By: Mike Kennedy mkennedy@railey.com 301-616-6106 June 18th, 2009 Category: 1031 Tax Deferred Exchanges, Deep Creek Lake Buyer Info, Deep Creek Lake Market Update, Vacation Rentals

Railey Mountain Lake Vacations, Deep Creek’s largest vacation rental company, is reporting that the vacation rental market at Deep Creek Lake is faring much better than other resort areas around the country.  With the slumping economy, vacation rental bookings are down nationwide about 18% from last year. In the Deep Creek Lake area rental bookings are only down about 10% from last year.

Other current happenings in the local vacation rental market include;

• - A positive sign is that 40% of all Railey Mountain Lake homeowners are ahead o f last year’s numbers. Not everyone is feeling the pain of this current slowdown. The other 60% are at the same level or down slightly.
• - On average each rental home is down about a week and a half of bookings this summer season.
• - The larger homes - the 9 bedroom and 8 bedroom homes - are still going strong. The 5 bedroom and 6 bedroom homes are currently lagging.
• - Renters are booking later and willing to sacrifice amenities for a lower price. Price is trumping everything right now to get bookings. If a property is priced properly compared to its competitors it will rent!
• - Some homeowners are being more flexible on restrictions to attract renters as well - such as allowing pets.
• - One of Railey Mountain Lake’s 9 bedroom pool houses set a record and went over $200,000 in gross rental bookings for the year.

In other positive news, future bookings for the 2009 fall season are already up 15% over last year. This may be due to the lower rates in the fall season and the fact the weather at Deep Creek in September and October is still very pleasant although certainly not hot by any means.

If you are thinking about renting your house or purchasing a vacation rental as an investment in the Garrett County area - give us a call at (800) 544-2425 or drop us an e-mail - there are some well performing rental houses currently for sale in the Deep Creek Lake area - as well as some houses that could be excellent rentals with some slight modifications. We’ve helped many clients over the years buy rental homes - we’ll be more than happy to get the buying process started for you as well. For those of you considering or in the middle of a 1031 tax deferred exchange this is one of the better performing resort markets in the country. Now is a great time to consider investing in real estate at Deep Creek Lake - inventory is up, interest rates are down, and there are some deals to be had.

By: Mike Kennedy mkennedy@railey.com 301-616-6106 March 18th, 2009 Category: 1031 Tax Deferred Exchanges, Deep Creek Lake Buyer Info, Deep Creek Lake Real Estate

Just recently, I met with a client who re-listed his house (it didn’t sell last summer) and made the following comment to me that was took me a little by surprise - “I’m so glad my Deep Creek house didn’t sell last summer” - very perplexed I asked him why? - he said “Because if it would have sold I would have put that money in the stock market and I’d only have half of that money today!” This particular seller has no mortgage against the property so the cash he receives when it sells will be a significant amount.

That got me thinking - with all the recent troubles and losses in the stock market over the past few months - and the Dow Jones average dipping to lows last seen in 1996 - as an investment how does a house at Deep Creek Lake compare to the stock market over the past 10 years?

I tried to find an example of a house purchased in the late 90’s and then sold again in late 2008 or early 2009 - and a house that has had no significant upgrades or improvements during that time period.

One house that recently sold that fits this criteria is 1038 South Blakeslee - which according to the tax records was transferred on October 4, 1999 for $510,000 and recently transferred again on February 13, 2009 for $1,000,000. From what I know there were no sizable capital improvements or upgrades to the house over the past 10 years - just some repainting and upgrading of some smaller items.

Therefore, in a “what-if” scenario - after typical upfront closing costs and back-end commissions and transfer taxes - a buyer who may have purchased this house back in October of 1999 with cash could have netted a capital gain of approximately $415,000 almost 10 years later in February 2009 - which by the way is also about one year into our national recession that started at the beginning of 2008. This potential $415,000 gain was calculated as follows - the $1,000,000 transfer price less $60,000 in commissions and less another $10,000 in state and local transfer taxes leaves a net of $930,000. On the front end (or when this person may have bought this house) it would have cost approximately $5,000 in recordation taxes so this person would have had around $515,000 invested in the property. $930,000 less $515,000 equals the gain of $415,000.

If this same buyer/investor decided to use this same $515,000 in cash back on October 4, 1999 (the same day the house above was purchased) to purchase some Berkshire Hathaway Class A stock (BRK-A) he would have been able to purchase 8.98 shares as the stock closed at $57,300 per share back on that date. Berkshire Hathaway is considered to be one of the most successful stocks of all time and its chairman Warren Buffet is considered a financial genius by most.

Fast forwarding nearly 10 years - if that investor decided to sell his Berkshire Hathaway stock on February 13, 2009 (the same date the house above recently sold) he would have sold it for $88,140 per share as that was the closing price on that date. There were no stock splits or dividends paid over the nearly 10 year holding period so this investor still owned just 8.98 shares.  Not even factoring the commission expense it took to sell these shares - this investor’s capital gain could have been approximately $276,943 = ($88,140 selling price less $57,300 purchase price) x 8.98 shares.

Without a doubt, both long term investments had impressive potential gains - but the Deep Creek Lake house was able to outperform the Berkshire Hathaway stock in this scenario over the last 10 years by a little over $138,000 (the difference between $415,000 and $276,943).

Some will argue that the Deep Creek Lake house had ongoing expenses over the years that would take away from the gain - expenses such annual real estate taxes, utilities, hoa dues, maintenance, land scaping, etc - expenses that the Berkshire stock wouldn’t have had. The house certainly has expenses - but I’ll argue back that if the owner had made it a vacation rental over the holding period the rents generated would have more than offset all these expenses plus related property management fees in addition to the benefits of depreciation on his tax return. In fact not only would have these rents been in excess of all the expenses this investor probably would have seen some positive cash flow each year on top of his capital growth.

Also, not to be overlooked is this particular investor/buyer could have used this vacation house a little each year for his own personal use - improving his lifestyle by allowing his family to enjoy all the activities and recreation found in Garrett County - boating and swimming in the lake, snow skiing at Wisp, and hiking in the state parks to name just a few. I don’t think it would have been possible to get any personal use or enjoyment out of those stock certificates - I guess he could have pulled them out of his safety deposit to look at them each year but that’s about it!

Now I am in no way saying the Deep Creek Lake real estate market will outperform the Stock Market, Berkshire Hathaway stock, or any stock or investment in the future. There is no such thing as a guaranteed investment - real estate at Deep Creek Lake included! And always consult your financial and tax advisors before investing in anything - stocks, real estate, gold, etc.  And I am no way claiming to be smarter that the great Warren Buffet - but in this particular long term scenario the Deep Creek Lake investment was better than his preferred stock.  Please note, this is a long term outlook - not a short term outlook - those looking to making a quick buck in our market by holding for a few years and selling will have a very hard time doing so. But if your outlook is long term - the Deep Creek market has historically proven that it can keep up with, and quite possibly may exceed, other types of investments.

After the most recent declines in the stock market most people should start thinking where they would rather have their money parked for long term? Are you enjoying the up and down wild ride known as the stock market roller coaster or would you like a steadier and stable alternative? If you are tired of throwing up on the roller coaster ride and are seeking  to improve the quality of your lifestyle by owning a second home - give us a call - we have some ideas for you!

By: Mike Kennedy mkennedy@railey.com 301-616-6106 March 14th, 2008 Category: 1031 Tax Deferred Exchanges, Deep Creek Lake Real Estate

This past week the IRS released a ruling that finally addresses some of the questions surrounding vacation and second homes and how they can qualify as a safe harbor in a 1031 tax deferred exchange. A 1031 tax deferred exchange is very common at Deep Creek Lake because of the mixture of homes that make up our market - a majority of vacation homes around the lake are used strictly for personal use on weekends, holidays, and summers - but we also have many homes where the owners will use the property for their own personal enjoyment and also rent it out as a vacation rental.

Previously, their has been a lot of grey area on this subject - the questions most asked were “How much personal use is too much if I want my property to qualify?” and “How long do I have to hold this property before it qualifies?”

With this ruling the IRS now says that if you own a vacation home and have some personal use in it, you should own it for at least two years before an exchange, rent it out at fair market value for at least 14 days in each of the 2 years, and limit personal use to 14 days or 10% of the days rented, whichever is greater. If you follow these guidelines and standards, the IRS states they will not challenge whether or not your property qualifies for a 1031 exchange.

The bottom line is that this is pretty good news for certain people looking to buy or sell a second home at Deep Creek Lake. This ruling can provide much more flexibility to someone down the road looking to change locations. For example, someone who now owns condo in Ocean City - uses it occasionally and has followed the rules above - can now sell that property, pay no taxes on any gain, and then buy something at Deep Creek Lake. However, it must be pointed out that the replacement property would also have to meet the standards above and a few other rules as well to qualify.

Disclaimer - as always this post should not be construed as any type of tax or legal advice. Consult with your CPA or Tax Attorney regarding for further explanation on these types of transactions.