Should I Buy a Vacation Home in California During a Pandemic?
The vacation home market is H-O-T in Northern California, where buyers who are tired of being cooped up during the pandemic are escaping to rural and coastal getaways like Tahoe, the Sierra Foothills, The Sea Ranch, and Russian River.
Many second-home buyers are Bay Area city dwellers looking for bigger houses and wide-open spaces. They are remote workers who aren’t tied to an office, and their kids likely are going to school virtually in the fall. With interest rates at a historic low, there isn’t a more popular (or stranger) time to buy a dream vacation home in California.
If you’re in the market for a holiday home, be warned: They are going fast.
In mid-July, 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’s pending with a no-contingencies offer that is $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 recently told the Realty Times.
Homes at The Sea Ranch on the Sonoma Coast are moving “faster than they have since before the Great Recession,” said Abio Associate Broker Elisabeth Watson, who owns a second home and represents buyers and sellers there.
Tahoe is 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.”
The Wall Street Journal reported that during the past few months, wealthy West Coasters have been flooding resort areas up and down the state – and beyond. Agents were quoted from “on fire” markets including Malibu, Napa, Pebble Beach, and Truckee.
If you are thinking about buying a secondary or vacation home in California, you should know it’s not all cake. Here’s what you should consider:
You can work from anywhere
If we’ve learned anything from this pandemic (beside 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.
You get 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 want 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 price in SF is nearly $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 some day.
Elisabeth of Abio 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 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 an up-and-coming hot spot, your investment might gain significant value.
Wonder which locales are hot? The vacation rental management website Vacasa studies the top 25 U.S. destinations to buy a vacation home, based on median home cost and capitalization rates (potential return on investment). In 2019, one California town made the list: Fort Bragg, where the median home sale price was $509,500 and the capitalization rate was 5.9%
See the full Vacasa report here.
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).
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 these 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 mortgage rates are higher on second homes. And 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, or take out a conventional loan for the second home.
Unless you can pay all cash. Nearly 30 percent of vacation homebuyers pay upfront, according a 2017 report from the National Association of Realtors. However, keep in mind that the national median price for a second home was about $200,000 – which probably doesn’t reflect our sometimes 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.
Still can’t decide whether to buy a vacation home? Elisabeth summed it up like this:
“The real reason to buy a second house is because you are in love with it.”
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 firstname.lastname@example.org.