If you've got the happy choice of plunking down $10,000 to $15,000 for a rental house in the metropolitan area or for seashore property, which makes more sense as an investment?
It depends on the properties involved, of course, and on your personal investment objectives. But in general, the odds strongly favor the local rental house over recreational property just about anywhere.
Which is not to say that investing in a town house on the Ocean City, Md., beach - or in a Costa del Sol condominium - is a bad idea. Vacation property can be an excellent investment, one that can provide a positive cash flow every year, long-term capital appreciation and a tax shelter. But it tends to be more vulnerable to the swings of the national economy than prime residential real estate, and, inevitably, it is a riskier bet.
Take the Maryland-Delaware beach area, for example.
From the mid-1960s until the early 1970s, buyers of cottages and duplexes at Bethany Beach and Rehoboth, Del., and Ocean City, Md., picked up what often turned out to be extraordinary investments. Cottages that sold in the $10,000 to $15,000 range doubled or tripled in value during that period and returned handsome summer rental fees and tax deductions.
Michael Sumirchrast, a Potomac resident and chief economist of the National Association of Home Builders, was one of the wise buyers. He bought a three-bedroom, two-bath rental house at the beach for $11,000 in 1965 and sold it in 1973 for $33,000 - a handsome capital appreciation by any standard. Plenty of other Washingtonians and Baltimoreans did as well and better.
Yet the very economic forces that produced Sumichrast's windfall also created the "condo boom" that plunged real estate at the seashore into a depression from 1974-1976. The massive overbuilding at Ocean City and elsewhere during the go-go years of the early 70s - combined with high mortgage rates and the Arab oil embargo - threw prices into a freeze that only recently has begun to thaw.
Buyers of condominiums and single-family houses at the shore who were anticipating 10 to 20 per cent appreciation of their property every year were disappointed. In 1975 and 1976 those who tried to sell found themselves competing with large banks, the mortgage-holders of foreclosed condominium projects, who were auctioning off units for a song. Owners of real estate around Ocean City found that property values were static or even slipping.
"To put it mildly," said one Maryland shore realtor, "appreciation rates were lousy. There was hardly a pulse rate."
The market has now turned around substantially, maintains C.B. Evans, president of Evans Real Estate, Inc., who says that people who buy ocean or bayfront rental properties now can look for 10 to 15 per cent increases in market value by early next year.
Evans, whose firm is active in sales and rentals at the beach, says that while prices are moving up, they still haven't hit the true "replacement cost" level: a three-year-old town house on the ocean, priced at $53,000, would cost $80,000 to $62,000 if it were constructed today, he said. With consumer demand increasingly bullish and the former surplus of units pretty much sold, prices all along the shore are likely to take their first big jump in years during 1978, according to Evans.
That's good news for owners and real estate brokers, but it illustrates the key weakness of vacation property as an investment: seashore and mountain real estate tends not to appreciate as dependably or as fast as residential property in the midst of an economically expanding metropolitan area. It may generate sizable gross rental figures in a place like Ocean City - if the owner works extremely hard at it or pays a broker 16 per cent of the rent as a management fee.
But in pure investment terms, a vacation house (or several units) purchased for capital appreciation and as a tax shelter will rarely stack up against rental units in the metropolitan area, ones returning 20 to 40 per cent a year.
Some investors do well in resort property despite the odds. They buy single or multiple units at the right moment.They were the ones who bought town houses during the nadir of the Ocean City depression, for instance, or condominium apartments - at a bargain - outside Charlotte Amalie on St. Thomas, V.I., right after the racial violence elsewhere in the Virgin Islands two years ago. Some who took big gambles are doing very well indeed.
Next week: A look at the financial and tax aspects of cacation property investment.
Kenneth R. Harney is editor of the Housing and Development Reporter, published here weekly by BNA, Inc.