(File under: Some terrible financial decisions can be great life decisions, and vice versa.)
A few months ago, I took my family on a road trip around the South Island. We stayed in various towns and cities we don’t often visit.
One of the things my wife and I often do when we go somewhere new is to open the TradeMe Property app on our phones and check out property prices in the area.
Like many Kiwis, we like the idea of owning a bach. I wouldn’t be surprised if we own one at some point in the future. In this article, I’ll start the process of justifying (or rationalising?) the decision.
The cost of owning a bach
As a financial blogger, I feel like my job is to point out how expensive it is to own a bach. (But stay with me here. I’ll give the other side of the argument as well.)
That’s true. All else being equal, you’re likely to end up in a better financial position if you don’t buy a bach.
There are major opportunity costs associated with owning a piece of property that lies dormant for most of the time. Let’s say you have $500,000 available and you spend it on a bach.
If you invested the money and were able to generate, say, a 5% return (after tax and adjusting for inflation), that’s $25,000 per year. After 4 years, that’s $100,000. And that’s forgetting compounding returns (ie, interest on the interest).
(There will be costs associated with owning the bach, including rates, insurance, and maintenance, but let’s put these to the side for now.)
Of course, you might use your bach to generate an income through AirBnb or Bookabach. I’d be surprised if you generated 5%, especially if you wanted to use the bach as a proper holiday home that you can visit on a whim.
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And if you chose not to buy a bach, you would probably spend some of the money you’d have otherwise spent on holidays elsewhere. But $25,000 per year translates to about $500 per week – my guess is you’d end up spending less than this amount.
Bach’s cost money but the money might be worth it
Lots of things in life are expensive. And lots of things in life are worth the expense.
For some people, opportunity costs of $25,000 are worth the expense.
If you’re confident that you’re going to end up in a decent financial position regardless of whether you spend $25,000 on a bach or not, then perhaps it’s worth the expense, and could even be an easy decision. (Consider my videos here and here…)
At the end of the day, if you’re going to end up with more money than you need, why not enjoy it?
Owning a bach can still be part of your retirement plan
There are some times of your life where owning a bach might be more useful than others.
If you have children – and the means – owning a bach while they’re growing up with you might provide you with an easy way to “get away” from the day-to-day. It might provide a different context for building relationships with your loved ones.
When you have grandchildren, it might also be nice to have a place where your extended family can gather. (Or to provide your children with an affordable, convenient place to get away during a time in their life when it’s not otherwise easy.)
Once you reach a certain age, you might lose interest in owning – and maintaining – a second home.
If you think of owning a bach as a time-limited thing rather than a lifetime thing, then you might be able to factor it in as a legitimate part of your retirement planning.
In much the same way that the idea of “right sizing” (otherwise known as “downsizing” – selling your home for a smaller and less expensive home as you need less space) can be part of a retirement plan, the idea of selling your bach to free up capital to support your lifestyle at a certain point can also be part of your retirement plan.
You might not end up with as much as you’d have had if you’d simply invested the capital into the bach (or saved the money that went towards the mortgage), but you might still have more than enough.
Some comments on baches and succession planning
A lot of Kiwis like the idea of keeping a bach in the family.
The challenge is, this can get pretty difficult pretty quickly.
A second-generation bach can be hard enough. Let’s say you have three kids. One or two might not live anywhere near the bach so won’t get as much potential use from it as the others. All of your children will end up in different financial situations. For some, the costs and obligations associated with the bach might become a major burden. There might be a perception that one or more siblings isn’t carrying their weight regarding upkeep. Instead of creating harmony, a second generation bach can create tension.
Think of it another way: let’s say you have a bach worth $600,000. Your adult children might get much greater benefit from having $200,000 and using those funds elsewhere.
Even if one of your children purchases the property to keep it in the family, there can be issues of fairness. Do they pay out their siblings based on market values? Do you provide them a discount? Do you provide favourable finance? And even if you do it in a way that sits well with everyone, how will everyone feel if the value of the bach skyrockets in value? Or falls?
At least between siblings, there is (hopefully) good communication. When you get to the third generation, and ownership needs to be managed between cousins, then things can get really challenging.
Instead of thinking of the bach itself as an inheritance, the “inheritance” related to a family bach may be better thought of in terms of the fond memories and spending time together as a family that it supported.
Something to consider: fractional ownership
The fact I’m even bringing this up may seen unusual, since I’ve just highlighted some of the issues of sharing ownership of a bach across different households.
But despite this, if and when my wife buy a bach, we will consider buying ti fractionally, with one or two other close friends or family members.
Frankly, owning a bach as tenants in common with friends (or via a corporate entity with allocated interests) is probably more appealing to us than owning a place outright.
For one thing, it reduces the capital requirements substantially. Buy a bach with another household and the cost (and many of the financial risks) go down by half. Buy a bach with another two households and the costs (and risks) reduce to one third.
Suddenly, the idea of owning a bach becomes a lot more affordable.
And despite, the risks, linking your financial fortunes with another one or two couples is also somewhat appealing — because if done right, it can actually strengthen your relationship and bond.
To be clear – there are major risks involved with this approach. But I’ve seen this sort of arrangement work first-hand. I know of three families that are extraordinarily close, in part because of shared ownership in a bach and in a farm.
In order for an arrangement like this to work, you would need to clear communication. You would need to manage expectations ahead of time. You’d also need to ensure that you can address conflict if and when it occurs.
You would also need to do some “due diligence”, to ensure that the other couples can maintain their sides of the bargain. For example, I would only do this with couples who I knew were in a strong financial position where either investing the capital or taking out a mortgage for the property wouldn’t unreasonably burden them.
You also need to be prepared to accept that unforeseen events can happen, and make peace with this possibility.
No one knows exactly how their life will go. For example, I think it’s probable that I will live to old age in decent health, stay married to my wife who will also live to old age in good health. My career, and my wife’s career, will continue on their current trajectories. Our children will stay healthy (for the most part) and become productive, independent adults who don’t need special assistance.
But who knows. And if we connect part of our financial situation with another couple or two… who knows about them. We need to be open to the possibilities of relocation, health issues, professional troubles, and relationship breakdowns, which might mean they need to liquidate their interest in the bach. They might also simply lose interest in having a bach (and so might us), and we need to be prepared for any of these scenarios.
However, if you think you can take the worst, it might be worth taking the risk.
A prophylactic: What does it look like on a Tuesday?
When I ask “What does it look like on a Tuesday?” I am using a good heuristic of Norton and Dunn’s book Happy Money. Basically, when you think about spending a substantial amount of money on something you should ask what it would look like on a normal, mundane, run-of-the-mill Tuesday.
The reality is, if I owned a bach, it would look… empty. Because I’d be home while the kids are at school and my wife and I are working.
Depending on how far away it was, I might head to the bach every now and then to do some work in a different context.
If it was a Tuesday on a school holiday, then our family might be there. And there’s a good chance some of us would be… bored. Or we’d be doing work around the house that we’d rather not be doing.
The idea of going to a new place is fun. Even somewhere like Oamaru or Omarama can seem exotic. (No offence to readers from Oamaru or Omarama!). But once you know a place, it’s not so exotic any more.
So for now, I won’t be writing about how we’ve just bought a bach. But as our circumstances change, such as our degree of confidence about achieving the retirement lifestyle we want; and as the image in our mind about what the bach would look like on a Tuesday evolves; and as opportunities arise (such as market dips, or other couples being in a position to co-own); this decision might well change.
And when that time comes, I’ll have some of the rationalisations to justify the decision right here in this article.