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The Family Cabin Equation

The Family Cabin Equation

| February 18, 2020

It seems more frequent these days, perhaps with busier families, that cabins aren't getting used as much as in the past. Many kids are in year-round sports or do a lot of activities that keep them from going up north to the family cabin as much as their parents did.

It's an emotional decision to try to figure out when is the right time to sell the family cabin, plus it comes with a lot of financial considerations.

This note was inspired by someone who recently told me they’re only using the cabin about twice per year, and we're starting to get into frank discussions on whether it makes sense for them to keep it.

I would say, if going twice a year, holding onto a $500,000 asset is approaching the no-brainer solution of selling; however, like other things, the decision is not so simple as just a dollars and cents formula.

This family has had the cabin for multiple generations. Children have been brought home to it when they were born and it was the primary home for a while. They've had countless Christmases and birthday celebrations, and Fourth of July, in particular, is a special occasion for which the cabin is the family gathering place.

Even though most people in the family are too busy to go, everybody thinks of it as the family gathering place, so let's start with the financial implications.

Assume $500,000 asset and no mortgage. For purposes of our discussion, this home could be either paid off or have a mortgage. Though, if we have capital allocated to this building, property, boats and so forth, we have to think what the opportunity cost of that capital might otherwise be.

This modeling is particularly acute after a year like 2019, where the stock market performed amazingly well along with bonds and international stocks.

Assume the money in the cabin ($500,000 for our example), instead of being tied up in the family cabin, was invested in a balanced portfolio of stocks, bonds, and cash.

Last year, if it had been invested, the money in the cabin could have been up in value about $100,000! To be fair, let’s assume an annual estimated return of 5% for investments. 5% * $500,000 = $25,000 a year in opportunity cost.

The Opportunity Cost of $25,000 + or –

That's the first data point on the equation. Now, it would be naive to assume we're going to have a big year every year with the market. You can also have big bad years, and there's something to be said for having money tied up in real estate which is less volatile and less correlated with the stock market. So, please don't get me wrong, I am a fan of real estate. However, there are differences between real estate that you're utilizing for your home, for entertainment, or, better yet, utilizing as an investment property to generate income and capital appreciation.

Generally, the appreciation in cabins over time is not enough to justify their continued ownership, although it may help with your equation. After all, “They aren’t making any more lakeshore.”

Ongoing Costs of $25,000 + or -

Add on the raw dollars and cents costs, which for a $500,000 cabin with taxes, toys, maintenance, upkeep, and utilities are probably in the $20,000 range plus or minus.

We should also include the depreciation of real items. That is, things that you're going to have to be maintaining and replacing over time; paint, docks, siding, roof, etc.

Insurance is also included in this formula, and in some cases, possible required capital improvements. For example, another client that will eventually need a $30,000 lift to get down to the dock from the steep embankment.

Next up, are the more important, critical, items to think about.

Emotions, Memories, Conflict, and Possible Regret - $???,???.??

What are the psychological or emotional costs of owning or not owning the cabin?

For some clients that might only use it two times a year, they may have other family that uses it, and it would be disruptive to them to no longer have access to the cabin.

This value should be assigned a number in your mind. What would you value the ‘value-add’ to your family members and the comradery and memories of using the place?

This could also help you along the lines of whether or not it makes sense to do family vacations instead.

There is the emotional side of it being in the family and selling to someone else. What if the beloved cabin is knocked down for something more modern? It could certainly be a shock.

Finally, there's the question of what would you do with the money if you sold?

Would you hoard it away, or “throw in on top of the pile” as some like to say? That’s certainly not compelling. It might be better just to keep it in the family and enjoy the time together.

Or do you need the money to live? Would liquidating the cabin reduce your cost and improve your chances of retirement success?

How does it fit your specific situation?

Ultimately, you want to run down the list with positives and negatives. Not only with the qualifiers of emotions, but also dollars and cents, capital opportunity costs, maintenance, depreciation, replacements, etc. Plus, possible capital improvement to remain accessible, or added maintenance as you get older and are no longer able to do the chores that the cabin requires.

Also, what is the difficulty of the drive and the number of times you use it per year, what is your per-night cost to maintain this home and is it worth it?

Would you rather be renting out something at one of the lake resorts and splurging on that, instead of maintaining an underutilized asset?

Lots of things have been written about cabin trusts and how to maintain the cabin in the family. They can be great if there are unlimited resources; however, in most of the cases we work with, there are not.

If interested and able, there are trust solutions to leave behind money to maintain the cabin and keep it in perpetuity for the family. But that may or may not be desirable for all parties, and often kids are in different situations money-wise and they may live far away, or prefer doing something else with their free time.

If you want to start brainstorming around your own “Pro-Con Ben Franklin list” and add some numbers as well, we'd be happy to talk.

Value to the Family? - Opportunity Cost - Recurring Costs = Annual Cost or Benefit

        $20,000                       $25,000               $25,000                      ($30,000)

Can you think of any other items we should include in our algebra?

Thank you for taking a look!