Should You Buy a Vacation Home?
The thought has probably crossed your mind… You’re just ending (another) great stay at your favorite ski resort, or you visited that town on the coast that you both love, or you spent a week in the mountains doing some hiking, fishing, and catching up on your reading. You pick up one of the local real estate guides and think, “it would be great to own a place here.”
And it might be an excellent idea for you! According to the National Association of Realtors Investment and Vacation Home Buyers Survey from 2020 (based on pre-COVID numbers, as pandemic-induced relocations distorted the market), roughly 11% of homeowners also have vacation homes.
We recommend considering the following financial, practical, and emotional factors when deciding whether you want to move beyond the fantasy of owning a getaway in a place you love to signing documents in a realtor’s office. We put together this list of pros and cons (eight each) and a few other things to help our clients think through these significant life decisions.
Eight Pros of Owning a Vacation Home (or, Yes! Go for it!)
Owning your own place in a location you love means:
No hotel reservations or rules. You have a guaranteed place to stay with no uncertainty about availability, even if you decide to go at the last minute. You can arrive late at night without worrying about whether someone will be at the front desk to give you your key, and you don’t have to ask for a late check-out.
It’s easy to combine work & play. If your work permits, you could view your “home-away-from-home” as a second office. That would allow you to use it fairly often (depending on how far away it is) instead of just when you’re on vacation.
You can stay as long as you like. No worries about running up a big hotel bill, leaving a day early, or extending your stay. No penalty if you “cancel” at the last minute.
Your parents, adult children, and/or grandchildren can stay there, too. With a vacation home, cabin, or condo, your extended family can enjoy some special time together. And when you’re not using it, you can offer it as a place they can use as their own get-away.
You set the policy about welcoming dogs or cats. This can be a big deal for pet lovers, especially if you live in a cold climate and like to escape to a beach town for a month or two during the winter.
It may be possible to reduce the cost of ownership by renting. Some places are set up to offer your place to renters when you are not using it – this is pretty common in Hawaii and at ski resorts. Note that the impact of investors buying homes to rent them out via Airbnb and similar platforms have led some cities and towns to limit how often you can rent a property that you use only a few weeks a year.
It could be a good investment, in addition to a getaway. The property's value could appreciate over time, primarily if it is located in a popular area.
You have a foot in the door regarding the real estate market. If you believe you will likely retire in the area someday, owning a place now could be helpful.
Eight Cons of Vacation Home Ownership (or, Wait – maybe this isn’t for you.)
Local realtors will always play up the benefits, and you may know people who love having a vacation home but keep in mind…
Owning property is expensive. Buying and maintaining another home means more than just another mortgage payment—it also means property taxes, homeowner’s insurance, repairs, and utility bills. You should likely have a more significant emergency fund / additional liquidity account for these additional unexpected expenses, but also to float a second mortgage (if applicable) in the event of job loss, becoming disabled, etc.
Buying a vacation home could create stress and interfere with other financial goals. Would buying a vacation home make it a stretch to cover your kids' college funds, fully fund your retirement savings, or postpone that kitchen remodel you’ve been planning? Having two mortgages could be stressful, especially if your income tends to fluctuate or the overall economy sags. Don’t allow your heart to overrule your head. Talk with your financial advisor about how this would affect your overall financial picture to ensure you’re not overextending yourself if life doesn’t go according to plan.
You'll have more home maintenance headaches. Pipes can freeze in the winter. Critters can chew a hole in your roof. The washer or dryer can fail. And you might have to coordinate with repair and delivery services from afar.
You may get wanderlust. You might decide you don’t want to spend most of your vacation time in the same place. You might feel constrained about going someplace else after making this investment in a vacation home.
Security is an issue. The bad guys know that homeowners in vacation areas are often away. Installing security cameras is not difficult, but what do you do if there is a break-in and you are hundreds or thousands of miles away? You may want to hire a security service and/or increase your theft insurance, which costs more, or buy a place in a gated community, which would involve monthly HOA fees.
Owning a vacation home is not a great way to generate passive income. Even though you may be able to rent out your place when you’re not there, that rental income is not really “passive” because you will need to put in a lot of time and effort. Even if you are willing to pay a management company 10% to reduce the workload, you’ll still have to interact with them and make decisions. It’s a hassle.
Owning a second home may mean your investments are not sufficiently diversified. If it means you have a huge chunk of your net worth in real estate, you are taking on a lot of risk – probably too much. Furthermore, you’ll have a concentrated location risk if the second property is nearby.
Real estate may not be a great investment and is illiquid. Property values don’t always go up, and your financial situation can change such that you need or want to sell. Ultra-low mortgage rates that helped to propel property values skyward over the past decade are unlikely to return any time soon. If you decide to sell, it may be quite a while before you can find a buyer who will come close to your asking price.
And lastly, some other considerations:
Mortgage interest may or may not be deductible. In most cases, interest on home mortgages of up to $750,000 is tax-deductible. That applies to a second home, too, but it’s $750K total, not per home. You may or may not be able to deduct interest on a home equity loan on a vacation home; talk with a tax professional.
Banks require more for mortgages on second homes. Banks typically require a bigger down payment on a second home, and you will pay a higher interest rate. Banks know that if you get into a financial bind, you are far more likely to default on the mortgage on your vacation home than on your primary residence. Their loan terms reflect that risk.
How will you get there? If it is a long drive and/or a flight, be realistic about how often you would use the home.
Your family may see this differently than you do. If you buy a second home because you see it as a place for the entire family to enjoy, be sure that vision is shared.
If you rent it out, the IRS may ask questions. If you buy a vacation home, rarely use it yourself but rent it out a good portion of the year, the IRS may see it as an investment property, not a second residence. That means different tax rules apply. Consult with a tax professional if this is what you plan to do.
Alternatively, you may want to avoid renting to other people. You may not want people occupying your space, sleeping in your bed, and possibly damaging things. You can lock up your stuff, but it may mean you keep fewer creature comforts there than you otherwise might or have to remember to bring them with you when you use the place.
Some people love owning a vacation home; others regret the decision. The ideal situation:you expect to enjoy your vacation home, even if it does not increase in value or generate rental income, and it fits in with your overall financial goals. Review the points raised here with your financial advisor so that you make an informed choice that is right for you.