Not long ago, Mitch Wasterlain asked and answered a question many physicians will ask. Is a second home a good real estate investment?
While there are many individual factors to consider, the math points to a second home as being less than ideal as a pure investment.
I’d like to share the story of our second home and why, for us, it was a fantastic investment.
I never imagined I would want, let alone have a second home. Maintaining one home is challenging. Doubling the property doubles the work. And you need to have lots more stuff. We have too much stuff! A second home means duplicate sets of silverware, flatware, beds, sheets, sofas, etc… Why on earth would I want to complicate our lives like that?
I distinctly remember telling my parents (who commuted six and a half hours round trip to theirs hundreds of times before moving there eventually) how I didn’t see that ever happening for us. I was happy with one really nice home in a place where we wanted to be.
Nevertheless, for nearly a decade, we were the proud owners of a second home until we sold it in the summer of 2021. I’ll detail the expenses, returns, and intangibles that we experienced over the course of 10 years with our little lakeside cabin.
How did we end up with a cabin?
A few months after that conversation with my parents, I saw a sign. Not one of those profound revelations that result in a new vision of how to live our lives. This was a plastic sign. On a wooden stick. It said “Auction.”
I also saw an ad in the newspaper detailing the auction and advertising a preview weekend. We toured the grounds of the resort turned summer camp turned condo association.
Sometime near the peak of the housing market in the mid-to-late 2000s, a developer purchased the property and attempted to sell individual cabins for a premium price. Only a handful of units sold in a few years. The rest were to be auctioned off in a couple weeks to the highest bidders.
While we had expressed little interest in a second home, this place was within ten miles of our primary home, on a picturesque recreational lake, with a bike path running right to and through the property. We could boat, bike (I like to bike), jog, or drive to this place. The cabins were in pretty rough shape, but we had recently built our home, so we knew go dependable tradesman who could do the work that would need to be done.
My attitude towards owning a second home shifted when it appeared I might be able to score a really good deal. This frugal physician loves a good deal.
I was serious enough about it to take out the required $5,000 cashier’s check as a deposit to obtain a bidding number. There were about as many people with the same idea as there were units for sale. This worked to our advantage and made the auctioneer rather surly.
The auction style was bewildering. It was so strange that I’m not sure I can describe it accurately, but I’ll do my best. There was a first round of bidding that set a reserve price of sorts, but we weren’t bidding on particular units. We were telling the auctioneer how much we would pay for first pick of the available units. Then there was a round for second pick, third pick, etc…
I had some idea of what was going on, having had the auction team explain the bidding process at the preview. I kept my number down throughout the initial bidding process. No need to drive up the reserve price. Other befuddled bidders thought they were bidding on the units, but all they were doing was unnecessarily increasing the reserve.
Once we had established a minimum price for the units in rank order, the actual selling began. The highest bidder in the initial round chose the unit they would prefer, and bidding began at the price they said they would pay. No one tried to top that opening bid price. Sold. Next was the second highest bidder from the first round’s turn, third highest, and so on.
There wasn’t much bidding going on until the prices dropped below $10,000. The auctioneer was literally scolding us for not bidding. It was awkward.
Winning at Auction
Those of us holding bid numbers realized that there wouldn’t be many of us going home empty-handed. I ended up with the winning bid on one of the last places up for grabs and was able to get one of the units we preferred.
At the time of our purchase, we were also in the market to buy a used minivan. We paid more for the van than we did for the cabin.
We were ecstatic! We would have a cabin just down the road, on a lake attached to our primary home by a navigable river. We could take family bike rides there, choose to spend the weekend or just a night there whenever we felt like it.
Our out of town guests could stay there. Our friends were more likely to visit. My winning bid was a sign. Not a plastic one on a wooden stick, but a sign of good things to come.
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Or so I thought.
Our hospital, the only one in the county, had been struggling financially. I thought my status as the chief and only anesthesiologist (the only one in the county) was a bulletproof vest. I didn’t realize just how dire the situation was, and a couple months after we closed on our second home, I lost my job.
The hospital shut down six months after that, and due to my non-voting volunteer position on the Hospital Board, I was later one of a number of volunteer Board members sued for millions.
There were no other jobs within commuting range. We landed on our feet eventually, but the second home dream lost some luster on that fateful day.
We decided to fix up our fixer-upper, and while I worked locums and found a new job, the cabin was transformed from dilapidated to delightful. A few years later, we had some exterior work done, installing cedar shakes and fresh layers of paint.
Second Home Financial Analysis
While our initial cost in 2011 was about $16,000, we put about $34,000 into it in 2012, and another $10,000 in 2015. We had roughly $60,000 into the place.
We sold the condo by owner, one of four properties we’ve sold ourselves, for $203,000. That would suggest a profit of over $140,000.
It’s not that simple, of course. If I hadn’t bought the cabin and spent the money to fix it up, it’s safe to assume I would have invested that money.
Using an S&P 500 returns calculator, I can estimate how much we would have if our dollars were working for us in a low cost index fund.
If we had invested that money in 100% large cap US stocks instead of buying and fixing up the cabin, we would have had a profit of about $184,000. That’s a bit better than our suggested profit of $140,000 that we got by investing in this piece of real estate.
However, there are other financial considerations. We paid the electric bill. We paid property taxes and association dues. Those dues covered lawn mowing, snow plowing, dock in, boat lift in, dock out, and boat lift out, etc. It was a pretty sweet deal.
There was also a pole shed to store our boat in the off-season. The dues were money spent, but it was money spent on things that allowed us to enjoy our time when we were there.
If we didn’t have a second home, we would have spent more on vacations and short-term rentals. I don’t know if we would have spent as much as the home costs us to own, but to answer that question, we need to know how much those annual costs are.
The association dues were $150 per month, or $1,800 a year.
Property taxes were just under $1,000 a year.
The electric bill was under $10 in the winter months when we shut it down, but ran much higher if we ran heat in the winter or air conditioning in the summer. We’ll say it averaged $50 a month or $600 a year.
While there could have been other expenses related to maintenance or repairs, our experience was that those were minimal. We’ll call it $100 a year to replace light bulbs, batteries in the fire alarms, and that sort of thing.
In total, we spent about $2,500 a year to own this place. To me, that’s a bargain. We get a lot for our $2,500. It’s difficult to take one decent vacation per year for a family of four for that price, and we spent up to 12 weeks a year at this place.
In a previous iteration of this post, I also calculated the opportunity cost of having the money invested in the cabin rather than in the stock market.
However, we already calculated that the place appreciated at a clip not that far off from the red-hot stock market over this time frame. Much of that came from forced appreciation by getting the place for a song and making it much, much nicer with the renovations.
While we didn’t live nearby for long, it was never more than a day’s drive away. When I was working, I would spend four to six weeks there every year, and my wife and boys spent most of their summers there, averaging around 10 weeks a year.
Our extended family used it, too. My wife has many relatives in the area, and they not only stay there on occasion, but they also help with tasks when we’re not around, like winterizing the cabin or putting the boat away.
We invited friends to stay there when weren’t around, and a few took us up on the offer. We actually had a family live there for eight months straight when they were in need of a place to stay.
Short-term rentals of the place were not allowed, but we got to be charitable with our property by letting our friends use our second home for free.
This second home actually became our primary home for a spell when I retired for good and we moved back to Michigan. Even when we bought another place in town, this place was a great spot for fun on the lake and a good base camp for winter downhill skiing trips in the area.
Second Home Lessons
We learned that we could live in a small space, at least temporarily. 700 square feet, 2 bedrooms, 1 bath, a small porch and deck, and we were perfectly content, getting by just fine without all the stuff that filled our primary home, which was roughly five times larger.
TV is optional. The largest screen at our cabin wass the 13 inches of pixelated space on my laptop computer. I could watch a game when I “needed to,” but there was no TV routinely on in the background, as is common in many homes.
Less is more. Without all the distractions of home, we had time to just be a family at our second home. Talking, reading, family walks and runs. No hustle. No bustle. Simplicity.
Low maintenance is key. If our second home was anything like our primary home, we’d have had a lawn to mow, snow to blow, and many little headaches that can add up to one big one. Our association dues pay for that work to be done, so there was very little for us to do but enjoy ourselves and our neighbors’ company while we’re there.
You can’t evaluate the value of a second home by looking at nothing but numbers. While this one looks pretty good when examined under the financial microscope, we received immeasurable value for our family in the boat rides, beach days, and sunsets that will never show up on the spreadsheets.
While we no longer have the place, it served us well for 10 years, and it turned out to be an excellent investment in multiple ways.
Do you own a second home? Has it been a good investment, financially speaking? How about from other perspectives?