HGTV recently aired an episode of their series Vacation House for Free focused on buying a second home/cabin in Lake Tahoe. The theme was to buying a dream cabin in Tahoe that would pay for itself. They referred to it as getting your home “for free.” Buying a cabin in Lake Tahoe definitely was a no-brainer for a real estate reality show. An episode focused on the concept of buying a second home that pays for itself with no carrying costs to the owner captured my attention. The buyers of this show had a budget for around $400,000 with $90,000 to put down. Being a real estate professional in the Lake Tahoe area for many years, I had a couple of observations:
First of all, most lenders want a minimum of 25% down for second home purchase, so, $90,000 would leave the buyers a few percentage points below this. Additionally, the buyers planned on using $50,000 of the $90,000 for renovations. This left the buyers with about 10% down. I haven’t seen a loan product in years that enabled a buyer to purchase a second home for 10% down. Maybe it exists, but if so, they needed to give that more insight as it is not the norm.
The second flaw that seemed evident was in the rental income that they were expecting. The numbers they talked about didn’t include management fees. Maybe the renters were going to rent on their own, but in such a case they would still have cleaning fees, for example. Since the buyers didn’t mention anything about renting the property themselves, I think the 30-50% rental management fee, depending on the structure of the agreement, that is deducted from gross income obviously needs to be factored in. They also did their math based on full weeks of rental income. Tahoe is very rarely week-long rentals, aside fom peak holiday periods. Tahoe is more of a weekend rental market. This might be a bit of a surprise come the end of their first year when they go to tally up their rentals.
In the show I also thought it was interesting that they showed the buyers as an example cabin that was a million dollar home. I am not sure how that was relevant. The sponsors were obviously Squaw Valley and Tahoe City. They kept talking about Tahoe City and showing pictures of Truckee. They also bought a house that is minutes from Northstar, yet the show said the nearest skiing was Squaw Valley- about 30 minutes away. I understand sponsors, so that didn’t really bother me, however it is worth noting that property values in our area vary depending on proximity to specific ski areas, amenity centers, and access to town/local communities.
I walked away from the show with the thought that most buyers should buy a second home property with long-term utility in mind. Buying for straight investment isn’t the best idea for many. Granted, we did just go through a real estate recession that allowed for some fantastic purchases by well-heeled real estate investors, but this is not always the case. Buying for utility, love of an area, family memories, experiences and for the long-term is really the best way to go.