A few weeks ago, a video was sent to my email list and to my ‘friends’ on Facebook,
This is a fool’s choice. Why? Let me weave the ways:
- Never, never, never would I recommend paying cash for a vacation home, or any other. A reasonable suggestion would be to put down as little as possible at the best possible rate. Assume 20% down at 5.00% for 30 years. [$2,300/month including tax & insurance]
- Rarely would I recommend not renting out a vacation home used by its owners only 2-3 weeks of the
year.Naturally, that affects the selection, as it must be able to take extrawear and tear. It must also have storage for the owners’ belongings. Local realtors can manage and clean the space during the season, whether for skiing or swimming. Assume 8 weeks’ rent (net of expenses) will more than cover 8 months’ carrying costs. ($30,000 vs $18,400)
- As inflation pushes up real estate prices as well as rentals, it is better than even money that the cost of your vacation will be zeroed out by year six. After 20 years the vacation home should be worth more than $1.3MM @ 5.00% dwarfing your mortgage balance of $201M. Net rental income(@ 4.00%) will have doubled, and it is likely that ca. $50M may have been expensed on repairs and renovation during that time.
- $400,000 of that ‘casually available’ $500M was NOT spent on the second home. If $50M was kept liquid for emergencies and the balance invested tax-deferred at 6.50%, after 20 years, the $400M could equal over $1,280,000.
- Not meant to be the primary point, note that mortgage interest is usually deductible and the rental, if properly structured, may also function as a tax shelter via depreciation, etc., driving the carrying costs down even further.
- The original comparison forgot an important variable: If you invested that $500M cash hoard, how will you pay for your vacation?
Finally, it is great having a place to use and count on over the years. You are sure to make lifelong friends among your fellow-vacationers and tenants as well as the locals. Value: priceless!
Now, ask yourself, would you rather have a fixed vacation abode, subsidized (maybe free) vacations, become a 'regular' among the summer/winter crowd, a member in good standing of the seasonal (and owners') community? -- Or would you prefer an extra $300,000 in the bank with no equity (another $1.1MM)?
Who knows – maybe your getaway home will become your retirement haven.