When my wife and I began to scout areas for vacation properties, I noticed some places where supply began to flatten out after going up for a while. So we bought a luxury property in great condition. The seller was needing to sell, so I wrote an offer price 20% below the tax-assessed value. After haggling, I bought the property for 17% below value! The market turned and in 12 months we sold that vacation property for $100,000 profit.

Vacation homes on the average appreciate twice as fast as other single family homes. You can get a tremendous return off that investment. And there will be 3.6 million (1,000 per day across the U.S.) second homes purchased in the next decade. In other words, demand will be high. That demand is primarily coming from baby boomers and the “echo boomers” (children of the baby boomers).

Whenever you get into a real estate market, it’s important to understand what drives demand for that market. There are seven things specifically that drive demand for vacation properties:

    1. The limited quality choices for vacation properties drives demand. There are not infinite areas to build, causing what’s already out there to be in demand.
      • I personally enjoy ski properties, but the U.S. Forest Service is not really issuing any more permits to build in the U.S. The properties already in ski areas are then considered a limited quality choice because they are not making any more of that land or those properties.
      • Another limited quality choice is waterfront and beachfront properties. Whether it’s by an ocean or a lake, waterfront properties are hot commodities. We can’t exactly go build more ocean, and so can’t build many more properties.
      • There are only so many large metro areas in America of a million or more. And well-selected vacation properties close to those will create demand.
    2. The amazing Return on Investment also drives demand. People want to make money.
      • Real Estate vs. Stocks. If I had $10k to invest and invested it in the stock market. That $10k would buy me $10k of stock. And with a 10% annual return, I would get $1000 annually. But if I purchase real estate, because of the power of leverage, with $10k down, I can secure a $100k property. If that property goes up 10%, then I just made make back my investment. People are interested in this 100% possible return.
    3. Historically Low Mortgage Interest Rates will be with us for the foreseeable future–so why not?
      • The opportunity to get financing to own a property at a reasonable rate per month creates demand. And it makes real estate a good investment! Real Estate is all about finance. If you can get good terms in your financing, then you’re starting off well. The caring cost of holding a property is obviously much lower when the interest rates are low.
    4. The 75 Million Baby Boomers out there are really into vacation homes.
      • Simply put, they’re looking for retirement homes.
      • Baby Boomers have enjoyed the appreciation of their home real estate. They are using their home equity that is locked up, by using a cash-out refinance loan, to buy new property.
      • Interestingly, there is also European demand. I overheard a German couple talking once about real estate in America and the properties they owned in the U.S. They also mentioned that many friends from Europe had been buying property in the U.S. for vacation homes.
    5. Supply is diminished because people are living longer and occupying and using their second homes longer.
      • A good analogy is in Pro Sport Teams. A quality 34-year-old player is preventing the new 24-year-old from making the team! There are only so many positions on a team, just like there are only so many properties in vacation areas. So even though the demand to get on that team is high, because we are healthier longer now, spots don’t open up very often.
      • I looked at property in a mountain ski area once, but the owners decided to give the home to their children. That property is one of the best in that area for views and won’t be available for years. All this causes supply to be diminished.
    6. People are taking advantage of the Primary Residence Capital Gains Exemption of $500,000.
      • Baby Boomers are downsizing by selling their primary residence, which has appreciated for a period of years, and moving to a smaller primary residence. They are then utilizing the rest of their gains to purchase a second home.
      • The government will allow a marred couple to take a $500,000 Capital Gains Exemption. You can profit on the sell of any home that you’ve owned for the last 5 years and lived in it 2 of those five years. You pay no taxes even though you profited on that property. Baby Boomers are using this!
    7. Ability because of technology to be productive at a vacation location.
      • People no longer have to stay close to work to work. Now we can sit on a deck and look out at the ocean, or lake, or mountain, and keep working.

Demand for vacation properties is continuing to grow and prove these properties are a great investment. What vacation area would you want to own a property in?

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