Rent or own vacation property
Every year, I meet more and more people that have bought vacation property or are thinking about buying vacation property. The question I get is whether this is a good idea or not.
It’s in the numbers
I’ve always said there are two influences to every decision we make – the logical influence and the emotional influence. From a logical perspective, the answer often lies in the number so let’s look at an example that is near and dear to my brain.
Previously, we took a family vacation to the Okanagan where we spent a week in Kelowna and a week in Vernon. We loved both places but we really fell in love with the resort we stayed at in Vernon called the Outback Resort. In fact we loved it so much we fell in love with the idea of spending longer summer vacations there and if that was the case, we should explore the option to buy a place there. We called up a realtor and looked at a 2-bedroom option and a 3-bedroom option. Let’s look at the math.
The math of the BUY
The 2-bedroom unit was selling for $300,000. If I put $50,000 down, the $250,000 mortgage would cost me $1315 per month (roughly $9300 of that payment would be interest and the rest would go towards principle).
Along with the mortgage payments is the strata fee of $350 per month and the property taxes at $2500 per year.
Total annual cost to purchase the condo is $16,000 per year. I can take some pretty nice holidays for $16,000 per year not including the $50,000 down payment.
Rent or buy?
Next, let’s look at renting. If I was to rent this unit for a vacation, it would rent for $339 per night. That means I could rent that place for 47 nights a year or 7 weeks to reach a total cost of $16,000.
With four young boys, there is no way I am going to be able to spend 7 weeks of every year in Vernon.
In my opinion, the math is pretty clear . . . rent the place for a week or two and I will be out of pocket a lot less than buying.
But what about an investment?
So my wife says to me “Jim, you are the investment guy. Isn’t investing in property a good idea?”
My response was “Yes but only if the numbers justify a return”.
If I look at the annual cost of $16,000 on a $300,000 property, I need that property to increase by 5.3% per year just to recover my costs. I don’t know if Vernon vacation real estate will increase by 5.3% per year but I know there are a lot of properties for sale and the prices have come down (not up) in the past few years. I also know that prices in Vernon are very much dependent on buyers from Alberta and Vancouver.
I know lots of people who bought property in the US and have not experience positive growth. I’m sure there are others who have made money as well.
Flip a coin on the investment argument. I say 50% chance it will beat 5.3% growth and 50% it won’t. What do you think?
What about renting it out on the days we are not there?
Here’s another argument from my lovely wife who really wants this place in Vernon. Here’s the problem. Let’s say we want the place for 2 or 3 weeks of every year. We are going to pick the summer months when the kids are on summer holidays, which is peak rental season. To recoup our $16,000 annual cost, we will need to rent the place for 60 to 80 nights in the year. Now this sounds like a part time job to me for a lot less money than my real job makes me.
My five cents
I’m not trying to discourage anyone from buying vacation property but I do think it requires careful thought and analysis of the numbers. The math on the $400,000 3-bedroom option was not appealingbut every property has it’s own set of numbers. Run the math, think logically and put emotions aside when making this big decision.
This is a simplistic analysis but a real one. Any thoughts on what I have missed? Do you have an experience (positive or negative) you want to share with others about buying vacation property?