During a hot tub party at my place at The Resort At Squaw Creek, I got to know a fellow owner who retired five years ago as a partner from a major law firm. We got to talking about the roller coaster ride we’ve had since purchasing our vacation properties 10 and 9 years ago, respectively. He told me something surprising after I asked him somewhat jokingly what he plans to do with his property now that global warming was over. After all, Lake Tahoe got a record ~23 feet of snow in #Janburied 2017!
He said, “Just continue to enjoy it. If you look at the latest listing prices, we’re back to even after an almost 50% fall. But I’d never sell because the property will be worth an insignificant amount as a percentage of my net worth by the time all is said and done. I’ll just leave the property to my kids to enjoy.”
Given this was a hot tub party, and not a personal finance 1X1 consulting session, I didn’t dig deeper into his finances. But given the retired lawyer was 20 years my senior with adult children, I realized I had just “seen the future.”
Vacation Property As A Percentage Of Net Worth
When I bought my vacation property in 2007, the purchase price was equal to roughly 25% of my net worth. Today, using the same purchase price, my vacation property is worth less than 8% of my net worth. Fast forward 10 years in the future, my Lake Tahoe property will account for less than 5% of my net worth if my net worth grows by a modest 4% per year. And by the time I’m 60 years old in 20 years like the law partner, the property will be worth just <3.5% of my net worth AND completely paid off.
Any asset that’s worth less than 10% of your total net worth starts feeling like a relatively insignificant amount of money. Think about it. Your 10% asset could lose 100% of its value, and you’d still have 90% of your net worth intact. Hence, my 1/10th rule for car buying has been a popular guideline because it helps protect consumers from their spendy selves.
I so happened to spend a significant 25% of my net worth on my Lake Tahoe vacation property right before Financial Armageddon hit. But if I had spent just 10% of my net worth on the property, I probably never would have started Financial Samurai in 2009 because there wouldn’t have been enough pain. Ah, thank goodness for always having a positive mindset!
Hopes And Dreams
What the ex-law partner said about passing his property down to his children really spoke to me since I’m planning to have a family of my own soon. Given his daughters are now 26 and 28, and he bought his condo 10 years ago, he lamented that he never got to spend as much quality time up in Tahoe with his family as he hoped. As teenagers, his daughters wanted to hang out with their friends somewhere else instead.
Since first coming up to Squaw in 2001, I’ve always imagined it to be a place where I could take my kids during their school holidays. During summer vacation, we can go hiking, mountain biking, boating, river rafting, kayaking, and water skiing. During winter break, we can go sledding after seeing who made the best snow angels. Lake Tahoe is magical.
Of course, not everything goes according to plan, but I’m someone who has the patience to think in 10-year increments. After all, I spent 11 years at my last firm and I’ve consistently written on Financial Samurai for eight years so far. Further, I’m now a varsity boys tennis coach because I want to see what it’s like working with teenagers at least 14 years before having one of my own! Perhaps through this new job, I can figure out a better way to relate to my future teenager so he will want to spend time with his old man.
The value of my vacation property will personally skyrocket if I’m able to fulfill my vision of hanging out with my little one up at The Resort. Neither he nor I would have a care in the world. When he grows up to be a big boy, he and his old man can carve down the leisurely blue run and talk our own stories as we soak our aching muscles in the outdoor hot tub.
Hopes and dreams are what keep me going.
A Vacation Property Is Always About Lifestyle
If you can view your vacation property as an investment in lifestyle instead of as a financial investment, you’ll find your asset much more rewarding. In order to never have your vacation property feel like a burden, I suggest spending no more than 10% – 20% of your net worth on a vacation property purchase price (not downpayment). I feel so much better now that my vacation property is worth less than 10% of my net worth versus when it was 25% of my net worth.
If you foresee a rapid increase in your income and net worth, then you can probably stretch your vacation home budget to 25% of your net worth. But I don’t recommend doing so based on all the worry and stress I had to go through. Buying a vacation property for enjoyment and then constantly worrying about whether it will financially ruin you is counterproductive.
Finally, before buying a vacation property, make sure you calculate how much you’ll actually be able to use the vacation property a year. Run a cost of ownership comparison to the cost of simply renting a nice place anywhere you want. Overestimating the usage time is quite common. The reality is that most people can only take off at most 4 – 6 weeks a year. Only if you’re unemployed, financially independent, or have a location independent business can you truly maximize your vacation property.
It’s been an amazing financial run since 2009. I’m sure some of you are far richer at this point in life than you could have ever imagined. Just make sure you never confuse brains with a bull market. Continue to maintain the financial discipline that got you here in the first place!
Invest In Real Estate Across The Country: Owning a vacation property is more a lifestyle choice and less of a good investment choice. If you want to make money in real estate, take a look at Fundrise, one of the largest real estate crowdfunding platforms that has investment opportunities all around the country. I foresee crowdfunding to attract a lot of capital to lower valuation, higher yielding projects around the country. Minimums are as low as $1,000, and you can invest in commercial real estate once available only to institutional investors are the extremely rich. I personally have $810,000 in real estate crowdfunding in markets outside of expensive San Francisco, Honolulu, and New York City.
Update for 2020 and beyond. I finally took my boy and wife up to our vacation property for the first time in July 2019 and it was magical!