RealTMOR Asset Mgmt LLC and RealTMOR Apartment Mgmt LLP
Properties in beautiful locales offer immense pleasure to their owners by providing great functionality and potential “rejuvenation effects”. There is definitely a “status-symbol” angle associated with owning real estate in exotic/desirable locales. Be it, the Hamptons NY, Aspen CO, Cape Cod MA, Gstaad Switzerland, Shimla India, Goa India, Montego Bay Jamaica or any such gorgeous location. A lot of these places are the stomping grounds of the rich and famous and hence have aspirational value. There are real merits to owning villas, ranches, beach-houses, farm-houses, cabins, ski-chalets et all in vacation areas. In addition, these properties could be financially lucrative for the owners. But, in my opinion, the money spent to acquire this real estate should not come from investible capital and an investment “it is not”.
I believe, that owning such “trophies” should be funded from “excess money” that one typically has (if there is any such thing as excess money). In addition, these properties owing to their environment/function would require significant maintenance. That should come from disposable income and not investible/essential-use income. One could consider the expense associated with the acquisition and maintenance of such properties as coming out of future vacation budgets. For the uber-rich (UBS defines that category as a family having a net worth in excess of $30MM) owning vacation-homes may not burn a hole in their finances or compromise their investment strategy.
It is important to note, that the more “chic” a vacation spot the better its real-estate value holds. So, these properties could definitely be viewed as a store of value. Additionally, in the popular holiday destinations, even during times of financial constraints, the value of these properties doesn’t fall off a cliff. These properties can be rented to short-term tenants during the high-tourist season to generate additional cash flow.
But all these points still DON’T make these a good investment from investible capital. Each portfolio would have some allocation to different asset classes. So, investing your real-estate investment funds into holiday properties is sub-optimal. There are compelling reasons:
- Cap Gains: there is no doubt that, in general, prime city areas close to the corresponding vacation destination will demonstrate better capital gains (on an annual basis over a reasonable time-frame). There are multiple examples to validate this fact:
- Comparing Boston MA and Cape Cod MA (Cape Cod is where rich and famous, including many US Presidents, vacation) over the last 7 years: the prices in Boston have grown at a CAGR of 5%+ while in Cape Cod prices have been flat/down.
- Comparing NYC and the Hamptons NY (the Hamptons is where Wall Street folk vacation) over the last 10 years: NYC prices have grown at a CAGR of 2% while in the Hamptons median sale prices have been flat/down. This is especially telling because 2006-2007 is when real estate prices in the US peaked. The NYC market has recovered from the post-bubble crash in 10 years and has now beaten peak prices. This data can be obtained from various public sources including local realty firms.
- Comparing Geneva to Gstaad (Gstaad is a destination of choice for European elite) over the last 5 or 6 years: the prices in Geneva have demonstrated a CAGR of 4% or so while the prices in Gstaad have a CAGR of -0.5%. This information can glean from research provided by Swiss financial firms.
- Comparing Delhi to Shimla or Mumbai to Lonavala/Goa over the last 10 years: Indian real estate pricing data (historical/current) is hard to obtain, particularly for smaller towns. But, by extrapolating anecdotal data (from real-estate websites) and making inferences from large city data (provided by Indian government sources) one can get “some” visibility. 10-year CAGRs in Mumbai have been 10+% while in Thane, Panvel, and Pune 7%-9%. Similarly, 10-year CAGRs in Delhi have been 7% and NCR is the best performing real estate market in North India. One can infer that prime Indian cities have outperformed other areas.
- There will always be the odd city or area that will be an outlier to this analysis but that is an exception, not a norm.
- Yields: vacation real estate can be rented out to short-term vacationers, and now with Airbnb etc, this has become easy/convenient. However, vacation areas tend to be seasonal and in many places getting year-round rentals is tough. During the high season, the rentals will command premiums but during the low season, there will be long vacancy periods or discounts. This normalizes yields when compared to non-seasonal “prime” locations. Short-term rentals require high levels of furnishings/appliances and maintenance/owner attention. The properties in seasonal/vacation locations need to be maintained well and that can be expensive/time-consuming. Gardens/farms need to be properly cared for, snow and rain measures need to be taken and beach-front properties have their own challenges. Care-takers must be employed, property managers must be hired and maintenance crews should be accessible to spruce up the property between rentals. These issues not only command owner attention but also raise costs and adversely impact yields.
- Liquidity: the buyer universe for specialized properties tends to be limited. Also, these properties command a high absolute price due to its locales, exotic reputation etc. Hence, it is difficult to sell these properties in a timely fashion. Days on market for such properties tend to be disproportionately higher than those for apartments in the “city”.
These are some financial disadvantages of owning vacation real-estate for the non-uber rich. Visiting the same place repeatedly, because it is available/economical, WILL get boring after a point and feels like a forced vacation. With current hectic, urban lifestyles it is very hard to get away as frequently as one would like to. Then one feels that the vacant/beautiful property is being wasted. There are maintenance related issues that one may need to attend to when one is at the property and then it doesn’t really feel like a vacation. There are many disadvantages that can be listed but one gets the gist.
Lastly, time-share companies have been and will continue to sell their product as sensible/economical because the customer has access to, and by default owns multiple properties/locations. They market the concept of “your ownership of property for a few days per year”. Further, they call it an investment because they say that “the time-share can be sold” whenever required. All these points are a fallacy and owning time-shares is NOT the same as owning your own vacation property. This is lateral to this discussion but somewhat connected, hence I bring it up.
If a “regular” family has a finite sum to invest there are many better investment avenues than vacation real estate. If one doesn’t have enough capital to invest in real estate of a prime (Tier 1) city then explore Tier 2 or Tier 3 cities, nationally or globally. That would work better. So, if one decides to buy a nice vacation property do it for good personal reasons and not as a financial investment.