26: Vacation Homes
You can't calculate the cost of confusion. If you want to sell vacation homes, it needs to be the focus of your content as well as your business.
About This Episode
There's not a person in the world who would turn down a free vacation home, but how complicated is it for you to buy your own? This episode explores where you can find them, how mortgages work on second homes, and the many factors to consider while you or your client is out shopping for the perfect spot to relax.
IPX1031's vacation home study: https://www.ipx1031.com/vacation-hot-spots/
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JON: It’s August, and in most places around the country, it’s hot. Your kids either just went back to school or are just about to, or maybe you don’t have kids at all. You’re twiddling your thumbs trying to think up the most enjoyable way you could spend the last precious few weeks of summer before the leaves turn, the days get shorter, and everyone starts carving pumpkins.
JON: If you’re in the mountains, maybe you’d like to hang on the beach when you vacay. If you live in a hot place, maybe you want to cool off. Regardless of where you live, visiting the other is always a fascinating experience that provides a nice break from your day-to-day grind. You might even be one of the numerous Americans who return from a lovely vacation thinking, maybe we should buy a vacation home.
JON: Hello and welcome to Shop Talk: The Real Estate Show. I’m Jon Forisha, and on this episode we examine vacation homes, why you’re always going to want one, how to help your client get one, and why maybe sometimes they’re not as great an idea as they initially sound.
JON: Right now, interest rates are 3.75%, which is the lowest they’ve ever been. No one knows for how long things will remain like this, so it’s easy to view this as your best opportunity to pounce on that dream you’ve always had, of mai tais on the beach, of passive income from a beautiful house that you can retreat to whenever you want.
JON: Corey Wesley is a Mortgage Loan Originator at Cherry Creek Mortgage Company, where he counsels agents and their clients on how to handle the financial side of their real estate transactions. Here’s Corey:
JON: How do mortgages for vacation homes differ from ordinary loans?
COREY: They are almost identical. There's really not a lot of difference when it comes to your standard conventional mortgage and how we approach a, we call it a second home, but a vacation home is a good alternative for that, uh, for that designation. Really one of the only differences for a conventional loan, we can go as low as three and sometimes as low as 0% down, in some cases with down payment assistance. Coupled in there for a primary residence, one of the only major differences is going to be for a second home or a vacation home, is going to require a 10% down payment on that home. It can still be a gift, but it doesn't need to be 10% or more of a down payment. One of the only other stipulations really from a guideline perspective is you can't buy a second home that's three blocks away from your primary residence. That's not a legitimate second or vacation home. So you gotta be careful about how you're actually going to be using the home. I get that question all the time. Hey, I want to buy a house to rent it out, but can we just call it a primary? Well, no, that's mortgage fraud. I'm not going to help you do that. But if a legitimate second home is, you know, something you want to look into, there's not a whole lot of difference.
JON: In 2018 there were 23,000 American vacation rental companies. A majority of vacation rental revenue is generated in the US - which was about $13 billion last year and is on track to account for even more this year. In fact, nearly every travel stat is trending upward - the benefits of a healthy economy and an increasingly-mobile working class.
JON: When you hear a stat like “Millennials are predicted to spend $1.4 trillion on travel each year by 2020,” it might seem like the pieces are coming together and your vacation home fantasy might not be such a fantasy after all. Because, you see, on those weeks that you’re not lucky enough to be able to enjoy your vacation home for yourself, you could rent it out and make some serious money. Or can you?
JON: The first question to answer when embarking on the search for the perfect vacation home is how will you use it? Some people - the independently wealthy, lottery winners, or perhaps people who just hate the idea of sharing their home with anyone else - only want a vacation home for themselves. They’ll use it those three glorious weeks out of the year, then they’ll lock it up tight and leave it alone for the rest of the year.
JON: Others will use their vacation home as an investment. They might hire someone to professionally manage the property while they’re gone. Many people go in together on vacation properties, counting on valuations in the area increasing over time. Still others might rent out their vacation home and pay down the mortgage while they’re still working, with the intention of retiring to it and living debt-free in a beautiful place.
JON: John Sebree is the CEO of Missouri REALTORS, where he makes policy decisions that affect over 20,000 real estate agents. When asked about second homes, John stressed the importance of tax laws. Here’s John:
JOHN: Well, you know, I came from Florida where we had members that specialized only in vacation homes. And we have a little less of that here. We have areas like Lake of the Ozarks where someone only sells vacation homes. So you're looking at it more like a commercial deal because if it's an investment property or you're not living there more than 50% of your time, the tax laws could impact the buyer differently and you have to know those kinds of things. So I think you, you know, you look at it through the lens of the buyer and you help them through that process. If they've been saving up forever, they're about to retire and all they know is the residential home that they've lived in. They may not be thinking about the tax consequences of buying a home that's going to be airbnb half of the time or something like that. The insurance issues are different, the tax issues are different, and so the realtor needs to help that client with those issues.
JON: This is likely no surprise to you, but houses fall apart over time - even vacation homes. And if the house is near an ocean or a large body of water, there are other maintenance issues you have to take into account. By nearly every metric, the weather is getting more intense and relentless, and roofs can only take such a beating before they need to be patched up. A good rule of thumb is to set aside 1-2% of your house’s purchase price for repairs. If this second home of yours is valued at $200,000, then you’ll need about $2-4,000 annually to keep it up.
JON: That cost doesn’t factor in homeowner’s association fees, which may be pretty hefty if you buy in a waterfront neighborhood or a vacation community. Then there are the property management fees, which vary wildly, and normal bills like utilities and internet, which you’d pay just like you do on your primary residence.
JON: Nowadays, there are plenty of options for managing the rental of your property when you’re not around. Sites like Airbnb or VRBO are hugely popular, especially with Millennials, and even though you can likely think up about a thousand ways that renting your beloved home to strangers through a website could go wrong, horror stories are few and far between.
JON: If you’re feeling overwhelmed, remember that you don’t have to buy. Sure, buying sets you up for a bigger financial reward whenever you choose to sell, but it also requires a lot of upfront costs. Renting is more short-term, and it gives you the freedom to check out a few different areas. If you rent in a different region every time you go on vacation, by the time you’ve got the cash to buy you’ll be positive you’re choosing the right area for you.
JON: Another method to have access to a property without all the hassle is a timeshare. There are plenty of timeshare scams out there, so you need to be careful what you buy into, but by co-owning a timeshare with other vacationers, you can drastically bring down the price tag of a vacation getaway. There are plenty of different timeshare options, but in most cases the minimum buy-in is a one-week ownership, and if you want to visit during high season you’re likely going to pay a lot more money. Just keep in mind that the ROI on a timeshare is going to pale in comparison to buying a vacation home, since trying to sell a timeshare investment is pretty difficult, to say the least.
JON: Michael Carr is a prolific real estate auctioneer and the COO of BrandFace, a company devoted to helping you develop your unique brand. He’s been licensed in 27 states as a broker and auctioneer, and recommends treating vacation homes as any other real estate niche. Here’s Michael:
MICHAEL: It shouldn’t be any different. No matter what they're doing. But if that's going to be their niche, they may need to, that needs to be their focus in their content as well as, you know, the focus of their business. But when it comes to different genres, we find that there's no, like you wouldn't do anything different than you would be if you just dealt with first time home buyers. Right? You need to find the unique thing. What I like to say is that one of the biggest things that would get you in real estate business is you can't calculate the cost of confusion. That's a big deal, right? And so how do we eliminate that? It’s to focus on something. So if you want to focus on a vacation rental or be a person of vacation sales, those kinds of things, then you need to be sure that your focus, your interest and everything that you build around it is focused on those same people's end attributes, of the people that are going to be wanting that. But I don't know exactly how that would look like because it's personal branding. It's different for every agent.
JON: Whether you’re buying a vacation home for yourself or helping a client, I think we’ve pretty well covered the hows and whys. Now let’s discuss where you’re going. A lot of your ideal vacation destination is personal, but here in America there are some inescapable facts. One of them is that the cheapest vacation homes are in places that aren’t blessed with great weather year-round. I’m talking about states like Alaska and Wisconsin, which might be pretty miserable in winter months but enjoy an idyllic summer season.
JON: Most people want to run away to Florida or California, but the fact that you could enjoyably visit those warm destinations any month of the year is exactly what makes them so expensive. Another factor that weighs into the astronomic cost of some real estate is how’s the local job market? Many popular vacation communities are pretty far from the hustle and bustle of local industry. There’s a reason there aren’t many beachfront corporate headquarters.
JON: According to a study by IPX1031, which is linked in the show notes, Maine, Vermont, and New Hampshire have the highest percentage of vacation homes state-wide. Some areas of California, like Little Grass Valley and Wilsonia, are actually 100% made up of vacation homes.
JON: The Great Lakes region is also a huge leisure destination, since you get many of the perks of being at the ocean without experiencing oceanfront prices. And then far from the water, places like Copper Mountain in Colorado or Hunter Creek in Arizona are also made up almost entirely of vacation getaways.
JON: No matter where your idea of paradise is, vacations are a great and necessary thing in today’s hectic world. Owning a second home isn’t for everyone, but there are many ways to do it without being financially irresponsible. Regardless of where you or your clients end up relaxing, having a second home to escape to can be the perfect reprieve from your busy lifestyle, and a great reason to put in a few extra hours at work.
JON: That’s it for this episode of Shop Talk, thanks for listening! If you enjoyed the episode, give us a review on your podcast player of choice. You can also subscribe to ensure that every new episode of the show ends up on your phone as soon as we post it. Join us next time for a branding discussion with Tonya Eberhart and Michael Carr from BrandFace.
JON: Shop Talk is a production of The CE Shop.