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Second Homes – Condo Hotels Make Sense

The Compelling Facts…

What if… Just 5% of the Baby Boom Generation learned of a cost effectice way to own more than 1 home in retirement? 75 million boomers will retire over the next 15 years, 5% equals a demand of 250,000 condo hotel units per year, every year unitl 2020.

What if… you could buy a second home/condo, use it when you wanted, and a professional (hotel manager) optimized the rental income and minimized the 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 several homes instead of just 1 or 2?

What if… you could say you have condos in Town & Country and on The Slopes & Shore? And all these condos cost you less than just one traditional second home?

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

The Condo Hotel opportunity will be the choice of more than 5% of the Baby Boom Generation, and the trend is just beginning. The condo hotel industry will also breath new life and prosperity into the hotel industry, making quality and ‘the best located’ hotels more profitable than ever. Condo hotel will separate the real estate business from the hotel service business and create a win-win for condo hotel ownership and hotel guests. Lastly, retirees of the next decade will expect more and be able to afford a higher lifestyle through condo hotel. These are the premise of this paper.

THE POWER OF THE BOOMER GENERATION…

Why are Baby Boomers Important?

81 million US Baby Boomers* (born between 1946-64) began to reach retirement age (59 ½) in 2004. 28% of the US population is a Baby Boomer. 2016 is the peak year, with 4.3 million 59 year old birthdays. A Boomer turns 50 every 7.4 seconds this 2005!

*Many non-US Boomers will choose to retire in the USA to be closer to the world’s best health care system.

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

Boomers have just begun buying their second/retirement homes.

Michigan has 234,000 second homes, California has 237,000 and Florida has 483,000. 6.4 million people own a second home, up over 40% since 1995. By 2010, an estimated 10 million people are expected to own a second home, despite 9/11, this is a 56% increase in just 5 more years and could be considered a boom market by any measure. More people will buy in the next 5 years than have purchased in the last 10 years, competition for desirable retirement residences will only intensify, appreciate in values will follow suit. Low rates have helped fuel this real estate market, but they are a smaller part of the equation than is commonly believed. Currency exchange rates have a much more dramatic inflationary effect on resort area real estate.

The trend began in 2001, and intensified as interest rates fell in 2002-03, causing some boomers to “buy early”. Real estate further became the investment “du jour” as it became clear in 2001-02 that the stock market was ‘not returning the level of investment returns’ that many boomers had built retirement savings expectations around.

This lack of security and control in the stock market, and its positive effect on real estate investment, will be discussed further in this report.
In addition, tax ramifications for second home ownership has helped encouraged second home ownership says the Wall Street Journal “In addition to low interest rates and demographics, the second-home market has been helped by the Taxpayer Relief Act of 1997, which established new rules for the treatment of a capital gain on a principal residence. Under the old law, taxes on gains 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 primary home. In addition, sellers over age 55 could claim a one-time exclusion of $125,000.”

New rules repealed the mandatory gain-deferral and increased the exclusion to $500,000, as long as a taxpayer owned and used the principal residence for two of the five years preceding the sale date of the home. Plus, the exclusion now can be claimed every other year.

These tax changes “liberated” sellers from the pressure to trade up to avoid a tax hit. Instead, says an NAR spokesman, it has encouraged many sellers to trade down to more modest digs, while using the remaining proceeds to purchase second and third homes. Tax changes have created a whole new form of property ‘trading’, where there is a tax advantage to buy a new home every 24 months, allowing a capital gain profit with zero tax cost. For many savvy investors, this has created a true ‘cottage industry’ in home flipping.

“The second-home market can accommodate 100,000 to 150,000 new housing starts a year over the next 10 years”, estimates David Hehman, CEO of EscapeHomes.

But why second homes? As many professional people have discovered, as technology allows us to ‘work from anywhere’; why not work from someplace beautiful, someplace ‘vacation-like’, from the cottage? The evolution of the home office has turned to the cottage office.
The typical vacation-home buyer is 55 years old and earned $71,000 in 2003, while investment-property buyers had a median age of 47 and earned $85,700.

For properties purchased between mid-2003 and mid-2004, the median price of a vacation home was $190,000 compared with $148,000 for investment homes. In contrast with the last available full-year price data in 2001, vacation homes have appreciated 12.8 percent from $168,500, and investment homes have risen 25.4 percent from $118,000.

Nearly one out of five second homes will become primary residences after retirement – 27 percent of vacation homes and 14 percent of investment property. “In addition, buyers were looking to diversify portfolio investments,” Mansell said. “This is now the most frequently cited motivation for purchasing 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 percent of buyers wanted to diversify investments, 28 percent sought rental income (37 percent investment vs. 7 percent vacation homes), 14 percent wanted a personal or family retreat (29 percent vacation vs. 8 percent investment), 6 percent planned to use for vacations (16 percent vacation vs. 2 percent investment), and 5 percent had extra money to spend.

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