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I SOLD MY CONDO last month and the first thing I wanted to do was celebrate. It was such a relief to get rid of it, because owning a second home requires spending precious time maintaining it. At age 69, I can think of better ways to spend my time than looking after a vacation home.
At first, I was reluctant to put the condo up for sale. I had lived there for more than three decades. It’s walking distance to the beach, and there are plenty of good restaurants and bars in the area. Also, in the neighborhood, I have many friends who are like family to me. I thought that, if I hung onto the condo, it might make a nice vacation home that we could visit during the year. The condo is also fairly close to our new primary residence.
The upshot: Selling was a difficult decision, but not one that I regret. Whenever I want to visit my old stomping ground for a lengthy period, I can always rent a place.
During the sale, the buyer told my real estate agent that I was making a lot of money on the property, because I bought it 35 years ago, when prices were far lower. Yes, I purchased the condo for $91,000 and sold it for $380,000. But did I really make a lot of money owning this condo?
If you subtract the $91,000 I paid for the condo and the $24,000 I owed in closing costs, I netted $265,000. But you also need to subtract the other expenses I incurred:
So did I really make a lot of money owning this condo? If it hadn’t been my primary residence—and thus provided me with a place to live—and instead the condo had been a second home, I wouldn’t consider it a great investment. I could have done far better investing the money in an S&P 500-index fund.
The S&P 500 has historically produced a total return in the 9% to 10% range, while real estate prices have outpaced inflation, but not by much. It’s also far less expensive to own an S&P 500-index fund, with annual expenses of perhaps 0.03%, or three cents for every $100 invested.
Of course, you can get some tax deductions from owning a vacation home and you can rent it out when you aren’t there. But is that enough to make it a worthwhile investment? I don’t think so.
Another thing to remember: An index fund doesn’t call you up in the middle of the night and complain about a leaky water heater. Yes, you can get someone to manage the property for you, but that means yet another expense.
I get it. It’s nice to have a vacation home in a place you really enjoy visiting. I, too, have a special place I visit many times during the year. But I realize one of the reasons it’s special is because I don’t own a second home there.
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor’s degree in history and an MBA. A self-described “humble investor,” he likes reading historical novels and about personal finance. His previous articles include Changing My Mind, Error of My Ways and Anybody’s Guess. Follow Dennis on Twitter @DMFrie.
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Thanks Dennis. Your essay gave me food for thought as my wife and I contemplate purchasing a second home 600 miles from our primary residence in retirement. Your experience suggests that renting for a month or so each year in the area where we would have a vacation home might be more cost effective.
Ocher, if cost is the only factor, you are absolutely right. We own what was a vacation home and now, in retirement, is a winter home 700 miles from our primary residence. Looking at the costs and appreciation we would have been better off financially to rent and invest.
However, renting doesn’t typically make you part of a community. Ownership and returning year after year to the same place does. Much of the happiness I have in my life comes from the people I spend time with and the community we create. Ownership created that community for me. Friends who fight over who gets to host us for dinner on our arrival day, a social plan arising out of a trip to the mailbox, etc. (all pre-COVID, of course). I don’t see renters embraced in the same manner we have been as owners. I encourage you to consider the entire scenario so you can live your best life.
Thank you for sharing your experience with your condo. I’m not far from your age, toy with a second home, and put it off in part for the reasons you cite. This helps with my thinking. Regardless of your concerns I’m glad you also had good experiences using the condo in those 35 years, benefits that are hard to put a dollar value on.