I’ve written in the past about how I think you should own your investments and rent your fun. I mostly think about this when it comes to vacation properties, but it can be applied equally well to things like boats and other major “big boy toys.”
Over the weekend, we nailed down our Spring Break plans. We’re heading to the Gulf coast for a week of sand and sun. Whenever we’re down there (usually once a year, sometimes twice) we stay in the same beachfront condo complex.
When we’ve been there in the past, I’ve noticed that a handful of units are typically on the market at any one time. While the prices have fluctuated a bit over the past few years, it’s currently around $500k for a 2BR/2BA beachfront condo.
Now don’t get me wrong — these are really nice places with a beautiful view. But… Seriously? $500k? While some people buy these places as retirement homes, many others buy them as vacation homes.
So what do these places cost to rent during Spring Break? A little over $1500/week. Yes, the rent is higher during the peak of summer (albeit lower in the winter), and yes, if you owned it you could rent it out, but still…
Let’s assume that you bought one of these places with 20% down, and you borrowed the rest ($400k) using a 30 year fixed rate mortgage at 5%. Looking at principal and interest only, that’s around $2150/month.
Now add in condo association fees, property taxes, and insurance. I’m not sure how much these would total up to in this particular case, but it wouldn’t be cheap.
And don’t forget about all the risk that you’re taking on. How long, for example, until there is another major oil spill in the Gulf? Nobody knows, but do you want to be left holding the bag if the next one is worse than the last one?
And what about occupancy rates? Sure, these things rent out pretty well during the peak season, but there’s a lot less demand during other times of the year. In fact, here we are just a month out and we had no problem finding an opening for Spring Break.
Oh, and those brisk rental periods? Those tend to occur right when you’d most want to be using it yourself, so you’ll have a choice to make… Either: (a) go on vacation while foregoing rental income, or (b) rent it out and stay home.
As for us, we choose secret option (c): keep our business and pleasure separate. We’ve built a broadly diversified portfolio to cover our investment needs and we pay cash for our fun.