One is not enough
More Americans are sticking close to home these days, choosing nearby vacation rentals for holidays and getaways, and likewise, a growing number are buying second homes for enjoyment and as rental investments.
The vacation- and second-home market is, in fact, appreciating faster than the already record-breaking Southern California real estate market, according to John Karevoll, an analyst at DataQuick Information Systems. And it is poised for an even bigger surge.
“This is discretionary buying,” Karevoll said. “It fluctuates more than primary-home buying does. When the market goes up as a whole, the vacation- and secondary-home market goes up faster. When the overall market goes down, it goes down faster.”
The increases in second-home purchases and vacationers choosing to forgo the expensive European or tropical island trip for a holiday closer to home are attributed to continuing concerns about safety and terrorism, according to David Lereah, chief economist for the National Assn. of Realtors in Washington, D.C. “Since 9/11, it’s about security,” Lereah said. “People don’t want to stray too far from home.”
This nesting mentality, and double-digit appreciation in local real estate while the stock market sags, is fueling the second-home market, experts say.
Although the Realtors’ association has yet to complete tabulations of 2003 second-home sales, a record of about 445,000 sales nationwide is expected. Currently, there are about 7 million vacation homes in the U.S. and about 500,000 non-owner-occupied homes in Southern California. The mountain resorts of Big Bear, Lake Arrowhead and Running Springs and the desert communities of Palm Springs, Rancho Mirage and Palm Desert make up 90% of the Southern California market for vacation and rental homes.
Many local areas popular for vacation rentals are enjoying tremendous appreciation in prices, according to sales tracked by DataQuick. Among those at the high end of appreciation in February were Laguna Beach, up 31.3% from the same month a year earlier; the southern area of Palm Springs, up 51.6%; and the mountain community of Crestline, up 53.6%.
Median prices for second homes sold during the first quarter of 2004 were $238,000 in the greater Palm Springs area and $194,000 in the mountain communities.
Karyn Benjamin, 49, and her husband, William, 53, recently purchased a $195,000 two-bedroom cabin in Lake Arrowhead after being advised in a real estate investment class that the mountain market was hot.
“We decided to take money out of stocks and invest in real estate,” said Karyn Benjamin, whose primary home is in Ventura. “Now is a great time to buy.”
Not only were Lake Arrowhead home values up 32.6% in February 2004 from February 2003, but there is more of a market for long-term rentals as tree specialists move in to help eradicate the bark beetle infestation.
The fall wildfires also have pushed up demand and rental prices, according to Tom Laurin, director of Economic and Community Development for San Bernardino County.
“The whole rental market has been affected by the fires as people look for rentals while waiting for their homes to be rebuilt. Rents are rising and demand is a problem,” he said.
The Benjamins initially had hoped to lease their property to a homeowner displaced by the fires but they had few takers; their asking rent of $1,100, which covered only their mortgage, was too high for the working people who lost their homes. The Benjamins decided to rent to a worker who relocated there temporarily to cut down infested trees.
Less wear and tear on the property and not having to worry about having the rental fully booked are among the reasons the Benjamins chose this route -- as well as wanting to offer housing to those coming in to assist the community.
For now, the Benjamins are happy with their break-even strategy and hopeful that the market will continue to appreciate so they can sell later and buy additional properties.
Among baby boomers looking to buy second homes, most are doing so for personal enjoyment, according to the “2003 Profile of Homebuyers and Sellers” study conducted by the National Assn. of Realtors.
Hugh Hecker, 46, who lives in Westlake Village, also bought a second home in Lake Arrowhead -- a 1,350-square-foot, three-bedroom home for $200,000 -- to enjoy a few times a month. His monthly mortgage on the property is $800, not including property tax and maintenance costs.
“For the price of a Hawaiian vacation,” he said, “I have a second home for the whole year.”
Hecker, a real estate broker and contractor, said he considered Mammoth, a six-hour drive from Southern California, but chose Arrowhead instead because of proximity. Not a bad choice in light of rising gasoline prices.
“It’s nice to get away,” he said, “and it’s only a 1 1/2-hour drive.”
Plus, he foresees continued appreciation. “Anything that is attached to dirt right now is worth a fortune,” Hecker said.
But whether buyers want to ride out appreciation or use a second home for enjoyment, over time income-producing properties can make a bundle.
Homeowners with vacation properties in Newport Beach, for example, can make $40,000 to $100,000 yearly renting them out, according to Olwen Ward, manager of Burr White Realty. “Everybody, it seems, wants to come to Newport Beach.”
As a result of demand, Ward said, the inventory of rental properties at Burr White has doubled in the last four years. “Business is crazy.”
The Internet is also fueling interest in vacation properties, according to Jeff Busche, owner of one of many Internet sites dedicated to promoting rentals worldwide.
“We get about 120,000 e-mail inquiries a month,” said Busche, who founded vacationrentals.com with a colleague in 1996. Their website lists 950 vacation rentals in California with more than half of them in Southern California. Those listing properties with the company pay a $100 annual fee.
One second-home owner, according to Busche, has already rented out his beachfront condo in the Mission Beach area of San Diego for most of May, June, July and August at $1,000 a night. “That’s some $90,000 he’ll make this summer,” Busche said. “Wow.”
But as a rule of thumb, second-home owners can expect to reap 10% to 20% of rental payments, said Hilda Erfe, 60, author of “Real Estate 101: Buying and Real Estate 102: Renting.” If the property is rented out for more than 14 days a year, the income made on renting must be reported to the IRS, but expenses such as broker’s commission, advertising, property taxes and some mortgage interest are deductible. Additional expenses that may be partially deductible include homeowner’s association fees, repairs and maintenance, insurance and utilities in proportion to the time the property is rented.
Erfe, who owns 16 rental properties in the Newport, R.I., area, chalks up success in owning rental properties to having a good rapport with real estate agents who can recommend the property, being selective about tenants and having a cadre of skilled and reliable maintenance workers at the ready.
But with the current run- up in prices, some wonder if selling can bring a better return than receiving monthly rental income.
Fresno resident Lynda Bulla inherited nine rental properties in the South Bay after her mother died in December. One of the properties, in Hermosa Beach, is worth $1.2 million and she’s only getting $4,000 a month rental income from it now.
Though her mother received about $12,000 a month in rental income from the properties while she was alive, Bulla and her sister, Marion Weller, are considering selling some of the properties while prices are high.
If Bulla were to sell soon, said accountant Dan Cohen, a partner with Cohen Pivo & Company, Beverly Hills, she would have little or no capital gains tax, as the fair market value is probably still close to that at the date of her mother’s death, which would be her tax basis.
“That seems to be the decision we are trying to make right now,” Bulla said. “The properties do produce a decent income, but not when you consider the value of the home.”
Allison B. Cohen can be reached at email@example.com.
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Summer rentals going quickly
Want to book a summer rental? Don’t hold out much longer, experts say, as the Southern California vacation rental market is booming.
Olwen Ward, with Burr White Realty in Newport Beach, reports most of its 197 beach rentals are already booked for the summer.
Although rentals have always been strong, she said, they are up one-third over the same time last year.
“Demand for renting a vacation home is greater than ever before,” she said. “People don’t want to travel in the air.”
Those seeking vacation rental properties used to come from a three- or four-hour drive away, Ward said. Now, she and other real estate agents are reporting renters driving from such places as Utah, Oregon, Arizona and Washington.
Vacation rental prices in the Newport Beach area range from $1,400 a week for a “shack on the beach” to $8,000 a week for top-of-the line beachfront luxury, according to Ward. Rents go down farther from the ocean, to $1,700 to $2,700, to about the same for bay views.
Up the coast in Ventura County, summer rentals in the Channel Islands, Oxnard and Ventura beach communities are about 60% booked already, according to Trigg Schaefer, owner of Channel Islands Realty.
When Schaefer bought Channel Islands Realty 14 years ago, there were only 20 rentals available, compared with 100 today. Rents range from $1,000 a week and up.
Locally, the South Bay vacation rental market is growing, according to Angela Schryver, property manager at Marine View Management in Redondo Beach.
Monthly rentals in Hermosa Beach, which by city ordinance allows only long-term rentals, run from $4,500 for a few blocks off the beach to $9,000 for beachfront. In Manhattan Beach, where there are more rentals, weekly prices range from $800 to $5,000.
With the construction of newer, more luxurious cabins in the Big Bear area, that community has about 1,000 vacation rentals averaging $200 to $400 a night. Luxurious lakefront homes, with four or five bedrooms, can rent from $3,000 to $5,000 a week.
Unlike beach communities, where weekly and even monthly bookings are common, the average stay for a rental in Big Bear is two nights -- a quick weekend getaway.
“I hear a lot that people are reprioritizing,” said Dana Prophet, with Coldwell Banker Mountain Gallery Realtors. “Instead of Mom and Dad going to Europe alone, they want to stay home with the kids and grandparents and bring everyone up to a cabin in the mountains.”
-- Allison B. Cohen