I still miss the best investment I ever made. It was a summerhouse on Cape Cod, overlooking the Cleveland Ledge light in Buzzards Bay and the entry to Red Brook Harbor. A ring of lilacs stood to the Southwest, adding perfume to the prevailing breeze. In spring the scent was intoxicating, the light dazzling.
I've never felt that way about any stock I've ever owned--- even if it more than quadrupled in value as the Cape house did. I'd be willing to bet you haven't waxed sentimental about many stocks, either.
If you've ever been tempted to buy a second home, let me explain the economics. The expenses for owning are in two categories, operating expenses and financing expenses. While second homes have the same operating expenses as first homes--- taxes, insurance, utilities, and maintenance--- second homes usually cost less .
Why? Second homes are located in areas with plenty of appraised value--- but little demand for services. (Think Aspen, Nantucket, Hilton Head .) As a consequence, whether the house is on the shore or on the slopes, odds are its tax bill will be half of the rate paid by an urban or suburban house. The utility bills will be smaller because you won't be there as much. And maintenance expenses will be lower because you won't be putting the wear and tear on the inside of the house even if nature won't let up on the outside.
Divide the annual expense by its value as your private hotel and you'll know how many nights you need to stay there for it to be reasonable. If you can spend 30 to 60 nights a year at your second home, odds are it will be a bargain. If your free time is more limited, wait until you can make that kind of time.
Which leaves us with the financing expense.
Suppose you bought the house for cash. Then it would be a portfolio transaction, something you measure against competing opportunities. If the house appreciated at 5 percent a year, you'd have the possibility of a 5 percent return that would be tax-free if you made the home your primary home before selling it. That's a lot more fun than life insurance or municipal bonds.
You want to finance the house with a mortgage? Then it can be magical. At a 7 percent interest rate, your after-tax-savings cost will be no higher than 4.69 percent (assuming you're in the 33 percent tax bracket and are domiciled in a no-income tax state like Texas). For the 40 percent tax bracket the net cost of interest will be only 4.2 percent.
Since second homes are usually located in areas of rare beauty, they tend to appreciate faster than other homes. Achieve a 4 to 5 percent appreciation rate and your mortgage payment is magically transmuted into savings. You take cash out of your checking account and it eventually appears on the asset side of your personal balance sheet. Second homes may be the last simple tool for turning high-taxed earned income into low-taxed capital gains income.
you ever sell it? Someday. But there's a good chance you'll cry all the way to