Have a Cottage with a Boat? Ever Wonder the True Cost of each Boat Ride?
A few years ago I did a podcast episode on the second home as the anti-dividend. Feel free to listen to it again. In that episode, I talk mostly about the effect of carrying two homes, especially in retirement. I still believe in everything I said there, and the math is absolutely true.
In this post, I want to address the folks who buy a cottage. It could be the classic up north place on the lake. I’m not sure if you’ve looked at the prices of these homes on lake Charlevoix or Walloon, but it's pretty much out of control. I’ve been telling people that we are 10 or 11 years into this economic cycle and it doesn’t feel like there are any bubbles out there, until I look at the lakefront property values! They are super expensive! So let’s say you buy one of these places for $500k, which means you’re not going to be on Charlevoix or Walloon - you should probably double your budget for one of those higher demand locations. Please note, the $500k is just the starting point. You need a boat, a jet ski, a dock, a hoist, furniture for the house, your wife is probably not happy with the paint, you need all kinds of other equipment required for lake fun like water skis, tubes, ropes, life jackets, hundreds of gallons of gasoline, new linens, etc. And you probably need a new deck or patio, the list goes on and on. Let’s just say its a long list. How much will this stuff cost? New boats are at least $30k and one that cheap probably doesn’t have enough power to pull you skiiing if you’re into that. The newer, big Jet skis are about $13k. A dock and hoist can be over 10k, tubes are like $300! Furniture for a house is well over $10k. A deck is $10k or more. So after you buy this place, you have to figure another $100k for stuff. And how much time and energy will it take to acquire all this stuff? And how many arguments about “do we really need that?” will the husband and wife have? You might think you don’t need $100k worth of that stuff, you might think it seems like a lot. You might be thinking, "All I need is a used pontoon." But I'm here to tell you, "you're wrong," and it adds up even quicker than you think.
Let’s also consider property taxes and insurance. Your State Farm policy for the house and all the toys is probably around $1,500 - $2,000 and property taxes are probably $10k - remember - this is non-homestead. So let’s round it up to 12,000 per year of fixed costs, plus we also have a mortgage payment. To keep it simple, let’s just assume we took out a $600k mortgage at 4%, which is $2,864/mo or $34k per year, and then we add the $12k of other fixed costs on, and we are up to $46k per year.
How much can we actually use and enjoy this new property which costs us $46k per year? How much does each boat ride cost? First let's figure out how many nights we can spend in the cottage and break it down from there. Perhaps we can use it each weekend from Memorial Day to Labor Day. So that’s fri/sat/sun for one weekend in may, four weekends, June, four weekends in July, four weekends in august, and one weekend in September for a total of 14 weekends with three days each so that 42 days per year. Which means 42 boat rides per year. This is pretty generous because I’m guessing you won’t be able to use it each weekend due to other stuff going on in life like kids soccer games and other activities. In addition, you probably won’t use the boat every day due to weather and other interests. But we will assume for this exercise you go every weekend and you take the boat out every day.
We have already determined the costs to be $46k per year and we are taking 42 boat rides per year, so we are paying approximately $1,095 per boat ride. Isn't it CRAZY to think of it like that???? Of course this analysis has flaws. If you decide you wanted to sell, your toys like the boats have residual value. The house should hold its value, and with each year of $46k costs we are reducing the mortgage balance some (but not much with 30 year amortization). We could also see continued appreciation on the home. But that is not a guarantee, even on the lake.
The take away here is that I don’t think you should buy an expensive cottage like this unless you have done your financial plan and these additional costs will not affect your other goals in any way. Meaning, if we’ve done your plan and assume you are maxing 401k for each of you, putting away $38k per year, and the plan looks good, and you’re able to swing these new costs of $46k per year without affecting your assumed savings, then it could be considered. But if taking on these costs would mean you are not able to continue your savings plan, this type of transaction should be strictly prohibited.
If you have a portfolio of more than $500k and you are wondering where you stand relative to your retirement goals, consider reaching out to us for an appointment at below or email@example.com. And if you have expendable income and you’re considering a purchase like this, we can consult on the sanity of that purchase as well!
Nick Hopwood, CFP is Founder and President of Peak Wealth Management in Plymouth Mi, and manages over $155,000,000 in client portfolios since 1999.