Deep Creek Lake Real Estate vs. The Stock Market
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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!
March 19th, 2009 at 10:35 pm
Of course the hypothetical stock investor could have also used a limit price (as is used in real estate transactions) to sell their shares at a much higher price instead of simply relying on daily auctions to determine the sale price. Using a limit price of $137,000 per share the Berkshire investor could have sold at a gain of about $700,000 just last fall, far exceeding the gain on the real Deep Creek estate investment over the same time. Or they could have sold one share at a time over a period of time and taken the average auction result, a clear advantage of investing in equities as opposed to real estate, and also likely achieving a greater gain than the example real estate property. What the “analysis” really lacks however is a discussion of value. In 1999, stocks were generally overvalued while real estate was undervalued. History repeatly shows that buying undervalued or ignored assets results in the best investment returns. So where is the analysis that shows Deep Creek real estate is a better value today than Berkshire stock? This is what people really need to make investment decisions, not a couple of cherry picked numbers to fit the a priori conclusion.
March 23rd, 2009 at 3:20 pm
Sam,
Thanks for your comments.
Unfortunately a lot of investors - especially those with 401k’s, IRA’s, and mutual funds - did not sell last fall - and probably 99% of all investors in this country are unaware on how to even use limit prices and other advanced trading techniques to lock in gains or minimize losses. A big part of the problem I believe is that our current educational system is greatly lacking any type of financial education for all kids coming up through the schools - public or private.
But whether the investor sold his shares or not is not the point I was trying to make.
The main points I was trying to make are (1) that stock values have been extremely volatile as of late - the value of real estate on Deep Creek Lake has not exhibited this same volatile behavior and (2) investing in a second home at Deep Creek Lake also includes some additional benefits - such as an improvement in one’s lifestyle and activities - benefits that owning stocks do not offer.
While I certainly cannot speculate on the future value of Berkshire stock - or any stock for that matter - I can certainly comment on the fundamentals that are still in place at Deep Creek Lake and why I think real estate here is still a good value today.
- About 63 of the 65 miles of shoreline around Deep Creek Lake has already developed. The only two remaining large acreage parcels that could developed and subdivided into lakefront lots or lake access properties is Thousand Acres and Pergin Farm. Both families have developed these parcels very slowly over the years. No one expects that to change anytime soon.
- A great majority of the current set of property owners around the lake could be classified as wealthy people - they are medical professionals, lawyers, small to medium sized business owners, executives at large companies, and those with higher ranking government jobs. We know who these people are - we’ve been selling them property for over 30 years now. You certainly get to know what people do for a living when you sell them a house. These are people and families who haven’t been greatly impacted by this national downturn or real estate bubble. In fact one might be able to argue that these people have been hurt the most recently by the stock market. With our aging population and litigious society these professions should continue to be less impacted if the national economy takes longer than expected to improve.
- A good percentage of the property owners around the lake do not have mortgages against these properties - and if they do have a mortgage it’s not that sizable in comparison to their level of income. Lenders for these types of properties in this particular area do not have a lot of risky loans (i.e. stated income, arms, etc.) on the books right now unlike other real estate markets that have led to foreclosures and drops in values.
- In addition most of these properties have now been in their families for years now. Like I’ve stated in previous posts the main reason most of them decide to sell their Deep Creek property is that they simply don’t use the property anymore. Distress sales have always been very minimal in this market. Sure we have some distress situations like divorces, short sales, and foreclosures but they are still very minimal in this market.
- Historically, lakefront values on Deep Creek have gone up over time and are still holding steady even after one year into a major national recession - and after the great real estate bubble burst in a majority of other markets around the country. Other resort markets like Florida, North Carolina, and the ski resorts out west have seen property values drop by as much as 50%! Most old timers around the lake will tell you that property values here have held steady even during the recessions experienced in the 70s’, 80’s, and early 90’s. We’ve recently seen a small decline in some property values in areas surrounding the lake - not on the lake - but nothing like what other markets have experienced.
- 9 million people live within a 3 hour drive of Deep Creek Lake and Garrett County and 25 million people live within a 6 hour drive. This is a drive-to market that is extremely accessible now that I-68 is complete. No commercial flying or long drives are necessary. People can leave their professions and places of work by 5 pm on a Friday and be here by 8 pm. This area is a great convenience for those people seeking a vacation home.
- The new administration has proposed generous government spending over the next few years. If history is any indicator most government spending usually stays in the Washington D.C. and northern Virginia areas. Some people will capitalize on this government spending and more wealth will be created for consultants and other business owners in these areas which very well could create a whole new set of buyers for the Deep Creek market in the future.
- And most importantly Deep Creek Lake is the only true four season resort in the entire Mid-Atlantic region with an abundance of recreational activities. What other market in the eastern United States is so close to so many people and metropolitan areas that offers so many recreational activities?
The fundamentals above should keep the lakefront inventory level in the historical range that it’s always been in - somewhere between 50 and 100 properties for sale at any given time. Steady inventory and continued demand should equal rising values over time. As with real estate here I’m sure there are some great long term value buys in the stock market right now as well - and over the long term (10, 20, 30 years or more) both types of assets should turn out to be really good. But once again I will ask - if someone with a long term outlook had the cash on hand right now - would they rather put their money in the stock market that has demonstrated some recently volatility wiping out 10 year gains or would they rather purchase real estate here at Deep Creek that has not shown any extreme volatility or declines in value yet?
I certainly hope I did not come off like I am arguing with you. That is not my intention. I am very much thankful you have continued this discussion. Please feel free to comment in this blog in the future. Everyone’s insights and opinions are valued and much appreciated.
March 30th, 2009 at 11:59 am
Mike,
Well researched and well put. The thing that stands out for me in this discussion is the unquantifiable value of creating memories and adventures with friends and loved ones in such a unique and wonderful place that is Deep Creek Lake, MD. Although profit can be gained and even occasionally lost, a house is not a bank or a stock really. It is a place that can provide quality times to enjoy in our short ltime here. This, to disagree slightly with Sam, is what people really need to consider for there vacation home investment.
Keep up the good work.