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Buying a Vacation/Retirement Home (Part 2)

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Last week, I found a few spare minutes to relate my initial experience of buying a Buying a Vacation/Retirement Home. Unfortunately, due to the lack of time between appointments to see houses, I skipped over some important details. It was clear in reading the comments that the post wasn't what it should have been.

In the post, I mentioned that we traveled 3000 miles from San Francisco to Newport, Rhode Island to look for a Vacation/Retirement house. If you didn't read my previous post, "Time to Buy that Vacation/Retirement Place?", the wisdom of that action may be questionable (it may be questionable anyway). The idea is that it seems the perfect time to buy the place we think we may live (winter, during in a housing downturn, with great interest rates). It will likely be an investment property in the short term - the idea is to rent it most of the year until we plan to use it ourselves. For a lot of people in their 30's that would be a long time. For us it would be around 8 years when my wife leaves the military with a pension and I continue to build online businesses which largely fits my definition of retirement. Managing the property from a different coast for 8 years would be a hassle and the question is whether the good outweighs the bad. I think that's a very subjective question and I'd love to hear thoughts on it in the comments.

The other thing that I mentioned in the last post was that we looked at houses that were more than 100 years old. If you are looking for prime property in Newport, Rhode Island, that's the kind of thing you are going to find. It's not like people just discovered new land in the prime locations to live. We ran up against one of the biggest challenges in looking at photos and determining if the place was any quality. It's very easy to confuse linoleum with tile. It's very easy to place a cutting board over a cracked tile in a counter. We didn't go out looking for places that were 100 year old money pits to manage from 3000 miles away, but it may appear that way because of how I wrote the article.

A lot of people asked the tough financial questions that I was hoping I'd slip by without addressing. The ones about whether the homes we are looking at would be cash flow positive and such. Well, I figure cash flow positive depends a lot on what you are putting down. If you are putting 20% down it usually is very difficult to find. I don't want to say it is impossible, but I'll just say that I found maybe one in the pile of places we looked at. It's close and may not be cash flow positive by the time you factor in the costs of maintaining it. I don't think this purchase could be looked at from a pure investment perspective - but that's a long story worthy of an entire separate post.

To pick up where I left off on the last post, we went to look out for a second day on house hunting on Wednesday of last week. We learned to avoid some of the 100 year old homes altogether. By the end of the second day we had looked at another dozen properties. We added two more places to the list of possibilities, bringing the total to 3. However, we had two front runners and pushed the other back to only pursue if we got tremendous value for it. One was a place near the top of our price range, in a great location a couple blocks from the beach, asking $224/sq foot with almost no land (under .10 acres). The other was smaller, in a questionable part of town, asking around $130/sq foot with a little more land. The "questionable" part of town is relative in a nice place like Newport. The next street over has million dollar homes, and it has great views, but there is some low-income housing behind it. Perhaps the most valuable land in Newport on the water with a breathtaking view of the Cliffwalk mansions was just across the street, but it was currently occupied by an eyesore of an abandoned Navy hospital. The land was recently given back to the county, but no one knows for sure what it will be. The small house itself was very nice, with lots of updates.

We were torn between the safe home at the top of our range, or the one that was priced at a bargain rate to start with a lot of upside depending on how the land develops (I figure it can't get worse). I decided to ask some friends for advice. I described both places as best I could. I was surprised at what I heard back, but I guess I shouldn't have been. They almost all went for the safe place at $224/sq. foot. I found myself defending the $130/sq foot place. I quickly realized that I probably shouldn't have asked for advice at all. They weren't there to witness both places, and going off my own description, I realized the choice was pretty clear. It's a classic case of "garbage in, garbage out." I couldn't accurately convey all the pluses and minuses of the two properties. I couldn't ask that they factor in my own risk aversion of losing $100K in equity as I did with my condo by buying at the height in 2004 (see: I Made a Mistake and Checked Zillow .com Today). The small house was kind of like a beat down stock with dependable earnings - I didn't see much downside and some good upside. The other house is going to follow the market. For the most part it is going to be what is going to be - it doesn't have the upside of someone improving the area around it.

As we started our third day of house hunting it was a two horse race and it was hard to say which was winning...

...to be continued.

Last updated on February 18, 2011.

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Real Estate

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3 Responses to “Buying a Vacation/Retirement Home (Part 2)”

  1. cubiclegeoff says:

    One way to find out what may happen in the area (I’m assuming the cheaper house was in Newport’s North End), is too look at the master plan for the area. Newport did the North End Master Plan a couple of years ago and they show ideas of what they’re thinking for the area around the Navy Base site and changes that are planned for the Pell Bridge interchange. You may or may not want to own anything while this is going on, if it ever moves forward.

  2. jim says:

    My wife and I have a rental on the other side of the country. There are some pretty big negatives about long distance rentals. Key would be to get a good property manager. You are really asking to lose lots of money without a good property manager. Some property managers out there are incompetent and downright dishonest. Be very careful to find a good one. I’m not saying they are bad as a group or anything but you need to watch for those bad apples. Failing to be careful with our property manager could cost you lots of money. Everything about the property’s financial success will depend entirely on the property manager.

    Repairs may be more expensive. You can’t do any work yourself. You have to pay contractors for everything and you have to rely on your property managers good judgment.

    I wouldn’t try to do it yourself long distance. How would you show the property from 3000 miles away? HOw would you collect past due rent? How would you handle a broken stove or even a tenant who locked themselves out of the property? Etc.

  3. Lazy Man says:

    Well, we do manage two rental properties on the other side of the country as it is. There’s some difficulty, but they are often one-time events. Real estate agents shows the property (or Craigslist). I can fly out for past due rent if it becomes a problem, but it has been a huge one. Broken stoves are handled by phone calls to repair men. Being locked out is handled by the condo super (he does this for all the residents of the condo).

    I’m not saying it isn’t tricky or complicated, it is. I have a problem with paying people who aren’t actually doing something. I suppose I could look as a property manager as insurance, but I can’t make that mental leap.

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