Buying a holiday home
Okay, let’s start the new year with a look at a situation which I think is unsustainable, and then I will make a suggestion. I’m talking about buying a holiday home, or buying a retirement home.
Have you been thinking about buying a holiday home in the warm south? Have you thought about buying a retirement home in southern Italy, or Spain, or the Algarve? Well, I’ve got a few things to say that I think you should take on board before you make that final decision.
Apartments in southern Spain are at last coming down to reasonable levels. You can now buy a two bed two bath apartment close to the sea, new build, for around €75,000. For a basic well built apartment in a pleasant area that is a reasonable current price. If you want to be on the coast itself, maybe a similar build will cost a bit more. If it’s a flashy joint then expect to pay more again, but for a basic well constructed all mod cons average holiday home that price is about right. Dont pay more.
If you cant find retirement homes or holiday homes at that price just drop me a line and I’ll point you in the right direction.
So, you have been looking at apartments costing €135,000 or even more. You think my prices are nuts, and that I’ve finally flipped. Well, look at it this way. First, those are the prices that are now available. If other prices are higher then you know what that means. It means those prices will have to fall, and they will. And I’m not guessing.
Second, how much would it cost to rent a similar apartment? You will find rentals available for anything from €400 a month upwards. If you haggle you can probably do a long term deal at €350 a month without too much trouble. Dont check out the rental sites, check out the local newspapers.
Now ask yourself what your apartment is costing you if you buy it. Say you buy your holiday home on a mortgage. What will the money cost? At current prices about 4%. If you buy something for, say, €100,000 the money will cost you €4,000 a year. If the mortgage is over 20 years that will be a total price to pay of €9,000 p.a. If, on the other hand, you have cash, that €100,000 can be invested to bring you in a darn site more than 10% p.a., but let’s say 10% at the moment. You could get 15% on managed US rentals, 12% on UK rentals, 14% on UK government backed solar panel investments, 15% on green oil investments, and so on. All solid investments, but we’ll stick with 10%. You’d earn €10,000 a year. Similar to the cost of the property so the price isn’t that far out of line. But…..
Let’s have a quick look at that caveat. How much for the maintenance, rates, repairs, gas and electric bills, and all the etc on that holiday home? That would lift the annual cost of your nice new apartment from €9,000 to at least €12,000, and maybe even more.
Now let’s have a look at another option. I spent Christmas in a four star hotel. I had a large room, with a large balcony overlooking a lagoon and the sea. I had half board, the use of a vast outdoor pool, and a heated indoor pool, a gym, and daily entertainment from table tennis, to shooting, to petanque on the beach, and golf, and so on. No electric bills, no maintenance, no cooking, no shopping or washing up, and someone even makes my bed. I reckon I save about €6,000 a year on food and service charges for one. Why not add that figure to the €12,000 from the previous paragraph. Now ask me what I paid for my room for two people.
It worked out at €55 a day. If I stayed for more than four weeks I would get a discount. 55 * 365 = 20,000. Assume a 10% discount for long term residency and that hotel with all its amenities, and worries removed from my day to day living, costs exactly the same as that €100.000 apartment. Quite frankly you can keep it.
I reckon we are going to see some changes in tourist land. And I think my investments will go up in value a darn site more than a holiday home will.
john
You have a point, but it is not exactly like that. First of all you assume that people know how to invest, how certain is it that the average Joe will make the right investment? No investment is without risk. People got carried away by the trend and made careless holiday home investments (money they payed, location etc), how certain are you that the same people wont be careless in any other type of investments? The important thing is to know what you want, to take the necessary time to research and to think about what you are doing and that goes for everything. I don’t see how people that have a holiday home at a location that they like can possibly lose, if the purpose was for them to use it on their vacation and breaks they can still do exactly that. Renting it is still viable (although perhaps not optimal) and they will, eventually, be able to sell it and move on to something else. All this assumes of course that you buy a holiday home for exactly that purpose, holidays.
If, on the other hand, they were planning to use it for a couple of years and then make a quick profit by flipping it, then they should have taken into account all the parameters before they spend their money. Investments are not for everyone, even less are investments in a foreign country, this has always been true and always will be true.
Thanks for the thoughtful response.
I agree. Most people are pretty hopeless when it comes to maths. My blog is not for dummies, so I assume my readers have a bit of nous.
If you buy a home for vacation breaks you will lose money. The cost of the mortgage or the opportunity cost of the money, plus taxes, insurance and maintenance far outweighs the cost of rental. And you only rent for the weeks you want.
Renting out is not viable. Go to any rental site and pick at random a property and see how many weeks are rented out. I did that just before I wrote the article. I chose ten properties in one location. Then ten properties in random locations. Not a single one had enough weeks rented out to cover basic property costs. Most of the properties had no weeks rented out, some had anything from 2-6 weeks. Not a single one had more than six weeks rented out. Over the past five years the rental market has fallen through the floor. I am also in touch with rental agencies. They will not take on more properties as they cant rent the ones already on their books. That business model is finished.
Within a ten mile radius of my home in the Algarve there are maybe 100,000 rental properties that have been lying empty for the past five years. Behind me is an estate of about 100 terraced villas. they are nicely built in pleasant surroundings. I have only ever seen people in six of them, and there is only one full-time resident. That is not unusual.
Things would be slightly different for retirement homes. But I have made a lot of money out of buying properties from retirees where one partner has either died, or gotten ill, and had to sell the home, usually at a loss. They find selling so difficult as the market is saturated, and people buying prefer new builds. I had one poor guy who only had one viewer in four years. That’s a long time to be stuck with a property you no longer want.
Even five years ago there was a rental market, and the maths worked. With higher prices, and higher maintenance costs, and less customers that particular model only exists in certain selective spots.
The one big no-no for retirees is that the older they get the less they want to do maintenance, and the more they want to make their shrinking pensions go further.
You are probably right; it will take the less sophisticated some time to get the message that it’s not economic. Some will never get it. All I’m warning is that savvy people should forget this model and plan differently.
john
Thanks for the reply
I don’t doubt your research, actually I had the same feeling this summer when we rented a villa in Crete (Chania) for 12 people. My initial feeling was that it would take some time and effort until we found just the right place for so many people. It turned out not to be so hard after all. Still, I don’t understand how the decline of demand for rental re-conciliates with the fact that both Greece and Portugal for example had record arrivals of tourists the past season. Everybody went all-inclusive? Or perhaps because “internal” tourism is in steep decline the past couple of years in those countries? In the first case, I guess it is a matter of choice and choices, especially lifestyle ones, cost (whether in money or effort or both) and perhaps, with the crisis in mind, people made less expensive choices. Assuming a decline in rental and sale prices which is already happening, isn’t the gap created by the declining domestic tourism expected to be filled even without a complete recovery of the aforementioned countries given the increase of arrivals which looks like it is going to hit another record next season? If the above assumptions are correct, I think a decent property in a good area which is not heavily overdeveloped might be a reasonable choice for a holiday home (and I mean exactly that without having a quick return in mind), with the potential to bring some profit in the future. I’d love to hear your recommended model though, if you want to share:)
C
I’d love to know where you get your stats from. Greece and Portugal had record arrivals of tourists? Gosh! I live in Portugal so I am aware of the empty streets, empty shops, empty hotels, etc. People and businesses are going bust on a daily basis. I am aware of waiters leaving to work in Switzerland, and so on. Portugal is on its knees.
We used to be served by six airlines from the UK. That number has dropped to four, and one of the airlines (Monarch) doesn’t fly from Luton in the winter any more. Easyjet has cut its flights substantially, and no longer has daily flights.
We also used to be quite high up in the tourist numbers lists. The country has dropped drastically over the past decade. Last year tourist numbers were officially 4.7% up on the year before which was the worst year for more than a decade. Official statistics are usually grossly overstated here, so I assume the real figures show yet another drop in tourist numbers. We are way below the summer averages at the beginning of the century, and the winter tourists are few and far between.
Regarding my basic argument there are two main points. One is simple maths. It costs £n to live for a year in a hotel. It costs £n+ to live in a house or flat. While one costs more than the other it is not commercially viable to buy into the more expensive option.
The other argument is the one about scarcity. A scarce resource rises in price. Holiday homes are not exactly scarce, there are quite literally millions of them. Where in Europe is not heavily overdeveloped?
I’ll put up a couple of videos showing the current over-development close to my home. I could run it almost continuously from Cape St Vincent to halfway down Italy and it’s all the same. There are negligible clients buying holiday homes in Spain and Portugal. There are over a million of them along the coast. It will take a decade to sell them all. You therefore have hotels cutting their prices to catch the few tourists about. You have house prices falling. You have taxes and expenses rising. You have a locked-up market which leads to low selling prices for the odd sales that do take place. And remember there are probably three places that would be for sale for every one that is for sale, if only the market would recover. That probably means the pent up sales will prove to be an even bigger drag on the market in the future than the actual sales.
Somewhere along the line, things will change, but not in any meaningful way before the end of this decade. And how can you make money from rentals when you have a large estate standing empty except for one inhabitant? And just down the road is another, and another, and another.
I’ll develop my thoughts over a series of articles. Stay tuned.
john
Hi John,
http://www.ekathimerini.com/4Dcgi/4dcgi/_w_articles_wsite2_1_26/12/2011_419994
The above link is from a respected greek newspaper. 16.5 million arrivals in 2011, a figure you can find from many sources. Also, I remember reading about it in a UK newspaper last year.
Historical data here:
http://www.tradingeconomics.com/greece/international-tourism-number-of-arrivals-wb-data.html
This year they expect around 17 million tourists in Greece, lets see if this rise becomes a trend.
You were right about Portugal though, I got confused by the rise relative to 2010 I suppose.
I’ll definitely stay tuned.
Sorry to be such an argumentative so-and-so, but 16.7 million visitors for Greece last year is a bit of a comedown from the 17.7 million in 2008 and the 19.3 million in 2009. Mind you, when they leave the euro the drachma will have to devalue by about 50%. Maybe that will pull in some tourists. However, it wont produce the same amount of money. Sorry, I just dont like what I see.
Anyway, have a look at part two of my diatribe on tourist hot spots on this blog.
john