Could I Afford A House On Paw Paw Lake? -Action Economics

Paw Paw Lake is one of the most desirable places to own a vacation home in the United States. Since the late 1800s Paw Paw Lake has been a tourist destination, and a popular location for vacation homes near Lake Michigan.

Paw Paw Lake is a roughly 900 acre all sport lake located 5 miles inland from Lake Michigan. It is roughly 90 minutes from Chicago. In 1996 it was named as one of the top 10 spots in America to buy a vacation home by the Wall Street Journal.

Published Sept 1996. Homes for “$129,000 to $425,000”.

I grew up in Coloma, MI which borders Paw Paw Lake. I could easily walk to the public lake access from the house we lived in from ages 12 to 17. Mrs C. grew up on the lake, living on the other side of the street as the Lake. She was only a few hundred feet from the public access, a public access that was allegedly named after her Grandfather.

Her Grandfather, Harry Smith, Owned a large chunk of land in that area and founded Smitty’s Grocery Store in the 1940s which he ran for many years, then turned into The Board of Trade restaurant in the 1960s. This business was effectively in his front yard. The family home wasn’t on the lake, it was one alley over from the lake, so it had lake views and was only a couple hundred feet to the public access.

In the mid 1990s her house was condemned by the Township and despite fixing a laundry list of deficiencies AND providing the proof in court, the corrupt lawyers and judges demolished her home. All of the surrounding houses were Lake houses of increasingly more and more wealthy Chicago people, while they were a relatively poor family with 4 children. The neighbors complained about eyesores and every maintenance issue until the township decided to condemn the house. Her house was torn down when she was 15.

To add insult to injury about 7 years after tearing down their home the township added a back sewer bill for 30+ years onto the 2 lots her parents owned, totaling close to $10,000. This was a bill they could not pay and they ended up losing both lots to back taxes for bills that never should have existed. Those lots have subsequently been purchased by Chicago people who have houses on the lake to use for parking.

I would like to be able to provide a lake house for Mrs. C. Being able to be back on the Lake and have her grandchildren play often at the lake house would be good for her heart. It would also be a 30 years later status symbol to the people who caused her home to be torn down years ago as well.

Even with our growing net worth and income I still feel like owning a lake house on Paw Paw Lake is a pipe dream. Heck, I’m still driving a $2,000 car, it is so hard for me to envision owning a house worth close to a million dollars. We are on the cusp of being truly job optional with a decent margin, which I would put at occurring in 12 months. If we pursued a Lake House I would certainly need to work longer.

What It Costs To Have A Home On Paw Paw Lake:

Currently the least expensive house listed is for $695,000. It is a 3 bedroom 3 bath house that was built in the 1950s and has not been renovated. There are no inside pictures in the listing, so it is likely in disrepair.

The most expensive house currently listed is $2 million, also for a 3 bedroom 3 bath home. This home sits on a point, with roughly 180 degrees of lake views. It is mostly glass walls and all single story. This represents the current high end of pricing for houses on the lake.

The average home on the lake is approaching $1.5 million. By looking at other recent sales, $700,000 is not uncommon for a livable “starter” 3 bedroom lake house. I will use this as my primary example.

Who Lives on Paw Paw Lake?

This high cost is why roughly 2/3 of the homes on Paw Paw Lake are owned by non locals, with the vast majority of these being people from the greater Chicago area (yes I counted). The greater Chicago area has a population of around 9.5 million people, while the entirety of Berrien county has a population of 152,000. A top 10th percentile household in the US has a total wealth of $1.9 Million. With the average house on the lake costing $1.5 million and a top 10 percenter having a wealth of $1.9 million, it is unlikely the average top 10 percenter could afford a home on the lake. The threshold for family net worth for a top 5 percentile household is $3.8 million. I will use this as the likely threshold for ability to purchase a home on the lake.

The median household in the US has 2.5 people. If we divide the population by this, we have 3,800,000 households in the greater Chicago area, with 190,000 of them being in the top 5%. For Berrien County we get 60,800 households with 3,040 being in the top 5%. This demonstrates how it is MUCH easier (20X more likely) for people from Chicago to buy these homes than locals, as there are FAR more people from Chicago with the ability to afford them.

To be fair, many of these homes have been owned by the same families for decades. They were originally purchased when prices were a lower multiple of the average house. Entry level homes on the lake in 1996 were $130,000 when the average homes in Coloma were $60,000, this was a 2.1X multiple. Today an entry level home on the lake is $700,000 while the average home in Coloma is $240,000, a 3X multiple. It pays to buy and hold. Likely homes bought in the 1970s had closer to a 1.5X multiple. By the same token though, a family that ended up with great appreciation in their lake house but without significant other assets would become inclined to sell their winner to wealthier people to finance their retirement.

At any rate, the population on the lake skews to of course wealthier people, older people, and Illinois people. Access to the Lake has also become more difficult as many of the original homes that were built in the 1920s through 1960s and were small, modest homes, get torn down and turned into 3 story 5 bedroom 6 bath mini mansions.

The advent of short term rental apps like Airbnb also changed the dynamics of these lake houses. The vast majority are not listed on any rental service, however it appears that somewhere between 5% and 10% of the homes on the lake are used as short term rentals. Being able to offset some of the costs associated with owning an expensive lake house with short term rentals opens the ownership market up to more people.

The Numbers:

A $700,000 home with 25% down payment would be $175,000 down and a mortgage of $525,000

With a 6% 30 year mortgage this would be $3,147 /mo

Purchase Price: $700,000
25% Down Payment: $175,000
75% Mortgage: $525,000
6% 30YR Mortgage: $3,147
Est. Prop Taxes: $862 if primary Residence, $1,387 if not. (We will call it primary)
Est. Insurance: $250
Monthly Cost: $4,259

Down Payment:

A $175,000 down payment is a ton of money. It is more that the total cost of our current home which took us a decade to pay for. Having a paid off house though does make saving for a new down payment easier, A LOT easier.

On Average looking into 2026 and beyond our income minus expenses will allow us to save roughly $100,000 per year. Saying that is so crazy. Having the ability to save that much per year is a result of taking extreme, consistent action on improving our finances for 2 decades. This is the result of the combination of building my W2 career, building our rental portfolio through massive value adds, and living extremely frugally. We have lived in the same house we bought in 2011 when our income was less than a third what it is now, and the current combined value of our vehicles is $4,000. We already have “enough” in retirement funds, so I would stop putting money into those while saving up a down payment. To reach a $175,000 down payment we would need to save for roughly 2 years at this rate.

Alternatively I could take out a loan on our 7 unit building (which is debt free) for $200,000 in order to instantly create the down payment from our existing equity. Such a move would come with a reduction in yearly cash flow of -$16,000.

Another option would be selling our home and using the proceeds for the down payment. The proceeds of the sale would exceed this down payment need. This is very unlikely to occur. Both of us are emotionally connected to our current home and we would want to keep both houses.

Overall this is daunting, but it is doable. The most likely course of action would be a combination of the first and second plans. Perhaps 1 year out between new cash savings and equity farming of current assets we would be in a position to have a down payment. The good news is that our financial position is growing at a much greater rate than the costs of houses on the lake. This means, essentially that waiting is better, and if we do wait 2, 3, or 5 years to purchase a house on the lake we will be in a net stronger position than doing so earlier, even relative to expected increases in values.

Monthly Payment:

Since we are able to save $100,000 a year (which sounds so crazy to say!), having a total house payment of $4,259 per month is doable, taking up about half our savings capacity. Taking on a monthly payment like this with no additional income would also mean that we are no longer “job optional” If my W2 income went away, we would not be able to support the house.

On the plus side, getting a single mortgage with over a half million dollars for a fixed rate over 30 years is the ultimate inflation hedge.

How To Pay The Monthly Payment:

Using The Property To Generate Income:

We are already in the Airbnb space. We would certainly rent the property out in order to offset our costs. We would not need the property to be cash flow positive, just to take the edge off. If we rented the property for half the summer and half the shoulder season at $2,500 per week during the summer and $1,500 per week during the off season we would generate $24,000 per year. In the off season we could likely stay booked at $1,000 per week and would rent for an additional 10 weeks. This would be $34,000 in total revenue with the property rented out for 22 weeks of the year.

We would still have access for half the summer weeks, half the shoulder season weeks, and 10 weeks in the off season. Doing this we would only need to cash flow around $16,000 per year instead of $50,000 per year. This is much more manageable.

I would only want to do this for a few years though, I would not want the property to be a permanent rental. The problem we run into with this half and half method is from a tax perspective. I could not deduct the costs of the property from our taxes if we used it for personal use for more than 14 days.

Using Our Current Home To Generate Income:

If we split our time between the 2 properties we could effectively live in our current home half the year and live in the lake house half the year. When at the lake house we could rent our current home out on Airbnb. This could generate a conservative $15,000 in additional income.

Paying Down The Mortgage:

I don’t think I would be comfortable carrying this large of a mortgage long term, even if I could offset the majority of it with short term rental income from the property.

With closer to $75,000 available per year in savings after adjusting for the new mortgage, If I dedicated all of this income for 3 years to paying down the mortgage I would owe $265,000. A refinance at this point would drop the monthly payment by $1,559 per month to just $1,588. This would make owning the house feel much more manageable.

Paying down $75,000 for 1 year after the refinance would then take 170 months off the mortgage. turning it into a 16 year loan.

If we started this process at the start of 2026 we would be ready to buy at the start of 2028 and 3 year in at the start of 2031. We would have bought the property when I am 41 and Mrs. C is 44. If I live to be 85 then this would be over half my life owning one of these lake houses.

Aggressive Time Line:

2025/2026 (40): Save the down payment and equity mine existing property for $175,000 total down payment. This could include refinancing or selling an existing property.
2027 (41): Buy lake house, put $75,000 from cash flow on mortgage,
2028 (42): put $75,000 from cash flow on mortgage
2029 (43): put $75,000 from cash flow on mortgage, refinance to new 30 year loan with $265,000 owed.
2030 (44): put $75,000 from cash flow on mortgage, cutting 14 years off duration.
2031 (45): Pay off other mortgages to increase overall cash flow: $22,000 on House 1: $552/mo, $17,000 on House 2: $337/mo. This effectively offsets the $1,588 mortgage to $700. At this point I certainly can see no longer having the property used as a short term rental.

Appreciation:

The majority of my properties were purchased for cash flow, not appreciation. Most of my properties are in Benton Harbor, MI and values will likely not increase much more than they have. The population is continuing to decline and despite large amounts of Federal, State, and Whirlpool investments to the area, this is not changing.

A lake house is different. Paw Paw Lake is not getting any bigger and there is no additional land to turn into houses. No new lakes are being made near Lake Michigan AND near Chicago. Buying one of the less expensive houses on the lake also opens up more upside.

Legacy:

On my family tree no one has owned a lake house ever. Owning a lake house that my children and grandchildren would have access to for many decades to come would be a cool legacy addition.

Could We Be Entering A Good Time To Buy?

Interest rates are high, and inventory, especially on the upper end is growing. There may be an opportunity where prices are partially depressed due to these factors. The Federal Reserve is in no hurry to cut interest rates. It may be years before we see any substantial cuts. “Luck” is when preparation meets opportunity. By building our cash reserves now and keeping an eye out, we may be able to snag a property for closer to $500,000 in the next few years. There may be a property that comes up that needs significant work and is full of junk that no one wants.

What do you think of about Paw Paw Lake and owning a lake house?