement accounts) and a $300k mortgage at 3.5% on our primary residence. No other debt. Selling the vacation home would pay off 75% of our mortgage.
Appreciate any feedback!


Am I correct that a sale or rental would probably be for a primary residence and not for "vacations"?

Unless you want to be a landlord for one more house, I would lean towards selling it. $12,000 a year rent for a house valued at $220,000 with taxes of $4,000 a year and repairs/maintence - seems to not be a good return.

orca91
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Re: Little-used second home: sell at a loss or rent?

Postby orca91 » Wed Aug 17, 2016 1:18 pm

Sell. Doesn't sound like it would be a good rental.

One rarely gets the full value of upgrades or improvements before a sale. I wouldn't look at it as selling at a loss. You only feel badly about that because you're looking to sell so soon after the upgrades and the situation has changed. That's more of an emotional loss than a realistic loss. IMO

Jack FFR1846
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Re: Little-used second home: sell at a loss or rent?

Postby Jack FFR1846 » Wed Aug 17, 2016 1:22 pm

Sell

,,,,,,,
Bogle: Smart Beta is stupid

Gill
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Re: Little-used second home: sell at a loss or rent?

Postby Gill » Wed Aug 17, 2016 1:42 pm

I was in the identical position with our mountain log home in 2008 when we decided to spend the entire year in our Florida home. Real estate prices, particularly on vacation property, had tanked and rental agents had proposed we put it in the rental market. We sold at a loss of about $70,000 and were relieved to no longer have it to worry about. Renters can be tough on rental homes and the return on your investment is minimal. No question in my mind - sell.
Gill

Smorgasbord
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Re: Little-used second home: sell at a loss or rent?

Postby Smorgasbord » Wed Aug 17, 2016 1:46 pm

ensign wrote:For a variety of reasons, including changing family dynamics, we don't get there more than a few times a year and don't wish to retire there. We are both 60. I am recently retired, she will be in 1-2 years.


I'd probably just wait two years and see if your usage of the place changes.

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BolderBoy
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Re: Little-used second home: sell at a loss or rent?

Postby BolderBoy » Wed Aug 17, 2016 1:59 pm

Gill wrote:I was in the identical position with our mountain log home in 2008 when we decided to spend the entire year in our Florida home. Real estate prices, particularly on vacation property, had tanked and rental agents had proposed we put it in the rental market. We sold at a loss of about $70,000 and were relieved to no longer have it to worry about. Renters can be tough on rental homes and the return on your investment is minimal. No question in my mind - sell.
Gill

+1. I agree with Gill. Sell it.
“Where you stand, depends on where you sit” - Rufus Miles

EnjoyIt
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Re: Little-used second home: sell at a loss or rent?

Postby EnjoyIt » Wed Aug 17, 2016 2:08 pm

You have to forget about the sunk cost of an upgrade. That money is gone and has no bearing to the question at hand. The way I see it is that you have a rental property that provides a very poor return on investments.

Rental property value of $220k.
You spend $8k/year on taxes and maintenance.
You would get $12k/yr if you rented
Total return is $4k/yr or a 1.8% return on investments plus any possible appreciation above inflation if any actually occurs.
In my opinion this is a horrible investment and should be sold immediately. 5 year CDs pay better than that and don't have you being a landlord in the process.

The only reason to keep it is if you are willing to spend $8k/yr to have a vacation home.

joebh
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Re: Little-used second home: sell at a loss or rent?

Postby joebh » Wed Aug 17, 2016 2:12 pm

Sell it now. Get it behind you. Move on with your life.

Look at it this way, if you didn't own this house, and could purchase it for what you expect to receive when you sell it, would you buy it with the idea to rent it out only to family and close friends? Probably not.
Last edited by joebh on Wed Aug 17, 2016 2:14 pm, edited 1 time in total.

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alpenglow
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Re: Little-used second home: sell at a loss or rent?

Postby alpenglow » Wed Aug 17, 2016 2:13 pm

Do you want to be a long distance landlord? Pretending the sunk cost doesn't exist, would you enter into this deal now? (I'm thinking the answer is no.) I'd sell and move on.

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bru
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Re: Little-used second home: sell at a loss or rent?

Postby bru » Wed Aug 17, 2016 2:18 pm

Would anyone rent it for a month at a time? Or were you just using that as an example? Where in general is it located? Maybe I'd have an interest if its in the area I have been looking for a vacation home.

MrDogg
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Re: Little-used second home: sell at a loss or rent?

Postby MrDogg » Wed Aug 17, 2016 3:29 pm

I find myself in this exact situation and have decided to sell. The property is currently listed with a Realtor for $109K. It's a 2 bedroom 2 bath vacation home in Linville Land Harbor (LLH), in the mountains of North Carolina with a golf course view and many nearby amenities. LLH is near Banner Elk and Newland. The house is in excellent condition and requires nothing (it's even furnished).

The housing crash of 2008/2009 hit this area a couple years later than most of the US and the recovery has been a couple years behind also. House prices in this area bottomed out two years ago and have been treading upwards ever since.

Selling it at a loss and moving on is the plan.

fourkids
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Re: Little-used second home: sell at a loss or rent?

Postby fourkids » Wed Aug 17, 2016 3:34 pm

life's too short. save yourself the hassle of renting. Sell it.

itstoomuch
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Re: Little-used second home: sell at a loss or rent?

Postby itstoomuch » Wed Aug 17, 2016 4:11 pm

see your tax professional.
4 buckets: SS+pension; GLWB VA & FI, by time & amounts laddered; Discretionary; Rental. Do OK on 2 buckets. LTCi. Own, not asset. Marginal 25%. Early SS. FundingRatio (FR) >1.1 Age 66/69

letsgobobby
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Re: Little-used second home: sell at a loss or rent?

Postby letsgobobby » Wed Aug 17, 2016 4:15 pm

Unless you think you'll use it much more after retirement, sell and move on. It doesn't get enough rental income to be a good investment.

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Watty
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Re: Little-used second home: sell at a loss or rent?

Postby Watty » Wed Aug 17, 2016 4:33 pm

One of the problems with homes in vacation areas is that they can be very difficult to sell in a bad housing market since so many other houses on the market will be distressed sellers or foreclosures.

Most parts of the country have decent real estate markets right now and mortgage interest rates are still near generational lows.

I can't predict future price trends but there are a lot of things that could change that could make the place a lot harder to sell in the future.

I would sell it.

hcj
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Re: Little-used second home: sell at a loss or rent?

Postby hcj » Wed Aug 17, 2016 7:04 pm

Would it be more profitable and have less wear and tear as a vacation rental?

ensign
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Re: Little-used second home: sell at a loss or rent?

Postby ensign » Wed Aug 17, 2016 8:21 pm

Thanks to all for the thoughtful replies. VERY much appreciated.

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F150HD
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Re: Little-used second home: sell at a loss or rent?

Postby F150HD » Thu Aug 18, 2016 7:16 am

ensign wrote:... we can only net $220k on a sale if we're lucky, so would lose $40k on the transaction...... Selling the vacation home would pay off 75% of our mortgage.


correct me if I'm wrong, but, by selling and paying off most of your mortgage you'd have a financial gain that might wash out the 40k loss (due to saving on loan interest etc) ?

sounds like a headache, despite the loss I'd sell. Or, strange idea, look into 'swapping', have seen agencies that swap houses, maybe you could get something you WOULD use in a different location.

Or, Airbnb it if you're into that until you figure out what to do.

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bru
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Re: Little-used second home: sell at a loss or rent?

Postby bru » Thu Aug 18, 2016 9:52 am

ensign wrote:Thanks to all for the thoughtful replies. VERY much appreciated.

I guess you aren't interested.

bru wrote:Where in general is it located? Maybe I'd have an interest if its in the area I have been looking for a vacation home.

goblue100
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Re: Little-used second home: sell at a loss or rent?

Postby goblue100 » Thu Aug 18, 2016 10:18 am

EnjoyIt wrote:You have to forget about the sunk cost of an upgrade. That money is gone and has no bearing to the question at hand. The way I see it is that you have a rental property that provides a very poor return on investments.

Rental property value of $220k.
You spend $8k/year on taxes and maintenance.
You would get $12k/yr if you rented
Total return is $4k/yr or a 1.8% return on investments plus any possible appreciation above inflation if any actually occurs.
In my opinion this is a horrible investment and should be sold immediately. 5 year CDs pay better than that and don't have you being a landlord in the process.

The only reason to keep it is if you are willing to spend $8k/yr to have a vacation home.


+1. The money is spent. Make the decision on what you want going forward.
Some people are immune to good advice. - Saul Goodman

Scamp
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Re: Little-used second home: sell at a loss or rent?

Postby Scamp » Thu Aug 18, 2016 10:32 am

You could at least investigate what other properties are renting for of Airbnb, VRBO and Flipkey. We use Airbnb and Flipkey to earn about 20-25k/year on a property costing about that much. Vacation goers tend to value the nicer kitchens and bath more than the buying market might. It depends a lot on how robust the vacation rental market is.

Bogle826
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Re: Little-used second home: sell at a loss or rent?

Postby Bogle826 » Thu Aug 18, 2016 11:23 am

ensign wrote:Six years ago my wife and I bought a vacation home located about 200 miles from our primary residence in the Midwest. The attraction of the vacation home was proximity to our several siblings and the option of moving there in retirement.

Appreciate any feedback!


Are you certain that the numbers are correct?

Your proposed return is a losing battle. Are you sure the tenants don't pay for utilities? Maybe I'm missing something, but you seem to be stating that the operating expense is 66% ( 8K/12K) of projected rental income. That is way too high.

I would also look to see what other comparable houses in the area are paying for land tax as well as check with another insurance agency to get another insurance quote.

In areas that don't have a history of appreciation, cash flow is king, and this property doesn't seem to have this trait as well.

You mentioned that you managed other rental properties as well, so presuming these numbers are good to go, you should look hard into selling this and use the proceeds to either pay down debt or reinvest in another asset that generates a higher return.

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Re: Little-used second home: sell at a loss or rent?

Postby NoVa Lurker » Thu Aug 18, 2016 11:51 am

We were in a very similar boat. Our "sunk cost" (original purchase price plus improvements) was around $300k. The property just didn't make sense for us anymore, even though we had paid off the original loan. Earlier this year, we made a decision to sell at a loss, thinking that the market price was around $270k. We ended up selling a little below that, and we netted around $240k after transaction costs / taxes.

It was a tough decision at the end, but my wife and I are very very happy not to have the hassles of that place anymore. Our finances also look a lot better, with plenty of liquidity instead of the vacation home. I guess it was a learning experience. We did get nine years of use out of the place, and we rented it seasonally to almost exactly offset the periodic property taxes and maintenance, so essentially it cost us around $7k/year, plus the lost opportunity to get returns on all that tied-up money.

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Re: Little-used second home: sell at a loss or rent?

Postby MrDogg » Thu Aug 18, 2016 12:10 pm

bru wrote:Maybe I'd have an interest if its in the area I have been looking for a vacation home.


Hello bru, Do you have any interest in the North Carolina Blue Ridge Mountains?

I find myself in this exact situation and have decided to sell. The property is currently listed with a Realtor for $109K. It's a 2 bedroom 2 bath vacation home in Linville Land Harbor (LLH), in the mountains of North Carolina with a golf course view and many nearby amenities. LLH is near Banner Elk and Newland. The house is in excellent condition and requires nothing (it's even furnished).

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bru
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Re: Little-used second home: sell at a loss or rent?

Postby bru » Thu Aug 18, 2016 4:10 pm

MrDogg wrote:
bru wrote:Maybe I'd have an interest if its in the area I have been looking for a vacation home.


Hello bru, Do you have any interest in the North Carolina Blue Ridge Mountains?

I find myself in this exact situation and have decided to sell. The property is currently listed with a Realtor for $109K. It's a 2 bedroom 2 bath vacation home in Linville Land Harbor (LLH), in the mountains of North Carolina with a golf course view and many nearby amenities. LLH is near Banner Elk and Newland. The house is in excellent condition and requires nothing (it's even furnished).

I saw your post and it sounds nice but it would be a bit far for a getaway. Just was reading Kiplinger's best places to retire and they mention Greensboro.

MrDogg
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Re: Little-used second home: sell at a loss or rent?

Postby MrDogg » Fri Aug 19, 2016 7:53 am

Totally different places. Greensboro is in the "low" country and LLH is in the "high" country. Always at least a 10 degree difference in temperature plus the mountain scenery.


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