Should I Buy a Vacation Home in California During a Pandemic?
Update – When we first posted this article in 2020, the vacation home market was going baaa-nanas. Lately, we’ve heard from a whole new crop of clients who are wondering if anything has changed – should they take the leap now and buy a vacation home in California?
In this update, we’ll help answer that question by looking at:
- The current state of the vacation home market in Nor. Cal. and what that means for buyers
- The buying frenzy of 2020
- Pros of investing in a vacation home
- Cons of investing in a vacation home
Today’s vacation home market
Although recent wildfires and drifting smoke slowed Northern California’s vacation home sales in July and August, we’re back to bidding wars and speedy sales everywhere from Tahoe and Truckee to Napa Valley and The Sea Ranch on the Sonoma Coast.
For example, this 3-bed/3-ba Sea Ranch beauty was listed at $1.975 million in September, garnered four offers, and sold for a whopping $2.426 million in just two weeks, according to representing Realtor Elisabeth Watson. And in South Lake Tahoe, a 3,016-sq.-ft. redevelopment opportunity at Regan Beach garnered 12 all-cash bids and is heading to close for 20% over the list price, says representing Realtor Linnette Edwards.
Demand outpaces supply, which is great news for sellers who are ready to cash out.
For buyers, our No. 1 tip is to partner with a real estate agent who intimately knows the local market and is well-versed in hyper-competitive, Bay-Area-esque bidding.
(This is probably a good time to mention that Bay Area-based Abio Properties also has agents serving The Sea Ranch and Tahoe region!)
Déjà vu compared to 2020
Let’s hop in a time machine and revisit the craziness that was summer 2020. Here’s our report from July 2020, when national vacation homes sales had jumped by 16%…
The vacation home market was H-O-T in Northern California, where buyers who were tired of being cooped up during the pandemic were escaping to rural and coastal getaways like Tahoe, the Sierra Foothills, The Sea Ranch, and Russian River.
Many second-home buyers were Bay Area city dwellers looking for bigger houses and wide-open spaces. They were remote workers who weren’t tied to an office, and their kids were going to school virtually. With interest rates at a historic low, there wasn’t a more popular (or stranger) time to buy a dream vacation home in California.
In mid-July 2020, Abio Properties co-founder Linnette Edwards represented a home in Arnold near Bear Valley ski resort and lakes that attracted seven bids in less than a week. It sold with a no-contingencies offer that was $255,000 over the asking price of $995,000.
“With inventory tight and interest rates low, buyers are literally coming out of the woodwork, including many young buyers tired of living and working, and even home-schooling, in their 800-square-foot apartments,” Linnette told the Realty Times.
Homes at The Sea Ranch on the Sonoma Coast were moving “faster than they have since before the Great Recession,” said Abio’s Elisabeth, who owns a home in Sea Ranch, splitting her time between there and the East Bay and representing buyers and sellers in both regions.
Tahoe was booming, too. One real estate investor told us, “the top of the real estate market has completely gone bonkers. Everything up here is selling. As a matter of fact, prices in Tahoe are probably more than they were before COVID.”
Well, here we are today looking at pretty much the same market in 2021. The question is, should you jump in and grab your own piece of vacation home paradise? If you’re on the fence, we suggest you make a good ol’ fashioned pros and cons list. We’ll help you…
Pros of buying a vacation home
- Live and work from your favorite place on Earth.
- Enjoy all the comforts of home (no lumpy hotel pillows).
- If you know where you want to retire, you can get in early.
- It’s a path to homeownership for big city renters who can’t afford big city real estate. Keep your urban rental for weekdays and escape to your rural resort house on weekends.
- Score some tax deductions if you rent out the home to other vacationers.
- Reap a return on your investment when the property value rises.
- Make memories!
Live and work from your favorite place on Earth
If we’ve learned anything from this pandemic (besides how to wash our hands properly), it’s that the “employees are more productive when they go into the office” philosophy might be a myth. For most white collar workers, all they need is high-speed, fiber optic internet service to be efficient from anywhere. (BTW, this blog post is being written from a backyard hammock.) Zoom is the new conference room. Slack is the water cooler.
Enjoy all the comforts of home
Owning a vacation home means spending less on hotels and restaurant meals. It means cooking in your own kitchen that you stock with the pans and spices you love. It means keeping a set of vacation clothes in a closet so you can pack light for each trip. It means you have a television (or none) and sound system set up just the way you like it. The sheets are yours. Your pets are welcome. If all that is important to you, buying a vacation home is the right choice.
You know where you’re going to retire
Forward-thinking home buyers purchase a second home in the place they want to retire before they retire for ease of financing and relative financial flexibility. If you buy your retirement home while you’re still working, you might be better able to qualify for financing, get a head start on the mortgage, and spend some time in your new community to make sure it’s really right for you.
It’s a way for city dwellers to buy their first property
If you are a longtime renter in an expensive metro area like San Francisco – and especially if you have a low rent-controlled apartment – you may never be able to afford to buy a house. (The median listing price in SF is $1.3 million!)
But you might have enough savings for a moderate home in less expensive Sonoma County, Shasta, or the Sierra Foothills that could become your weekend and vacation retreat, and maybe your retirement home someday.
Elisabeth works with buyers who live in rent-controlled apartments in San Francisco but love the change of pace – and the equity – that their vacation home provides.
Tax advantages if you rent it out
Yes, you will pay tax on rental income if you rent your home for more than two weeks a year. But the IRS allows deductions for rental expenses, including maintenance, utility bills, and insurance.
Location, location, location
If you buy in a rising hot spot, your investment might gain significant value.
Wonder which Nor. Cal. markets are climbing?
- In South Lake Tahoe, the median home price leaped 50% to $737,000 this spring compared to spring 2020. And Truckee, which saw an unprecedented increase in San Francisco transplants, gained 63% for a median price of $1.2 million, the San Francisco Chronicle reported.
- In Incline Village-Crystal Bay, a luxury market, the median sales price has tripled year over year, hitting $2.53 million this spring.
- At The Sea Ranch, the median sales price is up an astounding 61% compared to last year, hitting $1.6 million.
- Napa County saw median sales prices rise from $803,000 in summer 2020 to $925,000 in summer 2021.
Of course, now you’re probably wondering if these markets have hit the ceiling. Well, as long as demand keeps outpacing supply – as long as urbanites keep buying up second homes – there are no clear indicators these markets have topped out.
You’ll create memories that last a lifetime
You can’t put a price on all the holidays, birthdays, family vacations, and girls’ weekends that you’ll share in your second home with friends and family. Imagine all the s’mores melted. The puzzles completed. The wine bottles emptied. The meals cooked together while singing and dancing à la “The Big Chill” (gratuitous ’80s movie reference).
Cons of buying a vacation home
- Your financial planner might hate the idea.
- Ongoing property maintenance costs time and money.
- Renting it out probably won’t make you rich.
- Some communities don’t allow you to rent out your vacation home.
- You’ll feel obligated to vacation only there.
If you search online for advice about investing in a home-away-from-home, you get discouraging headlines like “Reasons Why Buying a Vacation Home Is No Holiday” and “Don’t Buy a Vacation Home.” We certainly aren’t saying that here, but you should consider the following issues before diving in:
Your financial planner might hate the idea
A good financial advisor will look at whether this second home will eat into your retirement savings and ask if you considered not only the purchase price but also the costs for insurance, property taxes, and property management.
Know that lenders often require a higher credit score and larger down payment than on a first home.
Three common ways to finance a second home are:
- Refinance your first home.
- Get a home equity line of credit on your first home.
- Take out a conventional loan for the second home.
Unless you can pay all cash, which a lot of people apparently can these days.
During January-April 2021, all-cash sales rose to 53% of all vacation home purchases, according to the National Association of Realtors. In comparison, 22% of all existing-home sales were cash sales during that period. (However, keep in mind that the national median price for a second home was about $320,000 – which doesn’t exactly reflect our dizzying California prices.)
Maintenance costs time and money
Owning a property means taking care of it.
Whether you buy an oceanfront cottage or a ski cabin, ongoing maintenance will be part of the deal. Ocean air and wind can peel paint, rust metal, and leave a salty haze on windows. Mountain homes must be winterized so pipes don’t freeze and burst, roofs need regular inspection, and chimneys need cleaning. Lake houses need new docks to replace rotting ones.
It’s not uncommon for buyers who are closing in on a vacation home to get spooked by potential maintenance costs and drop out.
Plan to rent it out part-time? It won’t make you rich
Renting your vacation home when you’re not there can be a great way to pay down the mortgage. If you are lucky, you’ll break even or make a little cash.
If you aren’t lucky, renting out the place will cost you money.
Consider expenses like monthly utility bills, cleaning fees, restocking, routine maintenance, and ongoing wear-and-tear by strangers. A property management company can help you with those headaches for a fee of about 30% of the rental price (or more). Linnette, who represents the occasional home seller in Tahoe, urges owners also to consider the cost of a good umbrella insurance and liability policy.
Wait, are you even allowed to rent out your vacation property?
Learn the laws of the land before you buy because local tolerance for short-term rentals is shrinking in certain tourist hubs. Bans are popping up in areas including South Lake Tahoe and Sausalito. Elsewhere in California, cities including San Francisco, Santa Monica, and Palm Springs have added a patchwork of regulations.
The lonely planet just got a little lonelier
You know that desire you once had to explore new places? Well, your passport might start gathering dust because you feel committed (financially and emotionally) to your vacation home.
The bottom line
Still can’t decide whether to buy a vacation home now? Elisabeth of Abio summed it up like this:
“The real reason to buy a second house is that you are in love with it.”
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Do you have questions about where to buy a vacation home in Northern California? Get in touch with Abio Properties experts at 888.400.ABIO (2246) or hello@abioproperties.com.
