Boats and Cottages

A couple of interesting situations have occurred in my life recently. Since they are related and deal with money, I thought I'd share them in one post.

The first is the number of people I have run into that have "cottages." For those of you who might not be as familiar with the term, here's a brief review:

• In Michigan, there are about four (maybe five) months of really great weather. As such, when the weather is nice, people want to be outdoors.
• Many people prefer to be outdoors in a wooded or semi-wooded location that's at least somewhat remote.
• As such, a good portion of the population here owns a "cottage."
• Contrary to my initial thoughts, a cottage isn't (usually at least) a 50-year-old, one-bedroom shack without running water or indoor facilities. Quite to the contrary, a cottage is more likely to be a "regular" house -- just one that is located in the woods, on a lake, or in some other scenic location, generally "up north" (in northern Michigan.) It's likely that this house is smaller than the home they live in most of the time (perhaps it only has two bedroom and one bathroom rather than four bedrooms and three bathrooms.) But make no mistake about it, it's a house.
• Some people inherit their cottage from family (or even use a family-owned cottage.) Others buy one outright. Both spend most of their summer weekends "up at the cottage."

Now think of the financial implications of owning two homes (not to mention the time commitment). Even if someone gave you the second home (like a family member), you still have maintenance, taxes, utilities, etc. associated with another home that you have to deal with. And for those who have to BUY a cottage, this might mean TWO mortgages. Yikes!

Now throw this into the mix. Over the last few months, I've had several people who either are: 1) in financial difficulty, 2) have been in financial difficulty, or 3) who could be in financial difficulty (because I know what they make) tell me that they have recently purchased a cottage (i.e. a second home) or have mentioned that they have a cottage. Each time I've thought "how can these people afford a second home?" The likely answer, "They can't." (Some will say they got a "great deal" on one due to the poor economy, but who can afford two homes even if the second one is 40% off what it once was?)

Thomas J. Stanley recently discussed owning two homes. Some of his key findings:

Most millionaires can afford to purchase and maintain a vacation home.  Yet, as I mentioned in Stop Acting Rich, 64% of the millionaires surveyed never owned a vacation home, beach bungalow or mountain cabin, not even a lean-to or a tree hut in the woods. 

In 2006, the second home buyer had a net worth of approximately $380,000 and a median annual household income of $80,600.  Are you thinking of buying "an affordable second home" because you want to emulate the behavior of most millionaires?  Be careful.  Most people who own second homes are not millionaires.  Most millionaires rent instead of buying vacation homes.

Within the same age and income cohort, who is better at transforming income into wealth?  Overall those who don't own vacation homes are more productive than those who do.

No doubt some second home buyers have enhanced their wealth by having another home.  Yet far too often even investment driven buyers of second homes grossly underestimate the real costs in terms of buying, furnishing, maintaining, commuting to, renting and possibly selling a second home.  Time is money.  Place a high price on your time, all that time it takes to shop for a second home, set up utility related services, pay bills and hire people to maintain your home.  Even renting your home takes time. And if you have a property management company handling and renting your home, you may pay up to 50% of the gross rent for this service. 

There are a variety of reasons why millionaires don't own vacation homes.  Most self made millionaires don't need to collect "things" to define and demonstrate their achievements.  Also, most wealthy people have a wide variety of interests and activities.  There is a substantial correlation between the number of interests and activities that people are involved in and their level of financial wealth.  Some wealthy people feel that owning a vacation home would restrict them, obligate them to spend a lot of time there.  And if they do not spend much time there they feel guilty spending lots of dollars on something that is underutilized.  Most millionaires realize this without having to make the first mistake of purchasing a second home. 

That's exactly what I thought.

Now look at the issue of spending on things most people can't afford in another way. My wife and I spend many summer evenings walking around our neighborhood. It's a nice, middle class neighborhood with several hundred homes in it. What do you think we find in driveway after driveway (other than multiple cars)? Yep. Boats. And I'm not talking row boats. I'm talking big power boats -- some so big that they barely fit into the driveway.

Again I'm thinking, can these people really afford these big boats (and all the expenses that go along with them). In many cases, I think the answer is "Not really."

Of course people can spend their money on whatever they like. It is their money after all. But I find it interesting that Americans have such low levels of net worth, are struggling with saving for college, are worried about whether or not they can retire (or if they'll have to work until they are 75) and yet they are bleeding money left and right on second homes and big boats.

And what's more sad is that fact that those of us who are financially responsible will be called on to care for many of these over-spenders later in life when they can't provide for themselves (have failed to save for their needs.) After all, it's only "fair" to help others, isn't it (at least that's what many in our government say)? I'm all for helping those who need help and are in trouble through no fault of their own, but I'm not too excited about helping someone who could have provided for themselves and chose instead to own a cottage, boat, or some other extravagance.

Or maybe I'm just becoming a grumpy, cynical old man... ;-)

Comments

[ajc @ 7million7years]

I believe the Rule of Thumb on boats is that you can rent one - one class bigger / better than the one you can afford to buy - up to 5 times a year, before owning begins to make sense.

[Chuckster Finky]

I disagree with how you use "millionaire" and "rich" interchangeably as though they're the same thing- they aren't. The fact why many millionaires don't own a vacation home simply could be that having a million dollars in net worth simply isn't that much depending on one's age and status. A couple at retirement age with a million dollars in the bank might be able to afford ~$35k a year in expenditures without depleting their savings in the long run, certainly they won't starve, but it's not enough to afford luxury like a second home. What about those with a net worth above 25 mil?

[Mr. GoTo]

The cited analysis overlooks this common situation: These "millionaires" often purchase bloated McMansions that completely suck up all of their housing dollars. Others (like us) allocate our housing dollars among two, lower cost residences, such as a comfortable but affordable second home on a lake. I would not do this with a home I could only use 4-5 months per year or that required extensive travel. I also agree that folks who are financially struggling have no business maintaining a second home. What's even better is that a lake home will usually appreciate faster than a McMansion.

[Sunil from The Extra Money Blog]

i have always believed that the criteria / the rules for "getting help" should factor in personal decisions individuals have made. i agree with the fact that help should go to those that truly need it, who have been responsible throughout and were impacted by the external environment beyond their control. it's a tough segregation to accomplish without raising all kinds of controversy - but it sure sounds logical and deserving.

[dd]

All, I am one of those "cottage owners" and found this article interesting. I recognize that my answer will be somewhat biased, but I think either side of this fence will be.

I bought our cottage at a very reasonable price after paying off my primary home. We were very blessed to have stumbled onto a beautiful little place on a peaceful lake in NC. It's close enough to our home so that we can be there in less than an hour, thus allowing us more use.

For us this cottage is one of the essential reasons we work so hard, sometimes at jobs we don't always like. (at least we have a job right now). Our reasoning is this; we feel there has to be a balance between being frugal all the time and building wonderful memories that are the core of of family time. Our kids spend many days swimming at the cabin with their friends, cooking marshmallows by the campfire and playing games until the wee hours. We have many great memories of cookouts with family and friends.

When they grow up and move out I will look back and know that these were some of the best times of our lives. I believe this will help them understand the importance of a work / life balance and how important family time really is. This has instilled a core value important to all of us.

My wife's family has a Michigan cottage and it is one of the main topics spoken when recalling childhood memories. We still go up once a year and have large family gatherings. My children now have wonderful memories of this wonderful place and how they got to play with cousins and aunts and uncles.

So, while I am a firm believer in fiscal fitness, I am just as adamant that I balance this with building family values and memories we will cherish the rest of our lives. I for one would much rather have these memories than a bit of extra monthly stipend when I retire.

Now, on the other hand ..... I won't be buying the beach villa since my math shows us we will lose $10k a year even after working hard to have it rented all summer. We are smart enough to know this option is less likely to create any fond memories and mostly a lot of stress. :>)

Remember why you work. Is it only to build wealth or stash cash for retirement or is it also to ensure you support it with a balance for family as well ?

[Lucas]

@Mr. GoTo

If you read the books written by Mr. Stanley, you would find that most millionaires don't live in "McMansions" as you stated. Most live in very nice areas, but far from mansions. The point of the article is that most millionaires don't have second homes for various reasons. Per your comment, it appears that you have a second home, but that doesn't mean you can't be a millionaire.

[Jon]

It's much the same here in Idaho. They call them cabins rather than cottages. My wife and I have weighed the pros and cons of buying one over the years, and decided not to invest the time and resources. If one owns a cabin, it automatically becomes the only place one can reasonably spend vacation time, and we just like to get out and experience new places too much to tie ourselves down to a single location. We're also fortunate in having access to several friends' or family members' cabins; my parents own a mountain cabin, my neighbors as well, an old friend has a huge ranch, and my sister-in-law inherited a beach cabin. So, we get invited to spend time in all of those places, without being committed to them, aside from whatever "sweat equity" we earn by helping out with repairs or remodelings on our visits. When we want to spend long time periods on vacation elsewhere, it's much simpler to rent a house there.
I don't think it's necessarily a bad investment to own a second home, if the conditions are right, but it's just not been our personal choice.

[ta da!]

I too have a “cottage” (second home), mine on a lake Northern WI. Bought it 7 years ago for 195K, paid it off last year. All I can say about it is “it’s the best damn thing I ever did!”.

It provides a readymade escape from the daily grind, We go up there year round and absolutely love it. Nothing like sitting lakeside and listening to the loons hoot while drinking a beer and fishing from the dock. I don’t think one can convey in writing how enjoyable and worthwhile it is. I love it and wouldn’t trade it for the world.

That being said, you are 100% right, if one can’t afford it, it could be a financial drain.

[Michael]

I'm one of those people who likes being out in nature and who wants a place "up north". My wife and I trying to decide how we will achieve that.

I want land because I want somewhere I can become familiar with to go hunt, camp and fish on a regular basis.

Here are some factors going into our decision:

1) I'm preparing to go to grad school. Depending what I choose to go back for, it could be a degree that facilitates rural living (as opposed to a job that needs a big company in a big city). So we could have 1 home and 1 piece of land where hunting is allowed and practical.

2) I don't need a cabin. I like camping, year round. My family are weekend campers though and wouldn't want to stay more than a few days without at least a modest shelter.

3) My wife and I have had many discussions about the merits of occasional world/USA big vacations vs. having land/cabin/shack to go to on a monthly basis.

4) All the best loved cabins I knew growing up were shared among family members so they were consistently used. If we did decide we wanted a cabin we would try to get buy-in from them nearby family members to reduce our cost.

5) The land we really like is in northern Wisconsin and Michigan. We live in Minnesota though so we would get a place in our state to save on out-of-state hunting fees.

[Nemo]

A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing.

-Alexander Fraser Tytler (1747-1813)

[billbill]

I have wished for years that my family had a cabin but in Utah, the prices for a decent cabin somewhat close are more than a house in the city. We have discovered that we can rent a cabin for $1000 for a week and that is less than 1 month of mortgage on a cabin.

My sister is a former boat owner and has said these 2 things: If you want to experience boat ownership, go sit in a bathtub and tear $100 bills into pieces. The other is that the 2 best days of a boat owners life is the day you buy the boat and the day you sell it.

[Michael @ aapfi.com]

If you can afford to pay cash for a "cottage", I'm all for it. Homes are a pretty stable asset and if you decide after a few months or years that you really aren't the go to the vacation home all the time type of person you can turn around and sell it. If you borrow to acquire it then you lose a lot of that flexibility.

[MC]

My Dad has a cabin in the mountains out west. He bought the land for $10K about 25 years ago. About 10 years ago he built a beautiful cabin on the land--very well designed but not expensive. Obviously, there was no mortgage on the cabin or land, ever. The cabin is currently used almost every weekend by family members year 'round, and my father, who is now retired and lives in a condo, spends 3-4 days up there at least once or twice per month. On the other hand, he doesn't have other toys, including a snowmobile, a riding lawnmower, an SUV, a boat, or even a big screen TV. And obviously, no McMansion. So a cabin doesn't necessarily have to be an underused money pit, and it can be an asset to the whole family and can work very well within a reasonable retirement plan.

[Michele]

Ahhhh....Michigan. :) I'm a native Michigander myself and I can testify that you're absolutely right: TONS of people own boats and cottages. Also: Pools are incredibly popular, which is strange given the climate and how limited one's use of a pool is.

However, there's something you have to take into consideration here: The cost of living (particularly in regards to property) in Michigan is EXCEPTIONALLY low. I grew up in a mid-size, mid-Michigan town (haven't lived there for nearly 15 years now), and every so often I'll do a search for my old zip code on Remax dot com. The most recent time I did this (about 3 months ago), there were 42 homes (FORTY-TWO!) for sale for under $10k (yes, TEN THOUSAND), and another 37 for sale under $20k (yes, TWENTY THOUSAND). These are large (albeit old) homes with charm and character and tons of potential. These prices are low even by Michigan's standards, but I can speak from experience in saying that my parents own a cottage on Houghton Lake that they inherited from my grandmother that is currently valued in the mid-40s. The property taxes are under $500/yr. This is for a 2br, A-frame, LAKE-FRONT cottage.

So really, this IS something you need to consider when it comes to the fact that SO MANY "middle class" people in Michigan own vacation homes and boats. Obviously boats don't cost any less in Michigan than they do anywhere else in the world, just like cars don't, but when your housing costs are SO LOW, it's easy to feel as though you can splurge on a boat or a car.

In fact, I just did some mental math, and I'm quite certain that if you add up the value of my parents' primary home, vacation home and travel trailer, you could add in a hypothetical speed-boat and STILL not reach a number as high as the cost and value of my small, modest house here in Colorado ($195k).

[Michele]

Oh, and another thing: Some people in Michigan (and elsewhere I'm sure) actually have NICER cottages than they do primary residences. The Assistant Principal of my high school was one of these people: He and his wife lived in a 1-br rental apartment on the 2nd floor of an old house for most of the year, but had a large, beautiful, custom built log cabin on a lake up morth that they spent the entire summer and most of their weekends at.

[billyjobob]

I live in Michigan also. My cottage is a trailer camper. Before this one I had a pop up. I loved it and I love that I can move my "cottage" to different locations (camp areas). I also have a boat. Its a 12 foot dingy with a 15 hp motor. It folds up and fits in the back of my truck. I go camping with my boat and trailer all over the place...Michigan, Indiana State Parks, Out west to national parks. Lake Powell... Anyway, Cottages are great for those that can afford them and for those that don't want to pull a trailer and pack up everything. But,I love it that for me the scenery and the weather is all a matter of where I want to be. And my cost are very minimal.

[Squirrelers]

I think it's about separating a want from a need. Is a cottage a need? Nope. Is a power boat a need? Nope. They're wants. Being able to retire, afford healthcare expenses, have an emergency fund - those are needs.

Of course, if someone feels comfortable working longer and having less for retirement and other needs - or really, really, REALLY likes boats/cottage - then go for it. We're all different, I've learned that much. For me, as a middle class person, I would stay away from those expenditures. If I wanted to vacation, I would want flexibility, rather than feeling obligated to go to a cottage or focus on boating activities. Plus I would want to save money anyway, and have fun in other ways.

But again, it goes back to the notion that we're all different....

[Mike Hunt]

The Michigan cottages sure sound cheap. We had thought about buying a beach home but decided against it. The reason being is that my wife and I like to travel to different resorts and locations and don't want to get stuck going back to the same place. The novelty wears off in my opinion. We have family around the US, in Europe, Australia, India so visiting them makes for enough excitement for us.

With regard to boats I will refer to a quote from my ex-colleague, a retired military man:

"If it floats, flies, or fxxxks then you are better off renting than buying!"

-Mike

[Rob Ward]

My wife and I often have the same sentiments, wondering how people can afford to do or buy whatever it may be. But that being said, it is not our place to judge. We have to be accountable for our own actions and let others worry about theirs. Of course, that does not mean we shouldn't encourage others to be financially responsible.

@ Mike Hunt - I like the quote since I know it is quite accurate (in regards to floating and flying anyway). I'm an aviation junkie myself so one day I'll be getting a pilot's license. And maybe a loooong time from now I'll own something that flies....but of course, it is usually cheaper to rent.

[FMF]

Chuckster Finky --

Look at the stats. $1 million in net worth puts you among the top few percentages of all Americans.

[MonkeyMonk]

I had a cabin in Northern Michigan for years that had been handed down from my grandparent to my parents to my siblings and myself. Beautiful place and something I really cherished. Unfortunately my family recently relocated to the East Coast after nearly a decade in Chicago. Even though annual expenses were fairly modest at only a couple thousand per year I ended up giving my share in the cabin to my brother who will be able to use it much more frequently than me.

I'll still get to visit but it's no longer costing me anything.

[CJB]

50% of gross rents, what kind of crazy property management is that? Somewhere around 7-10% is much more normal.

[John]

I own a "cottage" and here are my annual costs:

First the cottage and property are fully paid for, so no mortgage payments, 4 bedrooms, 2000 sq. ft.

Hydro $1050 per year- this is the minimum charge for hydro service in my area.
Taxes $600 per year - cottagers pay more than local residents
Telephone - $200 per year- this is needed for medical emergencies and we have had a few.
Insurance $150 per year

And the really expensive stuff:
Boat/gas/repairs $2000 per year
ATV's $800 per year
Snowmoblies $400 per year
Cottages repairs $800 per year

The total is $6000 per year, many people would not believe this total or would say that you do not need all these toys, but what is the purpose of a cottage if you do not have the toys.

Bottom line,cottages are really expensive, they are a life style choice and I use the place for about 30 days a year, I am not very smart, but my kids love the place.