Lakefront Lots: A Wise Investment Or A Money Pit?

Buying a lot by a lake can be a great investment, but there are some things you should consider before taking the plunge. Firstly, waterfront properties tend to be more expensive than other types of houses, and there are stricter requirements for financing if you're purchasing it as a second home. You'll also need to factor in higher insurance costs, maintenance costs, and potential flood damage. However, lake properties are in high demand and tend to appreciate faster than non-waterfront homes, so they can be a wise investment. Before making a decision, be sure to do your research, consult with experts, and carefully inspect any potential properties.

Lake property as a long-term investment

Lake property or lakefront real estate is one of the best investments any investor can make. This is mainly due to the high demand and limited supply of lake homes, which can make them a wise investment. Lake properties also offer income-generating benefits and tend to appreciate faster than standard properties.

Appreciation Rates and Income Generation

Lake properties have an annual appreciation rate that rises each year. The national average growth is around four percent, compared to one or two percent for a standard property. This makes lake properties excellent for long-term investments.

Vacation homes, which many lake properties are used as, offer investors generous returns on their investments year after year. The allure of vacationing in or renting a lake house brings in tourists and families, ensuring a steady source of residual income.

Things to Consider

While lake properties are excellent long-term investments, there are some disadvantages and important considerations to keep in mind:

• Higher Costs and Taxes: Lake properties often come with higher insurance costs, especially if flood insurance is required. Local and state taxes may also be higher due to the popularity and quick appreciation of these properties.
• Risk of Flood Damage: Areas with higher rainfall totals increase the risk of flood damage to the property. It is essential to have insurance to protect your investment.
• Increase in Tourism: If you are looking for a secluded vacation property, the increase in tourism and number of strangers near your property may be a downside.
• Maintenance: Lake properties tend to undergo more wear and tear due to their proximity to water, leading to higher maintenance costs.
• Legal and Zoning Restrictions: Lake properties often have stricter regulations to protect the natural environment and water quality. It is important to research these restrictions before purchasing to avoid potential legal issues.
• Utilities: If the lake property is in a rural area, power, water, cable, and other utilities may come at a premium or may not be available at all.

Tips for Buying a Lake Property

• Location: The potential return on investment will depend largely on the location of the lake house. It is important to research the local real estate market and understand the seasonal demand for rentals.
• Inspection: It is critical to carefully inspect the property and do surveys, elevation certifications, water quality tests, and other inspections to ensure that the property is in good condition and not at risk of flooding.
• Financing: Be proactive with financing as these loans tend to take longer, and consider the hidden costs of leasing the land, higher property taxes, and utility costs.
• Improvements: Adding amenities like a retaining wall, boathouse, or dock can make your property more appealing and increase its value.
• Specialist Knowledge: Consider working with a real estate agent who specializes in lakefront properties to ensure you get a good deal and are aware of all the complexities of buying this type of property.

In conclusion, lake properties can be a sound long-term investment, but it is important to carefully research and consider all the factors involved before purchasing.

The pros and cons of buying a lake house

Pros

• Lakefront properties are a good investment. They tend to appreciate more than inland properties and are always in high demand.
• They offer magnificent water views and the potential for water sports.
• It feels like you are always on vacation.
• You can generate good rental income.
• You can enjoy bonfires, singing, and roasted marshmallows.
• You can create memories and bond with your family and friends.

Cons

• There is a potential for flooding.
• There is more maintenance required.
• The lake could be noisy due to recreation.
• There are higher insurance costs, especially when flood insurance is required.
• There is less privacy on some lakes with small lots.
• There are more property restrictions.
• There is a potential for more bugs and wildlife.
• There are higher property taxes.
• Utilities may come at a premium.

The costs of owning a lake house

Lake houses are prone to higher maintenance costs than other homes. They are typically nestled between trees and the shoreline, so houses are exposed to mould and mildew from the moisture (especially if they’re a lake with high water levels) and potential roof damage from trees. Waterfront properties will also likely endure some amount of wind or water damage during storms, resulting in the need to repair windows, siding, retaining walls, and landscaping.

In addition to regular house maintenance, you’ll also need to maintain and repair the boat and dock. The initial cost of these items varies widely, but you can expect to pay up to $40 per square foot for a new boat dock and anywhere from $10,000 to $50,000 or more for a boat. You’ll also need to cover the cost of gas and repairs for the boat and dock.

You may need to pay flood insurance for your lake house on top of likely higher-than-average homeowners insurance. Even if you aren’t required to purchase flood insurance, you should seriously consider it. Even a few inches of water can cause costly damage to a home, and regular homeowners insurance typically doesn’t cover flood damage. Flood insurance can cost around $900 per year.

Additionally, standard property insurance on vacation homes tends to be higher than it is for your primary residence. This is because mortgage lenders assume you won’t be home as often, and therefore your property is more likely to sustain damage or experience theft. The average cost of vacation home insurance is between $2,000 and $3,000 per year but varies based on your credit, location, and the age and condition of your home. The insurance cost may be even higher if you plan to rent out the property to others.

Local and state taxing authorities know that lake properties are popular and quickly appreciate in value. The tax rates are often higher for local, city and municipal taxes compared to owning an average suburban home. It is essential to check the taxation rate of a property that interests you before deciding to purchase.

Finally, because lakefront homes are typically not found in concentrated urban areas, utility expenses can often add up quickly.

The income potential of a lake house

Lake houses can be a great investment opportunity, with the potential for both short-term and long-term gains. Waterfront properties are typically in high demand and can generate a steady income stream through rentals or capital appreciation.

Short-Term Rentals

The rise of platforms like Airbnb and VRBO has made it easier than ever to rent out lake houses for short-term stays. This option provides immediate income, allowing owners to charge a premium for accommodations, especially during peak seasons. For example, a lake house in a desirable location with amenities like a private dock or beach can be rented out for a higher nightly rate.

Long-Term Value Appreciation

Historically, waterfront homes have appreciated at a faster rate than non-waterfront properties in the same area. For instance, some Central Texas lakes, such as Canyon Lake and Lake Austin, more than doubled in value within three years. This trend is driven by the limited supply of waterfront properties and their increasing demand, making them a sound long-term investment.

Rental Income and Capital Appreciation

Lake houses offer the dual benefit of rental income and capital appreciation. By renting out the property when not in personal use, owners can generate a steady cash flow while also benefiting from the potential increase in the property's value over time. This combination can lead to significant financial gains, especially in thriving real estate markets.

Vacation Destinations

Lake houses are often located in popular vacation destinations, attracting tourists and temporary residents. These areas tend to have strong rental markets, ensuring a consistent flow of renters throughout the year. Additionally, the allure of vacationing in a lake house drives tourists and families to occupy available properties, further increasing the income potential.

Considerations

While lake houses have strong income potential, there are some considerations to keep in mind. Firstly, the cost of maintenance and utilities for a lake house can be higher than for a typical home due to wear and tear from the elements and the potential need for flood insurance. Secondly, local and state taxes may be higher for lake properties due to their popularity and rapid appreciation. Finally, it's important to research any restrictions or covenants that may impact the property's rental potential, such as homeowner associations or zoning regulations.

In conclusion, lake houses present a compelling investment opportunity, offering both short-term rental income and long-term value appreciation. With their high demand, limited supply, and potential for strong cash flow, lake houses can be a lucrative addition to any investment portfolio.

The legal and zoning restrictions of a lake house

When considering buying a lot by a lake for investment, it is important to be aware of the legal and zoning restrictions that may apply. These restrictions can vary depending on the specific location and regulations of the area, but here are some general guidelines to consider:

• Zoning Provisions: To manage the effects of shoreland and water surface crowding, prevent pollution, maintain property values, and preserve natural characteristics, zoning controls may regulate lot sizes, placement of structures, and alterations to shoreland areas. These controls ensure that residential lots meet certain dimensions and density requirements, with specific standards for natural environment lakes.
• Building Permits: A building permit, such as a Land Use Permit (LUP), is typically required for any structure over a certain height, such as decks, sheds, or additions to existing buildings. Contact the local planning and zoning department to understand the specific requirements for your area.
• Clearing Land and Tree Removal: Clearing land and removing trees, especially within a certain distance of a waterway or bluff, is strictly regulated. A permit may be required, and failing to obtain one can result in fines and restoration costs.
• Driveways and Access Roads: New driveways may require an access permit from the relevant authority. Additionally, the placement of roads, driveways, and parking areas must consider natural vegetation and topography to minimise erosion and maintain screening from view.
• Septic Systems and Sewage Treatment: Regular inspections of septic systems are often mandated, especially when applying for permits or during the sale of a property. Specific requirements, such as the use of a licensed contractor, may apply for properties located in shoreland areas.
• Fences: In most cases, fences below a certain height (e.g., 6 feet) do not require a permit and can be placed on the property line. However, fences exceeding this height typically need a permit and must comply with setback requirements.
• Additional Dwellings: Adding a second home or converting a structure into a living space on your property may trigger additional requirements and regulations, especially if it is located near a lake or river. Contact the local planning and zoning department for guidance.
• Non-Conforming Structures: If you own a home or cabin that was built before zoning laws were enacted and it no longer meets the current zoning requirements, it may be considered non-conforming. This could limit future use and expansion options, so it is essential to consult with the planning and zoning department to understand the specific restrictions.
• Signage: Placing signs on your property may require a permit, depending on the type and purpose of the sign. There are specific regulations for signage related to businesses, political purposes, residential identification, and other categories.
• Lighting: Lighting fixtures should be directed downward and shielded to avoid trespassing onto neighbouring properties or roads. There may also be restrictions on the maximum height for mounting lighting fixtures.

It is important to recognise that these are general guidelines, and specific legal and zoning restrictions may vary based on your location. Always consult with the local planning and zoning authorities to understand the exact regulations that apply to your lake house investment.

Frequently asked questions