A vanity market is one where the main benefit you gain from ownership is telling your pals that you own.
Similar to my observation that I was wired to buy a “big” house, there are other purchases our ego gravitates towards: cottage at the lake, ski chalet, big-city pied-a-terre, beach house, farm…
Our ego’s weaknesses depend on our cultural background, childhood memories, current mood and social situation.
My ego can lead me far astray, particularly with non-yielding real estate, and depreciating assets.
I’ve been battling with myself since I first visited Vail, Colorado. I’ll illustrate with real figures from the neighborhood of East Vail. It is a niche market, which I’ve been following for 16 years.
The “buy” => $1 million buys you the opportunity to spend another $375,000 to renovate, and furnish, a property that was build in the 1970s. After your renovation is done you pay ~$25,000 per annum in taxes, insurance, HOA and running costs.
The “rent” => $25,000 to $40,000 all-in rental cost for the same property.
Something we noticed about skiing, most skiers don’t ski.
Put this observation another way… there’s a lot of empty real estate around.
I’m sure every empty place has a history of buyers, who were certain they’d use the property more often than they do.
A useful rule of thumb is to assume that every $1 million, in a vanity property, costs your family $50,000 per annum. Renting makes (some of the) opportunity cost real, and allows you to calculate the cost-per-night of what you’re using.
Above is what you can see and calculate.
What about what you don’t see?
#1 => the option to change your mind, without cost or hassle. This is a powerful argument when framed correctly.
Honey, the kids are going to grow up and leave. When that happens, our life will change in ways that are impossible to predict. We should maintain the flexibility to change our minds.
#2 => the option to buy in a downturn. About once a decade, property values snap downward. Waiting does not feel like a valuable option but it is. I’ve seen brief, 50% markdowns numerous times.
#3 => what I think I will like does not match what I actually like. I am a master at fooling myself. Fooling myself with regard to location, views, amenities, garages, layouts… you name it.
Renting “forces” me into different types of properties. Because mistakes are so expensive, I write down the lessons from every new property.
Here’s the best lesson of all…
Assets don’t create the life you want to lead.
Focus on shared experiences with the people you love.