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!
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Jon Bell
Nancy Jo Fratz
Debra Savage