By Professor Ricardo Ulivi, Ph.D.
February, 2014
A trend I have noticed recently is that baby boomers are buying vacation homes, where they can spend part of the year. What are the costs and benefits of this?
Do Emotions Justify a Large Investment?
Does it make sense to buy a vacation home? After all, you may make a large investment and not use it that much. Can it be justified? As an example of this dilemma, I will relate a personal story. My wife and I bought such a home in Buenos Aires about ten years ago. For the first nine years, we rented it out full time because we were too busy running our lives in Orange County to spend more than a few weeks in Argentina. However, when I turned 63, my wife asked me, “What are we waiting for?” We decided to go ahead and remodel the apartment and to try and spend more time down there each year. The remodeling was a lot of fun but expensive. I had overlooked the fact that when you buy a second home you need to also buy beds, sheets, towels, dishes, etc. What took us 35 years to accumulate in our primary home, we had to buy in a few months for the vacation home.
Our initial budget to remodel was $100,000 and we finished the project about 10% over the original estimate, which was excellent because we made a few last minute changes as work progressed. We went from having one full and two half baths to three and a half full bathrooms. Plus, we gutted the old fashioned kitchen and transformed it into a California style one (with an island in the middle, and a garbage disposal unit—a novelty in Argentina).
What We Under Budgeted
What we completely under estimated were the living essentials like split air conditioners (6!), towels, sheets, mattresses, beds, mirrors, sofas, chairs, dishes, cutlery, etc. Plus, we wanted to have a complete set of clothes in the apartment, so that we can travel light. All in all, cloning our lives in Buenos Aires cost us an additional $50,000. That was a big surprise.
How could we spend so much on furnishings? For one, we bought an antique mirror for over $3,000. An antique Russian-French sofa cost another $3,000 or so. And because it would not fit through the door, we had to hire a crew to lift it over the balcony—all the way up 8 floors! There were more and more other items, and before we knew it, we had just spent a ton of money!
How can we rationalize splurging for something we will use a few months a year? Financially, it’s hard to justify. In our particular case, it was more of an emotional decision than a financial one, plus we could afford it, so why not?
Between the original purchase price, the remodel and the furnishings, we have an investment of over $500,000 in an apartment we might use 8 weeks a year. My wife and I are relatively frugal people—we still have dinner at Souplantation on Sundays and use a coupon to lower the bill—so we find it difficult to have such a large investment just sitting and not producing anything. Furthermore, we have on-going operational costs. Our homeowner’s association fee is about $300 per month, utility bills run $100 a month, and property taxes and insurance add more. All in all, we expect to pay about $8,000 in direct operating costs each year, not counting regular repairs.
What to do now?
Leaving our emotions aside, we are considering starting a new adventure: turning the apartment into a part time hotel! Yes, rent it out to tourists on a weekly basis. There are some excellent websites that allow you to offer your vacation home to tourists around the world, and you can make money while doing it. Some popular sites include airbnb and vrbo (vacation rental by owners).
Setting up the logistics for turning your vacation home into a part time hotel is not easy. You need a local presence to meet the vacationers to give them a key to the property; you also need someone to do the regular cleaning, plus someone to review the condition of the apartment once the tourists leave and make any necessary repairs. You need a local presence, too, for when the inevitable happens: a toilet backs up, or a tourist doesn’t know how to turn on the TV set! Collecting the rent has become relatively easy, because that is all arranged by the website. They collect the payment from the tourist, and then they send you your share.
The big question in our mind is: is it worth it to turn our dream vacation home into a part-time hotel? There will be a lot of repairs to do, plus lots of additional wear and tear. Furthermore, we designed and furnished the apartment for us, and we are careful people. We cannot expect tourists to take as much care with our belongings as we do, and that concerns us. We may have spent too much in buying high quality furnishings just to turn the apartment into a part-time hotel.
Other questions arise: we have three bedrooms (with three queen size beds) and three full bathrooms in the apartment. Theoretically, that means you can put six, or more, people in the apartment. Do we want to have that type of crowd in our “dream” vacation home every week? What are the potential pitfalls of doing this? We don’t have the answers.
Did We Make the Right Decision?
In sum, we embarked on buying, remodeling and furnishing an apartment in Argentina for purely emotional reasons. Now, cool heads are prevailing, and we are realizing that we have one heck of a big investment that potentially will sit empty, producing no income yet costing money each month. Therefore, we are considering converting it into a part-time hotel. Is this a smart move? I will tell you in a year.
If you are looking into buying a second home, I hope our experience will help you. It’s not cheap, but it can add lots of joy to your life.
If you have a friend who needs help with retirement planning, I would appreciate it if you recommend my services. Ask them to call me at 714.771.6000. And if you are planning a trip to Buenos Aires, and want to stay in the best location of the city, in a beautiful apartment, let me know. We would love to rent out our apartment for a few days!
