Is owning a second house really a good investment?

 

The picture above shows my parent’s beautiful summerhouse with a 10 minute walk to the ocean – a great investment?

What you are about to read now is kind of a contradiction to what I have written before about investing in property. I would like to challenge your mind and the common “universal truth” that investing in property is a good thing…

My family has had a summer house in a popular summer vacation resort for many years: Last year my mom told me what a great investment it has been. She mentioned that she and dad bought it for 12 000 USD in 1975 when I was one year old and my sister was three years old. And now the house is worth about 540 000 USD. It sounds like a great investment, doesn’t it? At least at a first glance…

Let’s look at this a bit more. When mom and dad bought the house they had to give it a thorough “facelift” as the house was in bad condition, and they also built on to the house. So they actually invested around 43 000 USD initially, including both the initial house purchase and renovation. But it still sounds like a great investment, right?

And in year 2003 they built on to the house a second time, this time to a cost of 77 000 USD. So they have actually invested 120 000 USD - and now the value is 540 000 USD. So, do you have any idea how much the value increase of the house has been per year since they bought the house? About 6%! Not too bad, but I must say that I got a bit disappointed when I calculated this figure as I thought it would turn out to be even higher ROI considering that 540 000 USD is so much money! L

Figure above: calculation of the ROI of the house investment

However, this is not the whole truth. During the years there has also been running costs such as maintenance and repairs, as well as electricity, insurance, water, etc. If we would take this into account (with the assumption that the running costs year 2014 are estimated to 1% of the yearly house price) we would have paid in total about 71 000 USD during the 39 years we have had the house, bringing down the ROI per year to around 5,5%.

Figure above: calculation of ROI also considering running costs. The housing costs of 70 669 USD decreased our calculated annual rate of return further to 5,45% (sorry about the small figures in the table :-) )

Does this house still sound like a good investment? Well, not really to me. But it of course depends on how you would have used your money otherwise and what returns you are looking for. I am looking for higher returns than 5,5% per year. But the house has been a safe investment, so for being a low risk investment 5,5% is quite good. Also, we shouldn’t forget how much fun we have had in the summer house. So from that perspective it actually has been a great investment!

As a conclusion, in order to get a really good return on your summer house/ 2nd house you should try to rent it out to increase the house payoff. I was in Hawaii (Big Island) earlier this year and got interested in buying an apartment there for rental purposes and for own usage. Hawaii is an excellent location for a rental property with good weather all year long, making the rental period long. And it has beautiful beaches and exciting landscapes and a strong, consistent rental demand from mainly the US and Japan. There are a lot of vacation rentals in Hawaii and I found one that seemed great at the first sight; a smaller condo (1 bedroom) in good shape right by the beach and quite central - and according to the prospect it had a track record for being a successful rental property. And indeed, it would give me a gross rental income of roughly 11%. Not bad. But there was a lot of overhead cost related to this, such as property management, repairs, electricity, which took down the ROI to around 5%. Not that good compared to the first calculated ROI of 11%. But on the other hand, I also would gain from the capital appreciation of the apartment.

Again, here is a good learning that reinforces what I mentioned earlier –things you don’t think really about (i.e. electricity, maintenance, etc.) actually add up quite a bit and actually cost a lot of money, bringing your potential net ROI down! Have this in mind when you look into vacation rental properties!

 

/Chris

My top tips for a successful short-term property investment

Happy New Year! I hope your holiday was as nice as mine.

Below are some useful tips for a successful short-term property investment based on my experience and from what I have heard has worked for others. Hope it will help you as well!

Choose a dedicated broker to sell the apartment. We invited several brokers for interviews when it was time to sell our apartment. Check if the brokers are familiar with the area. Check if they have sold other apartments in the area. Check their previous experience. Check how successful the brokers have been.
 

One of the invited brokers told us how lucky a buyer of his had been to get an apartment for a really low price. Would you like to have this broker to sell your apartment to a really low price..? Another broker showed great confidence and had trustworthy answers to all our questions. Also, he told us about how many successful sales he had made. He had broken a number of sales records in different apartment buildings. Either he was good at bragging or he was this good! We finally chose this broker because he seemed more motivated than the other brokers, had a positive attitude, and he was a bit of a “dreamer” where nothing was impossible. And he did indeed break another record as he sold our apartment for the highest price ever in our building – and the broker sold it for much higher than the average price in the area!

If you can get a broker on recommendation it is also worth a lot, but make sure to always interview the person to get a feeling about his/her capacity and sales methodology.

Renovate smartly. Ask yourself during a renovation: “What is the apartment lacking and will it be worth renovating?”. Think in terms of “renovation cost vs. benefit” and go through all decisions thoroughly before conducting them. Every single little improvement will cost time and money and not everything is worth doing. Consider also whether you should go for quality renovation or if would be ok to use cheaper quality (IKEA has great kitchens for a reasonable price!).

As I mentioned in an earlier posting, my wife’s and my apartment was basically fully renovated when we moved in and the previous owner had flipped the apartment with a huge profit. He had lived in the apartment for about six month and used IKEA in the kitchen and bathroom – and it looked great! Also, don’t just do the bare minimum when renovating, it will look cheap. That is the difference in what our last apartment sold for when we sold it and what it sold for when we purchased it. We made very few changes but had exclusive furniture, very good taste and a few showpieces of furniture.

Use an appealing taste which fits well with the rest of your apartment. I have visited many apartments for sale as this is an interest of mine and many have been top renovated but unfortunately not always with good taste. I remember one apartment with a fully renovated bathroom with carefully selected and expensive material. It would have been a great bathroom if it wouldn’t have been for the weird African style with crazy wall colors. It didn’t fly with the rest of the apartment, and certainly not with the taste of the average apartment buyer. It was such a waste with renovation money.

Speaking of bathrooms; if you decide to renovate one, make it unique for god’s sake! It seems like most renovated bathrooms too often look the same, with black tile floors, white tile walls and the same fixtures. Throw something unique in, but do it with taste so that it is still uncluttered and/or luxurious looking.

 

Figure to the left shows our bathroom before renovation and the right photo the result after renovation. Both of the bathrooms are unique in their own way… My wife and I wanted to create an exclusive bathroom with an old-fashion feeling that went with the rest of the style of our apartment from 1882. We are very happy with the result!
 

Choose your object wisely. It is important to choose an apartment that has qualities that is appealing to the market and will boost your chances for a successful sale. My wife and I normally look for the following criteria when we search for apartments:

·         Balcony. We, as many others, value highly the opportunity to sit outdoor in the morning with a cup of coffee, or sitting a summer evening on the balcony having a cold beer and enjoying the good weather!

·         Apartments located high up in the building. This gives the apartment better sun light. I never look at apartments on the bottom floor. Many people don’t even go to showings for apartments on the bottom floor apartments because the risk is higher for burglary, less sun light in the apartment and the fact that there is often little privacy because people can look into the apartment from the street.

·         Look for some aspects that make the apartment unique. Little quirks that not everyone may like, but that a few will find completely charming.

·         Be strict about floors. My wife and I are very picky about the floors. They must be all the same material and preferably old and charming, or very “earthy and textured”. Same material throughout the apartment creates a homogenous and nice feeling. We never choose shiny floors and never different colors. Remove room borders if possible when renovating.

·         Location. Many property investors claim that the most important factor for a successful property investment is LOCATION! Location is to my opinion important but not priority #1. I do agree that this factor is very important if you are looking for a long term investment, but in the short term the other parameters in this article can be just as important.

·         Renovation potential. Make sure that the apartment has the renovation potential you are looking for, and that it is within your budget.

·         Old apartments, turn-of-the century apartments if possible. High ceilings create a nice spacious feeling to the apartments, and old ornaments such as crown moldings gives charm to the apartment.

·         Elevator. Having an elevator makes a huge difference if you would live on the fifth floor… (even on the first floor if you are lazy J ). Older people, who often are strong buyers, would probably not even consider an apartment high up in a building without an elevator.

·         Fireplace. Imagine sitting in front of a fireplace with a glass of wine at night when it is snowing outside. Do I need to write more about this point?

·         Choose an open floor plan if possible. This creates a more spacious apartment and good social areas.

 

 

To the left are sales photos of my wife’s and my apartment, using tips from this posting. We made +33% off the purchase price –not bad considering the average apartment price increase in the area was about 0% during the same time!

 

 

Last but not least, make sure to have good luck and good timing during the sales process! This is probably one of the more important factors when selling an apartment, but unfortunately also the most difficult to control J. All it takes is two parties being really dedicated and interested in the same apartment. It can make a difference of several ten thousand dollars…

Also, some other smaller tips along the way:

·         Buy in an up-going property market. It is easier to sell in an up-going market and the apartment increases in value while being in your possession. Consider the micro- and macro-economic when buying as this often affects the property market. For instance, is the market at the bottom of a recession? How will the property market be affected by the Euro-crisis? Read the business newspapers to follow what is happening on the market!

·         Make sure to be ok to stay in the apartment for a longer time, in case the apartment would be difficult to sell (for instance due to a declining property market.) and you don’t want to make a loss

·         Live in the apartment while you renovate it – makes it cheaper

·         Consider what apartment size you want to target. Should you target a smaller apartment in an attractive area or a larger apartment for the same amount in a less attractive area? I would recommend the smaller apartment if you are going to renovate – it is less to renovate and saves both time and money – and chances for a better investment payoff are often higher in attractive areas.