Second Homes – Condo Hotels Make Sense

The convincing facts …

What if … Only 5% of the Baby Boom Generation learned about an economical way to own more than one retirement home? 75 million boomers will retire in the next 15 years, 5% equals a demand for 250,000 condo hotel units per year from 2020.

What if … you could buy a second home / condo, use it whenever you wanted, and have a professional (hotel manager) optimize rental income and minimize expenses while you were not in residence? Would this be more desirable than the alternative of doing it yourself for at least 5% of the population?

What if … you could deduct multiple houses instead of just 1 or 2?

What if … you could say you have condos in the city and in the country and on the slopes and coast? And do all these condos cost less than just a second traditional residence?

What if … all these properties appreciated as your home has?

The Opportunity Condo Hotel will be the choice of over 5% of the Baby Boom generation, and the trend is just beginning. The condominium hotel industry will also bring new life and prosperity to the hotel industry, making quality hotels and the best located hotels. more lucrative than ever. The Hotel Condo will separate real estate businesses from hotel services businesses and create a win-win situation for hotel owners and guests. Finally, retirees in the next decade expect more and may have a higher lifestyle through condominium hotels. This is the premise of this article.

THE POWER OF BOOMER GENERATION …

Why are Baby Boomers Important?

81 million US Baby Boomers * (born 1946-1964) began reaching retirement age (59 ½) in 2004. 28% of the US population is Baby Boomer. 2016 is the peak year with 4.3 million birthdays of 59 years. A Boomer turns 50 every 7.4 seconds in 2005!

* Many non-US boomers will choose to retire in the US to be closer to the best health care system in the world.

per year: 4,000,000

per day (4.0 mil / 365): 10,958

per hour (10.6 k / 24): 456

per minute (456/60): 7.1

The boomers began buying their second homes / retirees.

Michigan has 234,000 second homes, California has 237,000 and Florida has 483,000. 6.4 million people own a second home, more than 40% since 1995. By 2010, it is estimated that 10 million people have a second home, despite September 11, this is a 56% increase in just over 5 years and can be considered a booming market by any measure. More people will buy in the next 5 years than in the last 10 years, competition for desirable retirement homes will only intensify, valuation will follow suit. Low rates have helped fuel this housing market, but they are a smaller part of the equation than is commonly believed. Exchange rates have a much more dramatic inflationary effect on the resort area real estate sector.

The trend started in 2001 and intensified as rates fell in 2002-03, causing some boomers to "buy early." Real estate also became the "du jour" investment, when it became clear in 2001-02 that the stock market "was not returning to the level of return on investment" at which many boomers had built retirement savings expectations.

This lack of security and control in the stock market and its positive effect on real estate investing will be discussed later in this report.

In addition, the tax implications for second home ownership have helped to encourage second home ownership, says the Wall Street Journal. "In addition to low interest rates and demographic information, the second home market was aided by the Taxpayer Assistance Act. 1997, which established new rules under the old law, income taxes were deferred if the seller bought a new home of equal or greater value up to two years before or after the sale of the main home., sellers over 55 years can claim a one-time exclusion of $ 125,000. "

New rules revoked the mandatory deferral of gain and increased the exclusion to $ 500,000, provided a taxpayer owned and used the main residence for two of the five years prior to the date of sale of the home. In addition, the exclusion can now be claimed every two years.

These tax changes "freed" sellers from the pressure to negotiate to avoid a tax settlement. Instead, says a NAR spokesman, he encouraged many sellers to switch to more modest digs while using the remaining resources to buy second and third homes. The tax changes created a whole new form of & # 39; bargaining & # 39; property, where there is a tax advantage in buying a new home every 24 months, allowing for a zero-cost capital gain. For many savvy investors, this has created a real "home industry" in home launches.

"The second home market can accommodate 100,000 to 150,000 new homes per year over the next 10 years," estimates David Hehman, CEO of EscapeHomes.

But why second homes? As many professionals have found, technology allows us to work from anywhere. why not work somewhere beautiful, somewhere & # 39; like vacation & # 39 ;, at the cottage? The evolution of the home office turned to the cabin office.

The typical holiday home buyer is 55 years old and earned $ 71,000 in 2003, while investment property buyers had an average age of 47 and a profit of $ 85,700.

For properties purchased between mid-2003 and mid-2004, the average price of a vacation home was $ 190,000, compared to $ 148,000 for investment homes. In contrast to the latest available year-round price data for 2001, holiday homes gained 12.8% from $ 168,500 and investment homes rose 25.4% from $ 118,000.

Almost one in five second homes will become primary residences after retirement – 27% of vacation homes and 14% of investment properties. "In addition, buyers were looking to diversify portfolio investments," Mansell said. "This is now the most cited motivation to buy a second home." In listing the reasons why they bought second homes, respondents said there were some differences depending on the type of home. Overall, 30% of buyers wanted to diversify investments, 28% sought income (37% investment vs. 7% vacation homes), 14% wanted a personal or family retreat (29% vacation vs. 8% investment), 6% planned to use on vacation (16% on vacation versus 2% on investment) and 5% had extra money to spend.

"As the typical second-home buyer is a baby boom, it is likely that for the next decade, second-home sales will remain historically high," Lereah said. "Boomers are still at the height of their earning years and have the means and desire to buy vacation homes and investment properties." Ninety-two percent of all second home buyers see their properties as a good investment. In addition, 38 percent said they were likely to buy another home within two years, with 47 percent of investment buyers and 16 percent of holiday home buyers.

The September 11th effect and family values ​​are another unpredictable phenomenon that many experts observe when discussing the second domestic market. Theory says that when Americans were shocked by the events of 9/11, they wanted to create more time for the family to be together. and unite in vacation destinations where distant family members could come together as an entire unit. Drive-to destinations were the first to experience the effects on family tourism from 9/11. These resort locations within a two to five-hour drive of the metropolitan areas actually saw increases in occupancy immediately after 9/11. The theory is still evolving, but through my own research with boomers this effect has merit in the demand for the chalets. Drive-to vacation homes are still the fastest growing market.

Can the demand for second homes, resort properties and senior residences really be measured or is it just another hype version of real estate investing? A new NAR study shows that 23% of all homes purchased in 2004 were for investment, while another 13% were vacation homes. In addition, there was a record 2.82 million second home sales in 2004, up 16.3% from 2.42 million in 2003. The investment home component increased by 14.4% to 1, 80 million sales in 2004 from 1.57 million in 2003, while holiday home sales increased 19.8% to 1.02 million in 2004 from 850,000 in 2003.

The numbers have merit and factual measurement. Real estate values ​​in almost all areas of vacation, resort and retirement outperformed the general market by double-digit (alarming) rates. America's working communities are not only lagging behind, but in many cases falling in real value (when adjusted for CPI inflation).

(Note on inflation and currency: We often read reports about the rise in the value of assets, such as real estate, without discussing the cost of inflation in these increases or the exchange value of the currency used to value the asset. If the dollar falls in value 30% against other currencies, the value of real property, plant and equipment should increase correspondingly by 30% (if desired for foreign purchase) Real estate markets with high levels of foreign investment will appreciate rapidly, the dollar falls and falls if the dollar strengthens (Hawaii around the 90's.) If the Consumer Price Index (CPI) rises by 3%, the value of a house that will rise by 5% will actually only increase by 2%. be discussed more openly by our mainstream press, who by profession are journalists with a liberal arts background, not MBAs. media.)

Can these high rates of appreciation in second home markets really continue? Many experts believe that "yes!" It can sustain in the long run (not months, but years). The fundamentals of rapid appreciation amount to a supply that grows slower than demand. Supply in areas such as South Florida has been rapid (78,000 new or planned condo units entering the Broward / Dade County market by 2007), but material shortages and hurricanes have slowed growth and created a large amount of pent up demand. provide. In addition, the demand from foreign buyers in the Miami area is extremely high, meaning that these buyers are using a 20-30% stronger currency than last year. A 30% increase in property values ​​is easily absorbed in this environment.)

In areas such as Arizona and Las Vegas, water concerns and a lack of infrastructure and skilled labor have slowed the pace, but the growth rate is still impressive. Other scenic second-home destinations, such as mountain states, the Pacific Northwest and the Florida Keys, have environmental obstacles that raise barriers to entry and restrict supply. A tight supply in the face of demographically authorized demand is always a formula for rapid price appreciation (CA in the 1970s).

What goes up has to go down? Yes. But an increase of 20% per year for 5 years, followed by 5 years of stagnation or 10% loss, is still 5% + annual growth rate (worst case). If leveraged by 90%, the initial return on investment is still 44% per year. The hard part is making sure the best years are at the beginning … even hard is selling at its peak. It is estimated that between 40 and 90,000 new condominium hotel units will enter the market by 2008.

Demand for these units will exceed 1 million buyers, so the price of condominium hotel units may be much higher than currently expected.