Is a Second Home a Good Investment? 🤔

Brock's newsletter | March 15, 2024

We are in Palm Springs for a wedding and just finished an architecture bus tour. Highly recommended (and we are not missing Modernism Week next year!).

Palm Springs is an interesting place - a city of vacation homes that has ebbed and flowed in popularity over the decades.

It was built out in the ‘50s, hit its stride in the ’60s and '70s, and fell into real disrepair in the ‘80s and ’90s.

Then three things happened.

First, modernist architecture took off in popularity (the first Modernism Week was 2006, and Dwell Magazine launched in 2000). Second, the cool kids rediscovered the area at the Coachella Valley Music Festival, which started in 1999.

The third thing, and this was the big one for home values, was AirBnB, which launched in 2007. Suddenly, owning a second home was not a huge expense or an (at best) break-even investment. A second home could be massively profitable.

Queue the hoards of Palm Springs buyers, and a booming real estate market.

And not just Palm Springs, but Joshua Tree too. AirBnB opened the doors to seamless advertising and management of second homes as rentals, and prices shot up all over.

But the good times did not last. Investors speak of the Four Horsemen of Risk:

Inflation
Deflation
Devastation (flooding, etc.)
Legislation

The last one is the most destructive. The first three can hurt, but they won't take an asset to ZERO. But legislation can - never invest in a business that some city council can vote out of existence after a ten-minute hearing. And that's what is happening to AirBnB all over:

· Palm Springs basically shut down AirBnB in all the good neighborhoods.

· In Mammoth, you can't AirBNB single family homes and the city has paused all new condo approvals.

· LA County (Joshua Tree, Altadena et. al.) is finally cracking down.

· And the city of LA is requiring police permits to operate, amid other, ongoing restrictions.

Second homes temporarily became good investments, but suddenly income and values are dropping and the Golden Age of AirBnB is over.

Once again, we come back to the bullet-proof desirability of single family homes in big cities and good neighborhoods.

Buy a house. Live there. Rent it. AirBnB it. Rent it on Peerspace. There's a plan A, B, C & D. And absent some act of God (i.e. the big one), your home equity will continue to rise.

Now, there's legislation being threatened on houses - a proposition this fall that will allow rent control on single family homes.

But it's been defeated twice and I think this one will go down too.

Why? Single family homes have proven to be untouchable legislatively. In America, no one wants to be told what to do with their house. And over half of Californians own a home, and vote accordingly.

“A man's home is his castle” is the expression.

From the safety of your well-located home, you can flip off the four horsemen. A house is 1) a hedge against inflation, 2) a tax-shelter, and 3) an actual shelter from the storm.