Second Homes... Part I

Posted on September 2nd, 2010

A recent Wall Street Journal article indicated that a variety of developers of expensive vacation homes are responding strategically to the meltdown in their market.  In short, they are providing vacation home opportunities of the downsized variety.  ". . .building smaller less expensive homes in resort communities. . . this pitch may sound a little funny: 'affordable housing for the affluent.'"

The terms affordable and affluent have a variety of connotations.  To marketers "affordable" implies that those who can afford one also have a demand for a vacation home, for example.  Most millionaires can afford to purchase and maintain a vacation home.  Yet, as I mentioned in Stop Acting Rich, 64% of the millionaires surveyed never owned a vacation home, beach bungalow or mountain cabin, not even a lean-to or a tree hut in the woods. 

At least one developer understands that pricey vacation homes are not for everyone:  "the whole world doesn't live in second homes that are over $2M."  He's correct.  In 2006, the second home buyer had a net worth of approximately $380,000 and a median annual household income of $80,600.  Are you thinking of buying "an affordable second home" because you want to emulate the behavior of most millionaires?  Be careful.  Most people who own second homes are not millionaires.  Most millionaires rent instead of buying vacation homes.  In America, about 2.6 million millionaires [those households with investments of $1M or more] are in this category.  About 1.5 millionaires own vacation homes.  Not all of them rent these houses out. 

It seems that there are just not enough vacation homes owned by millionaires to rent to millionaires who don't own vacation homes!  Could it be that many millionaires who don't own vacation homes are renting them from those who are not affluent?

Within the same age and income cohort, who is better at transforming income into wealth?  Overall those who don't own vacation homes are more productive than those who do. 

The issue of affordability struck a cord with me.  I recall receiving two letters from a self made decamillionaire businesswoman in which she contrasted affordability versus demand.  Just being able to afford something is not enough she stated.  She has the means to buy but prefers rafting and kayaking over ocean cruises.  She prefers to invest in commercial real estate rather than in a vacation home.  She prefers to buy stocksrather than designer clothing.

No doubt some second home buyers have enhanced their wealth by having another home.  Yet far too often even investment driven buyers of second homes grossly underestimate the real costs in terms of buying, furnishing, maintaining, commuting to, renting and possibly selling a second home.  iIme is money.  Place a high price on your time, all that time it takes to shop for a second home, set up utility related services, pay bills and hire people to maintain your home.  Even renting your home takes time.And if you have a property management company handling and renting your home, you may pay up to 50% of the gross rent for this service. 

Could it be that property managers  know something that most owners of rental second homes do not?  Real estate property management is one of the most profitable businesses in America.  It has a profit margin of almost 40%; 86% of them generate profits.  If buying and renting a vacation home is so profitable, why don't all the real estate managers quit managing and start buying up every vacation property on the market?  They know that it is the owner who really takes the financial risk. 

Perhaps you are not motivated by profits.  According to an article published in Atlanta Magazine's Home, "owning a vacation home affords you prestige among peers, business associates and family members."  Webster's defines prestige as the power to command admiration or esteem. . . distinction based on achievement; having or showing success, rank, wealth, etc.  Do you want to command admiration instantly, distinguish yourself as being a brilliant achiever and be considered as being a wealthy person?  If the answer is yes, then, according to this article, all you have to do is buy a vacation home. 

There are a variety of reasons why millionaires don't own vacation homes.  Most self made millionaires don't need to collect "things" to define and demonstrate their achievements.  Also, most wealthy people have a wide variety of interests and activities.  There is a substantial correlation between the number of interests and activities that people are involved in and their level of financial wealth.  Some wealthy people feel that owning a vacation home would restrict them, obligate them to spend a lot of time there.  And if they do not spend much time there they feel guilty spending lots of dollars on something that is underutilized.  Most millionaires realize this without having to make the first mistake of purchasing a second home. 

Given the facts as I see them developers should not expect a significant demand from the affluent population for their downsized vacation homes.  For most millionaires, the decision is to own or not own a second home, not about the size or price of the offering.  

 Several of the vacation home developments which were mentioned in The Wall Street Journal were offshore.  Even in normal times it is not easy to market second homes that require a long distance commute.  Most millionaires who own vacation homes are family oriented and are purchasing a second home for family vacations including children, grandchildren, etc.  Buying is more a function of doing for others rather than for oneself.   Those who purchase a vacation home want it to be accessible and easy to reach for the entire family. 

Category: Studying the Wealthy
Tags: Stop Acting Rich, The Wall Street Journal, real estate,