Bogleheads and Investment Property/2nd homes

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jeh
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Location: Coastal NC

Bogleheads and Investment Property/2nd homes

Post by jeh »

I would like to hear some insight from Bogleheads about their choices concerning real estate investments especially those that are for fun and perhaps profit. Books, websites they recommend etc.

The Mr. and I are in a position to be able to perhaps buy a 2nd home that would serve as a rental and vacation fun for us. We live in an area that mountain, lake or beach property is all quite accessible/close by. But I'm having a hard time finding something like a mortgage calculator like one would use for a primary residence to help determine how much I really can afford (anyone know of one?). Right now we are most interested in the type of property that would be a vacation rental - I'm not really interested in becoming a landlord. Really I would expect this situation to be break-even monetarily with perhaps some added tax benefit. Plus I feel we have a really long time horizon (he -29, me - 31) so it actually could become a good investment.

I'm comfortable with the rest of my portfolio, AA, etc. We max out all retirement accounts and then some, live far below our means, etc.

Any feedback of either issues to consider, questions to ask the professionals I'm sure we will eventually encounter (re agents, etc.) places to research about 2nd home investing, or anything else would be greatly appreciated.

Thanks as always!
JEH
CaptSJD
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Post by CaptSJD »

MortgageProfessor.com is a real good site with a lot of articles and calculators.

Scott
Wagnerjb
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Post by Wagnerjb »

Really I would expect this situation to be break-even monetarily with perhaps some added tax benefit.
I suspect you will find out the hard way that rental properties are not break-even, even after including the tax benefits. If they were, everybody would have one. :D

My wife and I bought a vacation home a year ago, and when we were considering the purchase we looked into rental opportunities. We found the agent who did the most rentals in our condo complex, and he told us of the rates we could expect. In the end, we have not rented the unit - as we are using it for ourselves and our relatives. However, we have discussed renting the unit if we find ourselves not using it enough.

The main issue seems to be the amount of time the unit will be rented. We can guage the rental income per week (or weekend), we know how much the rental agent charges, and we know how much the cleaning crew charges after each rental. But there is no guarantee that the unit will be rented enough to reach "break-even". After going to these condos over the past year, I see most sitting vacant when I am there. I suspect some are rental units that are simply not rented much of the time.

I suggest that you do your research into the local rental market, and be sure to be conservative on how much rental business you will actually get. If you truly believe you can rent the unit and achieve cash break-even, you gotta ask yourselves why the sellers are willing to let the house go for such a price - when they could continue renting it themselves...

We did not consider our condo as an "investment", and the purchase price is not reflected in my investment portfolio (we paid cash). We are viewing the condo as a luxury for our family and our enjoyment. I suspect you are viewing it differently, so my opinion may not be of much help.

Best wishes.
Andy
TwoCybers
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Post by TwoCybers »

Before you buy a second home, you might want to rent in areas you are considering and get to know some owners. We have been going to the barrier islands in Eastern NC for a few years and reached the conclusion rental was much better than owning. A couple of things - there are lots of companies who will handle the rentals for your -- they just want 30% plus expenses off the top. Additionally there is this little issue of when a serious storm happens. First you will not be able to get flood insurance to cover the property -- the limits are below the cost of almost anything on a barrier island. Second, even if you could get insurance, the time and delays are getting the repairs done with lots of damaged properties will be much longer than in interior places like Charlotte.
-- | Gordon | Atlanta, GA
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jeh
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Location: Coastal NC

Thanks

Post by jeh »

Thanks guys for your responses.

Andy, I totally understand what you mean by "wouldn't everyone be doing it" but I try not to think that way cause - at least by what you hear - "everyone" is living paycheck to paycheck as well :roll: ! I don't think I would really look at it as an investment (maybe a semi-investment!). I feel like all of real estate can be such a fickle mistress :)

Gordon, I certainly see more risk in coastal property my hometown is in Eastern NC and flood insurance, etc. is not foreign to me. Right now I'm focusing more on stuff closer my way in the NC mtns.

I know I have a ton of research to do. I'm not one to go into anything lightly. Any other viewpoints are welcome!
kerry75
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Post by kerry75 »

My wife and I own a commercial building that is leased and used as a store. We own it outright (no mortgage) so it's a positive cash flow situation. However we have found over the years that it's the appreciation in value rather than the income that makes it attractive. It is not fun but a serious business that we one day hope to leave to our son. We frequently get inquiries about selling it or giving a company a ground lease but we've kept it as it is, a rather bare-bones affair.

We have owned rental houses but people don't pay, etc. Commercial rentals require large cash deposits, have leases that favor the landlord, and, if necessary, we can obtain much easier evictions. A judge will be hard pressed to put a couple with a child out of their rental home and onto the street but a non-paying company is out within a month-and then we keep the deposit.

Commercial rentals are much easier if you have a good landlord-written and property-specific lease.
Last edited by kerry75 on Mon Mar 17, 2008 9:10 am, edited 1 time in total.
heyyou
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Post by heyyou »

Whoever does the work is who makes the money, not necessarily the investor in the property. Property maintenance at a distant location is a headache. Weather is tougher on buildings near beaches or in the mountains.

Our experience was that 5 hours away was a little too distant for a restful 2-day weekend experience at our near-the-beach house in Mexico. For vacations and holidays, that was fine, except the traffic made the holiday trip longer. That was when gas was nearer a dollar a gallon. We spent a lot of time working on the place, listening to the waves. What we wanted was a restful getaway, what we had was a second home needing care. We sold out prior to retirement in order to build in the country near the mountainous resort town that we were living in.

At the edge of the national forest, five miles from a small town, our neighbor bought his multi-acre property 25 years prior to retirement, built a small cabin on it for a vacation rental, then built the main house after retirement. He was living in the city that is under two hours away. That is the model that I suggest. Near the edge of the mountains, buy enough raw land for multiple dwellings (need appropriate zoning). Add small housing (DIY vacation rental) when you can afford it, then just prior to retirement, build the house you want and sell out of the city location. For health reasons, high in the mountains is not the place for retirees, either you or your rental customers.
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Rager1
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Post by Rager1 »

In September, 1985, we decided to purchase some rental property with the intention of purchasing a property every year for 10 years, taking the generous tax write-offs that were provided for rental property, and then begin selling them off, one-by-one over a period of the next 10 years. Our objective was to reduce our current income taxes, through the rental property write-offs, and use our ultimate rental property profits when we sold them to help fund our future retirement. Our effective total marginal income tax rate in 1985 was 41.3%, so it made a lot of sense, from a taxation point of view, to capitalize on the tax benefits of holding rental property.

Since we felt we were “behind the curve” with this wonderful tax write-off, we purchased 3 properties to get us started, closed on them during the 4th quarter of 1985, and became landlords for the first time. Our plan was to continue purchasing a new property every year for the next 7 years to get us to the point where we owned a total of 10 rental properties. However, in 1986, Congress changed the tax laws regarding write-offs for rental property, taking away the bulk of the tax benefits. Since we were new to the rental business, we decided to keep the 3 properties we owned and abandon our plan to obtain a total of 10 properties. We felt that the 3 properties we owned would eventually provide us with a long term payoff, although we realized the annual tax benefit was gone due to the tax law changes.

We held the rental properties for a total of 17 years, selling them in 2002. When the sales were closed, I did an internal rate of return (IRR) analysis to see how these properties “paid off”. Unfortunately, the IRR was not impressive. The total IRR for the three properties combined was -1.25%. We considered this relatively small loss a learning experience for us.

However, the light bulb went off for us when we went one step further with the analysis. We wanted to know what the “opportunity cost” was for our rental property experience. To do this analysis, we assumed that in the years where the properties had a negative cash flow (where the expenses were greater than the income), that we took that amount of money and invested it in Vanguard’s Total Stock Market Index on the first trading day of the next year. (We ignored the years where there was a positive cash flow (3 years out of the 17 years)).

The end result: an opportunity cost of $553,000!

An expensive learning experience.

Ed
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jeh
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Post by jeh »

Ed - What a great response. Thanks very much for the very analytical viewpoint of the opportunity cost.

Seems like the common theme here is that if you want to do it you need to look at it like it is a "toy" not an investment and its probably too costly a toy to have.
ResNullius
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Re: Thanks

Post by ResNullius »

jehx2 wrote: Gordon, I certainly see more risk in coastal property my hometown is in Eastern NC and flood insurance, etc. is not foreign to me. Right now I'm focusing more on stuff closer my way in the NC mtns.
Over the years, we've owed two houses in the NC mountains. Four years ago, we sold our primary house and bought a permanent home in Blowing Rock. Since we live here full-time, we aren't interested in renting, but we did try the rental deal with our first two mountain houses. I offer this comment: Don't purchase resort real estate with the idea of it being an investment, or with some hope of it breaking even via rental. Buy it because you want to use it and enjoy the lifestyle. If you get a little rental income on the side, well that's nice if that's what you want, but count it as gravy. Also, I know very few folks up here who like to rent a place that they also like to use a lot for personal use. Rentals can get trashed and torn up, particularly during the winter. Some people think they can make money renting during ski season, but they stop thinking it after the first winter. Between realtor fees, cleaning service, utilities (huge during the winter), and repair/upkeep, they usually end up losing money. It's easier to just keep it for personal use. Bottom line: Don't purchase resort real estate for investment. Purchase it for fun.
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jh
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Post by jh »

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Last edited by jh on Sat Mar 29, 2008 2:26 pm, edited 1 time in total.
Wagnerjb
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Post by Wagnerjb »

jehx2 wrote:Ed - What a great response. Thanks very much for the very analytical viewpoint of the opportunity cost.

Seems like the common theme here is that if you want to do it you need to look at it like it is a "toy" not an investment and its probably too costly a toy to have.
I do view my vacation home as a "toy"....although I probably use a different term ("luxury"). I paid cash for the condo and I track the expenses for the condo in my Excel budgeting spreadsheet. I tell myself that this luxury is costing me the lost income from the home (I could sell the house and invest the funds) plus the out-of-pocket costs for property tax and utilities. I choose to afford this "luxury", and I am honest with myself about what it costs.

Best wishes.
Andy
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