Reader Case Study: The Black Hole Second Home
The Vacation House. A home away from home, where you get to escape on weekends to live a fantasy life that is better than your real life. It is a concept that seems to be coming up more and more among my friends and family these days, as people get older and wealthier and start to look for more things to spend money on.
Mr. Money Mustache’s advice? Resist the temptation and put that effort into your real life instead. By focusing and simplifying things, you bring the best parts of the happy fantasy into your real world, with the added benefit of much faster wealth accumulation. Then you can move to the idyllic location of your choice, without the need to buy two sets of everything and commute between your houses along with all the other helplessly indebted cottagegoers.
Our next story is an interesting variation on this theme.
Hello Mr. Money Mustache,
Background: I am one half of a dual Merchant Marine couple who is based in Seattle. I am in dire need of input on whether to sell my rental/vacation condo in Jackson Hole, Wyoming.
First of all, I have never made money on the thing, but have enjoyed living in it myself between 1-4 months per year. I love the area and have connections there. I have tried various rental schemes with many companies to rent it out most of the year, but get time for myself there too. Nothing comes close to covering the mortgage and HOA dues. Even if I rent it out year-round in the expensive short-term rental pool, I cannot cover my expenses.
A few stats and a bit of history:
The condo is a 1 bedroom, 1 bath ground floor end unit, 766sf in an established neighborhood on the West Bank of Jackson Hole
Purchase Price: $200,000 (back in 2004)
Current Market Value: $280,000 (approx)
Monthly Mortgage payment: $1194/month ($162k balance remaining @ 5.625% interest)
Property taxes: $1245/year
HOA: $3588/year (this includes cable and internet)
Water Utility: $976/year
The long-term rental rate in this area is only $1050-$1100/month, and while you can do ski rentals at up to $200 per night, I have found that the vacancy, management, and cleaning fees bring the average over a year down below that which you’d earn with just a long-term rental.
I’ve owned this property for 9 years, and have been considering selling it for the past 7 years. I got greedy in 2008, thinking if it had gone up that much, of course it would reach the overpriced levels of Aspen, and beyond (at one point, my type of condo was on the market for over $500K!) As we all know, reality came crashing down before I sold.
Now that we are coming off the bottom of the market, I have finally realized I hate this debt, and I hate how much I have to work for it. I am in no way underwater, but adding up all I have spent over the years, I am $50,000 in the hole, which is hard to swallow. In actuality, I will walk away with about $70-$80,000 in my pocket after taxes, agent fees, etc…and free up $19,000 a year in mortgage/fees/utilities I will no longer be paying.
To me, this means I can either add this to my savings, or I can go to sea 1 month less per year. Either way equates to greater freedom.
Despite the answer being obvious, (SELL!!!), I can’t help going back to the old way of thinking that the market is just going to go up next year, surely enough to keep the thing ONE MORE YEAR.
Ugh. I just don’t want to be a fool anymore, but I am afraid I am shooting myself in the foot no matter what I do.
Other relevant information:
Age: early 30s
Income: My own contribution to our annual income is $70-$80k, if I spend about 4-5 months of the year at sea. Partner earns a similar amount
Retirement savings: $175,000
Annual Savings rate: about $15,000/year in retirement accounts
Have 3 months emergency savings (equals 6 months if I sell the condo)
have access to $15,000 line of credit with zero balance
Partly own another house, with a mortgage, in Seattle, which I live in primarily. My share of the mortgage = $800/month
No credit card debt, student loans. or other debt outside of the mortgages.
My only landgoing motor vehicle is a 2000 Honda Insight that gets about 60MPG
Thanks for inspiring me with this blog.
First of all, you’re still in a great starting place, so congratulations on that. High income in a neat job with loads of time off, no emergency debts, reasonable car, and a good start on the savings.
But you are right, that Jackson Hole condo is a disaster. The rent is RIDICULOUSLY low for such a high-price/tax/HOA unit!
Just for comparison, just today Mrs. MM helped a friend buy a rental house in my area. It’s a mint-condition 2-bedroom brick house with a nice yard, garage, etc. Price is $170,000, HOA fees are $0, annual property tax is $1300, and monthly rent will be $1300, with the renters paying all utilities themselves. So the return after property taxes is about 8.4%. And my area is not a very good area for rentals, compared to many other US cities.
For your $280,000 condo to provide similar return after the $480 of monthly fixed costs, you’d need a rent of at least $2440 per month. Since you have never even cracked half of that, it is safe to say it is a terrible, disastrous rental!
The bad news is, you need to sell it. The great news is that it looks like you have seen some great appreciation on your condo already – $80,000 is nothing to sneeze at.
In today’s US real estate market, I’d say we’re not just “coming off the bottom” – we’re in the full fury of a huge seller’s market, which means it is a great time to sell. Prices may keep going up, or they may ease back down as interest rates rise, but either way there are better places to make money than in a cash-flow-negative rental house. And you can still visit Jackson Hole whenever you like – by taking that $80,000 in cash out of the house, investing it elsewhere, and renting by the month whenever you have the urge to visit there or anywhere else. Even better, try out some home exchanges, as your desirable Seattle home would be of great interest to people everywhere.
The difference to your savings rate will be immense – probably over $25,000 per year, which means you will be more than doubling your savings rate, or halving your time to financial independence. Congratulations!
For the rest of us, a great general lesson can be learned from this:
Buying a second home is usually a bad financial proposition, because you are instantly creating an average 50% vacancy rate in each house. And that’s before accounting for the duplicate furniture, appliances, and all the commuting you’ll do between them. In business, idle resources are a red flag, and they should be in your personal life as well. Instead, focus on making your own house the one you want to live in, having more fun close to home, and renting vacation spots when you need them.
Buying an investment home is a different story. If you can find a house that practically rents itself, and generates a strongly positive monthly cashflow, you will do much better. And if this home happens to be in a beautiful spot, and you can book some of its time for your own vacations, then you may do so with my blessing.
Once you reach the stage of Infinite Wealth, and you have already bought your freedom from mandatory work, you might be able to justify things like extra houses and yachts that sit around idle most of the time. But I’m hoping that by the time you get there, you will have shed the flabby materialist desires and moved on to such a happy stage of life that you find yourself wanting less stuff rather than more.
After posting this, several people have written in with emotional descriptions of the happiness brought by their own second homes. Points like these are valid, because the vacation spots were serving as a gathering place for friends and family, which really does bring more happiness.
But then how is it that some of us can some of us be equally happy without owning vacation houses? By figuring out other ways to accomplish the underlying goal – spending time with people you care about.
The following two articles can help separate the consumption from the happiness:
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