| The Compelling Facts... | | | | Nearly one out of five second homes will become |
| What if... Just 5% of the Baby Boom Generation | | | | primary residences after retirement - 27 percent of |
| learned of a cost effectice way to own more than 1 | | | | vacation homes and 14 percent of investment |
| home in retirement? 75 million boomers will retire over | | | | property. "In addition, buyers were looking to |
| the next 15 years, 5% equals a demand of 250,000 | | | | diversify portfolio investments," Mansell said. "This is |
| condo hotel units per year, every year unitl 2020. | | | | now the most frequently cited motivation for |
| What if... you could buy a second home/condo, use it | | | | purchasing a second home." In listing the reasons why |
| when you wanted, and a professional (hotel | | | | they bought second homes, respondents said there |
| manager) optimized the rental income and minimized | | | | were some differences depending on the type of |
| the expenses while you were not in residence? | | | | home. Overall, 30 percent of buyers wanted to |
| Would this be more desirable than the alternative of | | | | diversify investments, 28 percent sought rental |
| doing-it-yourself for at least 5% of the population? | | | | income (37 percent investment vs. 7 percent |
| What if... you could deduct several homes instead of | | | | vacation homes), 14 percent wanted a personal or |
| just 1 or 2? | | | | family retreat (29 percent vacation vs. 8 percent |
| What if... you could say you have condos in Town | | | | investment), 6 percent planned to use for vacations |
| & Country and on The Slopes & Shore? | | | | (16 percent vacation vs. 2 percent investment), and 5 |
| And all these condos cost you less than just one | | | | percent had extra money to spend. |
| traditional second home? | | | | "Because the typical second-home buyer is a baby |
| What if... all these properties appreciated like your | | | | boomer, it's likely over the next decade that |
| home has? | | | | second-home sales will remain historically high," Lereah |
| The Condo Hotel opportunity will be the choice of | | | | said. "The boomers are still in their peak earning years |
| more than 5% of the Baby Boom Generation, and | | | | and have both the wherewithal and the desire to |
| the trend is just beginning. The condo hotel industry | | | | purchase vacation homes and investment properties." |
| will also breath new life and prosperity into the hotel | | | | Ninety-two percent of all second-home buyers see |
| industry, making quality and 'the best located' hotels | | | | their property as a good investment. In addition, 38 |
| more profitable than ever. Condo hotel will separate | | | | percent said it was very likely they'd purchase |
| the real estate business from the hotel service | | | | another home within two years, breaking down to 47 |
| business and create a win-win for condo hotel | | | | percent of investment buyers and 16 percent of |
| ownership and hotel guests. Lastly, retirees of the | | | | vacation-home buyers. |
| next decade will expect more and be able to afford | | | | The 9/11 effect, and family values is another |
| a higher lifestyle through condo hotel. These are the | | | | unpredicted phenomenon that many experts sight |
| premise of this paper. | | | | when discussing the second home market. The |
| THE POWER OF THE BOOMER GENERATION... | | | | theory says that as Americans were shocked by the |
| Why are Baby Boomers Important? | | | | events of 9/11, they wanted to create more 'family |
| 81 million US Baby Boomers* (born between 1946-64) | | | | together time' and come together in vacation |
| began to reach retirement age (59 ½) in 2004. | | | | destinations where far-flung family members could |
| 28% of the US population is a Baby Boomer. 2016 is | | | | rejoin as a whole unit. Drive-to destinations were first |
| the peak year, with 4.3 million 59 year old birthdays. | | | | to experience the effects on family-tourism from 9 |
| A Boomer turns 50 every 7.4 seconds this 2005! | | | | 11, these resort locations within a 2-5 hour drive from |
| *Many non-US Boomers will choose to retire in the | | | | metro areas actually saw increases in occupancy |
| USA to be closer to the world's best health care | | | | immediately following 9/11. The theory is still evolving, |
| system.per year: 4,000,000per day (4.0 mil / 365): | | | | but through my own surveys of boomers, this effect |
| 10,958per hour (10.6 k / 24): 456per minute (456 / | | | | has merit on cottage demand. Drive-to vacation |
| 60): 7.1 | | | | cottages is still the fastest growing market. |
| Boomers have just begun buying their second | | | | Can the demand for second home, resort properties |
| retirement homes. | | | | and retirement residences be truly measured or is it |
| Michigan has 234,000 second homes, California has | | | | just another version of real estate investment hype? |
| 237,000 and Florida has 483,000. 6.4 million people | | | | A new study by NAR, shows that 23 percent of all |
| own a second home, up over 40% since 1995. By | | | | homes purchased in 2004 were for investment, while |
| 2010, an estimated 10 million people are expected to | | | | another 13 percent were vacation homes. In addition, |
| own a second home, despite 9/11, this is a 56% | | | | there was a record of 2.82 million second home sales |
| increase in just 5 more years and could be considered | | | | in 2004, up 16.3 percent from 2.42 million 2003. The |
| a boom market by any measure. More people will | | | | investment-home component rose 14.4 percent to |
| buy in the next 5 years than have purchased in the | | | | 1.80 million sales in 2004 from 1.57 million in 2003, while |
| last 10 years, competition for desirable retirement | | | | vacation-home sales rose 19.8 percent to 1.02 million |
| residences will only intensify, appreciate in values will | | | | in 2004 from 850,000 in 2003. |
| follow suit. Low rates have helped fuel this real | | | | The figures have merit and factual measurement. |
| estate market, but they are a smaller part of the | | | | Real estate values in nearly all 'vacation, resort, and |
| equation than is commonly believed. Currency | | | | retirement' areas have out paced the overall market |
| exchange rates have a much more dramatic | | | | by double digit (alarming) rates. The working |
| inflationary effect on resort area real estate. | | | | communities of America are not only lagging, but in |
| The trend began in 2001, and intensified as interest | | | | many cases falling in real value (when adjusted for |
| rates fell in 2002-03, causing some boomers to "buy | | | | CPI inflation). |
| early". Real estate further became the investment | | | | (A note about inflation & currency: All too often |
| "du jour" as it became clear in 2001-02 that the stock | | | | we read reports about the increasing value of assets |
| market was 'not returning the level of investment | | | | like real estate without any discussion of the cost of |
| returns' that many boomers had built retirement | | | | inflation in these increases or the exchange value of |
| savings expectations around. | | | | the currency being used to value the asset. If the |
| This lack of security and control in the stock market, | | | | dollar falls in purchasing value by 30% against other |
| and its positive effect on real estate investment, will | | | | currencies, the value of real fixed assets should |
| be discussed further in this report. | | | | correspondingly rise by 30% (if they are desirable for |
| In addition, tax ramifications for second home | | | | purchase by foreigners). Real estate markets that |
| ownership has helped encouraged second home | | | | have a high level of foreign investment will appreciate |
| ownership says the Wall Street Journal "In addition to | | | | quickly as the dollar falls, and fall if the dollar |
| low interest rates and demographics, the | | | | strengthens (Hawaii circa 1990s). If the Consumer |
| second-home market has been helped by the | | | | Price Index (CPI) rises by 3%, then the value of a |
| Taxpayer Relief Act of 1997, which established new | | | | home that rises by 5% has truly only increased by |
| rules for the treatment of a capital gain on a principal | | | | 2%. It is disturbing to this author that this is not |
| residence. Under the old law, taxes on gains were | | | | more openly discussed by our mainstream press, |
| deferred if the seller bought a new home of equal or | | | | who by profession are journalists with liberal arts |
| greater value up to two years before or after the | | | | degrees, not MBAs. Watch the true inflation-adjusted |
| sale of the primary home. In addition, sellers over age | | | | appreciation rate, no the media hype.) |
| 55 could claim a one-time exclusion of $125,000." | | | | Can these high rates of appreciation in second home |
| New rules repealed the mandatory gain-deferral and | | | | markets really continue? Many experts believe, "Yes!", |
| increased the exclusion to $500,000, as long as a | | | | it can sustain for a long run (not months, but years). |
| taxpayer owned and used the principal residence for | | | | The fundamentals of rapid appreciation equate to |
| two of the five years preceding the sale date of the | | | | supply growing slower than demand. Supply in areas |
| home. Plus, the exclusion now can be claimed every | | | | such as South Florida have been rapid (78,000 new |
| other year. | | | | or planned condo units entering the Broward/Dade |
| These tax changes "liberated" sellers from the | | | | county market by 2007), but material shortages and |
| pressure to trade up to avoid a tax hit. Instead, says | | | | hurricanes have slowed the ramp-up and created a |
| an NAR spokesman, it has encouraged many sellers | | | | large amount of pent up demand chasing reduced |
| to trade down to more modest digs, while using the | | | | supply. Also, the foreign buyer demand in the Miami |
| remaining proceeds to purchase second and third | | | | area is extremely high, this means these buyers are |
| homes. Tax changes have created a whole new | | | | using currency that is 20-30% strong than last year. |
| form of property 'trading', where there is a tax | | | | A 30% rise in property values is easily absorbed in |
| advantage to buy a new home every 24 months, | | | | this environment.) |
| allowing a capital gain profit with zero tax cost. For | | | | In areas such as Arizona and Las Vegas, water |
| many savvy investors, this has created a true | | | | concerns and lack of infrastructure and skilled |
| 'cottage industry' in home flipping. | | | | laborers have slowed the rapid pace, but the grow |
| "The second-home market can accommodate | | | | rate is still staggering. Other scenic second home |
| 100,000 to 150,000 new housing starts a year over | | | | destinations, like the mountain states, Pacific |
| the next 10 years", estimates David Hehman, CEO of | | | | Northwest and Florida Keys have environmental |
| EscapeHomes. | | | | hurdles which raise the barriers to entry for |
| But why second homes? As many professional | | | | developers and restrict supply. A restricted supply in |
| people have discovered, as technology allows us to | | | | the face of demographically empowered demand is |
| 'work from anywhere'; why not work from | | | | always a formula for rapid price appreciation (CA in |
| someplace beautiful, someplace 'vacation-like', from | | | | 1970's). |
| the cottage? The evolution of the home office has | | | | What goes up must come down? Yes. But a 20% |
| turned to the cottage office. | | | | per annuim rise for 5 years, followed by 5 years of |
| The typical vacation-home buyer is 55 years old and | | | | stagnation or a 10% loss, is still 5%+ annual growth |
| earned $71,000 in 2003, while investment-property | | | | rate (worse case). If leveraged at 90%, the return |
| buyers had a median age of 47 and earned $85,700. | | | | on initial investment is still 44% per year. The hard |
| For properties purchased between mid-2003 and | | | | part is making sure the best years are in the |
| mid-2004, the median price of a vacation home was | | | | beginning... even hard is selling at a peak. It is |
| $190,000 compared with $148,000 for investment | | | | estimated that there are between 40-90,000 new |
| homes. In contrast with the last available full-year | | | | condo hotel units coming to market by 2008. |
| price data in 2001, vacation homes have appreciated | | | | The demand for these units will exceed 1 million |
| 12.8 percent from $168,500, and investment homes | | | | buyers, so the price of condo hotel units could be |
| have risen 25.4 percent from $118,000. | | | | much higher than presently expected. |