The Second Home Tradeoff:  To Rent, or Not To Rent  

    My wife and I have owned a vacation home in Pawleys Island, SC, for a dozen years.  We had our reasons for plunking down $210,000 on the condo 200 yards from the first tee at the Jack Nicklaus Signature course at Pawleys Plantation, but they were more emotional than financial.  The two-level unit overlooks a pond that plays host to dozens of egrets, woodstorks, herons and a couple of alligators; it is a mere five-minute drive to a wonderful ocean beach; and the golf course is close enough and the gated community safe enough that back in 1999, a 10-year-old obsessive golfer could walk safely to the practice range at 6:30 a.m. without waking his parents.  (A few weeks ago, that now 21 year old played his last competitive round of college golf.)
     We decided to forego thousands of dollars in potential rental income from vacationing golfers, opting to furnish the unit with reproduction antique wood furniture instead of the ubiquitous and uncomfortable cheap faux-wicker and canvas stuff that populates most rental units and is not expensive to replace should a foursome of golfers a long way from home become a little overzealous.  We also found attractive the notion that we could decide in Connecticut on a Wednesday to fly down to Pawleys Island on Thursday for a long weekend, without luggage.

The home appreciates, but….

    For a few years, that looked like an okay decision as the value of our condo increased at least 10% annually…until 2007, when the bottom began to fall out of the Myrtle Beach area real estate market in general, and the condo market in particular.  Since then, the value of our condo has dropped steadily.  Today, I’d say our unit, which sits at the 15th tee of the golf course, might fetch $325,000.  We consider ourselves fortunate to be ahead of the game financially.
     Or are we?  When I tote up annual dues for the golf club we use infrequently, annual property owner association payments, property taxes and other incidentals of second-home ownership, and multiply by our 12 years as owners, we would just about break even if we sold the unit today at market value.  Make no mistake about it; a second-home traditionally is not an “investment” in the way stocks and bonds are investments.  But today, with tons of vacation homes on the market and prices at their lowest in almost a decade, and with that enormous baby boomer generation poised to migrate to warmer weather climates, vacation homes can seem “investment grade.”
    If you are contemplating the purchase of a vacation home you plan to use only occasionally each year, think carefully about whether it makes sense to rent it out to vacationers.  Do not count on rental fees to recoup all your costs, such as mortgage, taxes, homeowner association dues and, if you opt to join the community’s golf club, dues and fees.  And to save the personal hassles of playing long-distance landlord by renting your unit on Craigslist or VRBO (Vacation Rental By Owner), consider that you will pay a local rental management company from 20% to 40% of the gross rental income to market your property and clean it up after vacation renters depart.  Balance all that against the reality that you may not be able to use your vacation home on the spur of the moment, and won’t be able to leave many of your personal effects in the unit.

A calculated investment

     Here is some math that might be helpful.  The calculations are based on a unit currently listed for sale in Pawleys Plantation.  For the sake of the example, we assumed a down payment of 20% and conventional 30-year mortgage at 5% (although banks often require slightly higher down payments and interest rates for condos).  Although the Jack Nicklaus designed Pawleys Plantation Golf Club is semi-private, we have not included membership fees in the equation since membership by the condo owner is not required in order for renters to play the course (initiation fees are $15,000 and dues around $260 per month).  Green fees range from $70 to $120, depending on the season (cart included).  Note in the adjacent column that we have included examples of condo units in other communities we have visited and can recommend.

Villa unit on fairway, 2 BR, 2 BA

*    based on 8 wks/yr @$1,000 net

    A quick back-of-the-napkin calculation shows that, in this example, the owners of this unit would need to pay out a net total of $5,160 annually.  Of course, that could be made up by renting out the home for additional weeks (a possibility, especially in the more popular resort areas) and by depreciating the home as an income-generating rental unit (note that, in such cases, you may only be able to use your unit "legally" for vacation purposes a couple of weeks annually).  And, of course, if you use the condo for your family’s vacation, you save on whatever you would have spent at another resort.
    One last point:  If you believe that prices are about as low as they will go for vacation homes in popular destination areas, then the future appreciation of the unit should be figured into your calculations.  Even a modest 2% annual value increase in our example above equals $3,200 in just the first year alone (and because of compounding, more in future years).
    With banks still offering 1% interest rates on savings accounts and the possibility, as some economists predict, of inflation on the horizon, an investment in a vacation home that you can use as an occasional escape hatch starts to look better and better.