Should I Buy A Vacation Property?

in Financial Planning by

Imagine sitting on the lanai of your Hawaiian vacation home, overlooking the ocean while the sea breeze kisses your face as you pour yourself and your loved one another margarita. You’ve escaped the daily grind and aren’t checking any work e-mails until you return to the mainland a couple weeks later. If you’ve got a couple million dollars to spare, what a life!

Owning a primary home is a part of the American dream. But having enough money to own a vacation home might very well be an American fantasy. Who actually has a vacation home? And what questions did they address before taking the leap? We discuss these issues and more in this post.

According to a 2014 National Association of Realtor’s Investment and Vacation Home Buyers Survey, vacation-home sales accounted for 13% of all transactions in 2013. NAR’s analysis of U.S. Census Bureau data also shows there are 8.0 million vacation homes and 43.7 million investment units in the U.S., compared with 74.7 million owner-occupied homes. In other words, roughly 11% of primary home occupiers also have vacation homes.

The typical vacation-home buyer is 43 years old, has a median household income of $85,600 and purchased a property that is a median distance of 180 miles from his or her primary residence, according to the NAR. For those of you who live in New York City, perhaps a vacation home in The Hamptons or The Jersey Shore are desirable locations to choose from. For others who live in the San Francisco Bay Area, Napa Valley, Santa Cruz, and Lake Tahoe are popular destinations. Only 34% of vacation homes in the survey were over 500 miles away.

Let’s focus on some things to think about before you consider buying another piece of property.

Related Post: What You Need To Know Before Buying Rental Property

Vacation Property Considerations

Here are a few questions you should consider before purchasing a vacation home:

1) What are the alternatives? Before buying a vacation property, compare what other properties you could rent for the same cost of owning your property. Owning property will include property taxes, maintenance costs, time, effort, insurance, and a mortgage if you do not pay cash. You’ll also have to pay homeowner’s dues if you purchase a time share or condo. Make a realistic assessment of the number of days of planned usage and divide by the annual cost of ownership to come up with a rental cost per night. Now look on online at various sites like VRBO, AirBnb, and Expedia to see what else is out there in the same price range.

2) How often do you truly plan to use the property? Most American workers average 3-6 weeks of vacation a year, excluding those who are able to work from home. Do you really want to spend all your vacation days at one place? Or would you like to visit different parts of the world instead? It could be difficult to spend as much time as you’d like at one specific vacation property depending on your schedule and interests.

3) Does your vacation property have rental income potential? Rental income is a great way to support the ongoing cost of owning a vacation property during the 40+ weeks a year that you will likely not be there. There are services such as VRBO and vacation management companies that can help you earn income. The IRS tax laws even allows you to rent out your vacation home for up to 14 days a year without paying taxes on the rental income generated from those days. You might be able to deduct any uninsured casualty losses too, within limits, though you can’t write off rental-related expenses. If the home is rented for more than 14 days, however, you must claim the income.

4) Are you maxed out on your mortgage indebtedness? The IRS says you can write off a maximum of $1 million in mortgage indebtedness between your primary and qualified secondary home. If you are already capped out with a $1 million or greater mortgage on your primary home, then you can no longer write off your vacation property mortgage to your income. But if you rent out your vacation property, you are able to deduct the interest as an expense off of your rental income. Use Schedule A to make the deductions. See the IRS for more details.

5) Do you need to finance it? Getting a mortgage for a vacation property can be a tough ordeal. Banks are still quite strict on limiting borrowers to a 42% debt/income ratio. Meanwhile, the average credit score for rejected mortgage applications was around 729 according to FICO back in 2012.

6) Do you plan to own your vacation home for at least five years? Despite the proliferation of online real estate sites that help you find homes, real estate selling commissions have stayed stubbornly at 5%. Almost every other industry has seen a decline in transaction costs due to the Internet except for real estate. Given the high transaction costs associated with buying property, it’s best to own your vacation rental for as long as possible.

7) How strong is your income? A vacation property is largely considered a luxury purchase. The vacation property market is typically the first market to get hit during a downturn. And the vacation property market often suffers the biggest declines as well. During the financial crisis, many people not only suffered pay cuts, but they also lost their jobs and saw huge hits to their real estate portfolios as well.

8) Can you see yourself retiring in your vacation property? One ideal scenario is buying a retirement property long before you actually retire. If you absolutely know where you want to retire and have the financial means to afford a vacation property, then buying a retirement property decades in advance might not only bring tremendous capital appreciation, but a place where you’ll have already paid down your mortgage. The difficulty is predicting your tastes in the future.

9) What is your current net worth allocation? When the financial crisis hit, the average American saw their net worth get wiped out because property accounted for the large majority of their overall net worth. Each person’s risk tolerance is different. However, having more than 50% of your net worth in any single asset class, especially one where leverage is required may not be a great idea. Property is one of the least liquid investment classes.

10) Can other people benefit from your property? Perhaps you might only be able to visit your vacation property three weeks a year. But maybe your children, relatives, parents, clients, or friends can also take advantage of your second home. This goes back to utilization rates. If utilization rates are low, then perhaps it’s best to simply rent a home or a hotel room instead for a few weeks a year.

A Vacation Property Is A Luxury

Nobody needs a vacation property. It’s just nice to have one. Chances are high that you’ll be better off financially just renting instead. You’ll have a lot more freedom and flexibility to relax as well.

That said, there’s no reason why buying a vacation property can’t be a wise long-term investment. But in order to capitalize on your investment, you must either make a rental return, sell or retire there. It’s important to know ahead of time whether you are you really buying a vacation property for a better lifestyle, or are you simply buying an investment property to make money?

Finally, make sure your vacation property isn’t a hassle to manage. The more you have, the more problems that may ensue. You can only live in one place at a time. Here’s hoping you’re living exactly the way you want!

Readers, do any of you own a vacation property? Are you thinking about buying a vacation property? Do you think a second home is a good idea?

Manage Your Assets Today With Personal Capital

Regards,

Sam

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Financial Samurai

Sam is the former Managing Editor of the Daily Capital blog. He worked in finance from 1999-2012 before deciding to focus full-time on his online endeavors - FinancialSamurai.com and the Yakezie Network. Sam is an avid tennis fan who loves to travel. He received his BA from William & Mary and his MBA from UC Berkeley.

48 comments

  1. Jim

    One additional consideration is rental income may not be possible depending on the community in which you live. Some cities don’t allow short term rentals, and have a minimum requirement of 30 day stays. With the rise in AirBnB and VRBO more communities are putting in regulations like these to protect full time residents and local hotel industries.

    Reply
  2. Linda

    I’ve always dreamed of having a vacation property up in Healdsburg. My chance was in 2010, but prices seem to be moving quickly again.

    I think more people like the idea of owning a vacation property vs. actually owning one. Kinda like a boat!

    Reply
    • Anonymous

      That’s where I bought my vacation home in late 2998, got lucky with timing.

      Reply
  3. Ellen

    In 2011, I bought a tiny cottage, 5 houses from the ocean, for $240k. It needed a lot of work, so I’ve put some money into it since, but I live there 6 months of the year. My cottage is very small–the building is only 20’x20′! BUT, the important part is I own the tiny scrap of land that it sits on. A friend bought a place too, but he bought on leased land. Years later, when he went to sell, he learned the truth the hard way. Land is what appreciates; houses depreciate. His dream of getting a big return on his investment was vapor. Worse yet, the investment had become illiquid because, by the time he sold, there were fewer than 30 years left on the land lease, so no buyer could get a 30 year mortgage to buy the place. In my beach community, owners on leased land are dealing with non-renewable leases and have to pay to demolish their own home, in order to return the land to its owner in the condition it was leased in 60 years ago. A friend who bought in the mountains owns his land, but the previous owner had already leased out the mineral rights. Now, for the next 20 years, he faces the potential for fracking and even an oil derrick type structure in his yard–with no potential for negotiation or compensation. Realtors are quick to assure potential buyers that these arrangements “won’t be a problem” and, buyers are eager to believe this because in every one of these other instances you’ll be able to afford more for your money than you’ll be able to afford in a fee simple purchase that includes the land. Just be cautious so that you don’t buy what you see as an investment only to discover it was just a very expensive vacation rental of finite duration.

    Reply
  4. Robert

    About the only time it makes sense to buy is if you intend on making that vacation home your retirement home one day, and want the ease of transition. The benefits of owning a 2nd home monetarily just do not add up in today’s climate. Back in the double digit real estate gains per year, it did.

    Reply
  5. Albert Colburn

    My wife and I purchased vacation home/time from Wyndom. The places we stayed at were great. We were able to trade for places from Hawaii to England and enjoyed our time. The problem arose when I reached retirement age. The maintenance and the cost of the weeks grew over time to cost almost as much as the our house payment. To our surprise when we decided to get out of the vacation home (now points) we found out that the time share would not take back the time at no cost and there is no market to rent or sell the time points. The only out was to default on the payments and let the time share take it back by force. You would be better to buy a vacation home outright

    Reply
  6. Dave

    My wife and I own a vacation property. It will be our retirement home in a few years. It is helpful to experience a few dry runs on our retirement lifestyle while still working. Meanwhile, we offer the home to family members who would like to have a nice getaway. After one year, we have no regrets.

    Reply
  7. Marc

    My wife and i have purchased 2 vacation properties this last year. One is a small flat in coastal Spain as the Euro is low and property prices remain beaten down. This is a place for friends, family, ourselves, and rental market in high season. The other is land only at moment and this is in Panama with long term goal of retirement (gated, community near beach, airport, and hospital). Cash for both, and planning to build rental home on the Panama lot with the expectation we will renovate before retirement in +/- 20 years. For us it is a mix of purchasing in markets that are currently undervalued as well as personal interests. If truly a vacation home (part or full time) it is as much an emotional decision as a business choice.

    Reply
    • Michael

      Which town in Spain? We’ve been thinking of coastal Spain for that very reason (Euro).

      Reply
      • Marc

        We drove down from Barcelona and to Torre Viejo, then down to Malaga, through Marbella, Estapona, and passed Gibraltar to Tarifa and up to Cadiz. All are fantastic for various reasons. Marbella was definitely more up-market. For us we preferred more flips flop style location. We ended up in La Duquesa, a smaller port area about 20 minutes from the Southern tip. Can see lights from North Africa on a clear night. There are so many towns. And if go just a bit inland, can get some amazing mountain views. We want to go back and scope out the wine regions as well as the ski areas.

        Reply
  8. Heather

    We purchased a lake home in northern MN 8 years ago, in our early 30’s. It is almost exactly 180 miles from our main home. We bought it in part because we appreciate the mortgage interest deduction, but the heart of why we bought it isn’t even mention in this article: family. I have extended family (cousins) that live in that area, and I would never have gotten to know them without buying the property.

    We’ve also connected with our more immediate family in a very different way than just hanging out on the weekend…here you have a place where 3 generations can gather away from life’s stresses and relax and have fun – for an entire weekend! It’s a completely different experience, and there’s beauty in being up there during summer’s laughter and sunshine and equal beauty in the quiet of winter (yes we participate in various snow sports). 🙂

    Of course owning a second home requires financial introspection, but having lost my father in law very recently, I’m ever more appreciative of the non-financial benefits that owning a second home can offer.

    Reply
  9. Nadine

    Here in the Phoenix, AZ, area many of us own second homes in the mountains. It’s a two or three hour drive from the Valley of the Sun (and 110+ temperatures June – September!) to spend the weekends in the Ponderosa Pine forest (where the temperature is at least 20 – 30 degrees cooler). There are thousands of acres of National Forest to explore on foot, horseback or on an ATV. There are even lakes in the forests for boating and fishing!

    At retirement, many of us weekenders stay at our summer cabins the whole summer and return to Phoenix for the winter to avoid shoveling snow. Then we have to accept the kidding about being “winter visitors.”

    Reply
  10. Ron Majors

    I bought a vacation home in 2012 on a nearby lake just 1.5 hrs from home. It’s the only mortgage we have and it’s a very low rate. We could have paid cash but why when our investments are earning more than the mortgage costs. We probably won’t retire there but it’s been great to have as we do spend weekends there and also keep our boat docked there at no additional cost. We bought at a market low for the area so we hope to make a pile of money when it comes time to sell. But even if we sell at a modest loss, that would probably still cost us less than renting for the same duration, even considering taxes and improvements. To be honest, we would already be a really long ways down a bad financial pathway if we attempted to rent a comparable for the same duration, we’d have nothing to show for it. I think that’s something worth considering.

    Reply
  11. Joshua

    This may be an odd question but are there issues, drawbacks or problems with buying a vacation home without owning a primary? We live/work in NYC metro and have a stable renting situation (rent is only 10% of our income). Buying a primary home would represent the unrecommended shift of a vast majority of our assets. An inexpensive vacation home… we’re thinking Caribbean… seems rather doable on our income. But what are the issues of buying what amounts to a second “vacation” home without owning a “first” home?

    Reply
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    Reply
  13. Veteran Celebration Branson

    I like your blog , great work , well done

    Thanks for share !!!

    Reply
  14. Alicia

    Great point Dave. My family members really enjoy the vacation property my husband and I have, and we feel like we’ve made a good investment because friends and family enjoy the property all year round.

    Reply
  15. Violette Wise

    My grandfather is the epitome of a self-made man. He started a very successful logging company when he was only 19 and bought a piece of lake property very shortly after. He also built the cabin that’s still standing today. That property is still in our family two generations later. Although it’s a wonderful place to have family reunions, I would like to buy my own property on the lake we live next to. My goal isn’t to live a luxurious life. In fact, if I go through with the purchase, I will be selling my home so that I can live on the lake permanently.

    Reply
  16. Drew

    Great list of questions that you should be asking yourself before purchasing a vacation property. It’s a good idea to do as much research as you can so that you make the best possible decision. Thanks so much for sharing.

    Reply
  17. Annette

    I want to buy a beach front in Puerto Rico with rental potential and hopefully by the time I retire in 15 years, that would be my paid off home. How could that not be a smart investment?

    Reply
  18. Mark Henry

    Vacation property can definitely help you in enjoying the leisure time but you have to manage many things for this. The rental for the vacation property should be considered first. It should even be according to the location.

    Reply
  19. salty

    We have a place in FL.. will be vacation for now and hopefully retirement later. The problem we have most recently is that when we bring our kids..they always want to bring a friend (kids are 18 plus yo). It seems like no one has ever told them how to be a good house guest. We have never had anyone offer to pay for a tank of gas or a meal. I don’t know why their parents send them with just a few bucks for souvenirs.. but nothing for their hosts to thank them for hosting their kids! I even let my sibling use the place for the week for no charge and ended up with a certificate worth less than 50 dollars as a “thanks”. The truth is that the increase in utilities from their visit was more than 50 dollars. I wish we could figure out the way to be generous.. yet not feel like we are being taken advantage of by people.

    Reply
    • chrisinsd

      maybe you should just tell them you want money. when you “invite” someone or “offer” something there is generally an unstated expectation that it’s because you’re being nice and don’t expect something in return

      Reply
  20. Faylinn

    My husband and I have been trying to decide whether or not we should get a vacation property. We really like the idea of renting a cabin in the mountains that we could escape to with our kids whenever we are bored of city life this summer. However, I definitely think that it would be important for us to analyze how often we would be going to the cabin. We would probably just use it on the weekends, but how many weekends do you think we should use it in order for it to be worth renting?

    Reply
  21. James Bergman

    I think you make a good point about deciding how often you are really going to use your vacation home before you get it. If you are retired, then it probably doesn’t matter as much, but I personally think that a vacation home should be somewhere you love to go, and/or close to home. This way you are more likely to use it often and if it is close, then you can just spend your long weekends there. I also think it is a good idea to rent out the home, if possible, when you are not using it. Then your vacation home is not just another house gathering dust.

    Reply
  22. dev brown

    Hello. Really appreciate your balanced and common sense approach to owning a vacation rental. I’m looking for a really large property (8+ bed ideally) that can double as a company house (for meetings, retreats…) and generate vacation rental income when we’re not using it. It needs to be nearby a major US airport. Where do you suggest I look? Thinking about CA State.

    Reply
  23. Braden Bills

    I’ve been trying to decide whether or not I should get a vacation property. I didn’t realize how relaxing it is! If I did get one, I’d make sure to use it as often as possible. I think I’ll get one as soon as I can! Thanks for sharing!

    Reply
  24. justin

    I think I’d rather invest in something I’d probably use more. Maybe just buy land to eventually sell or build on.

    Reply
  25. Shilo Zitting

    The tax advantages of a vacation home should be considered as well. Depending on the amount of days that you rent your vacation home or the breakdown of personal and rental use for your rental income could be tax-free. There are two scenarios in which this could occur; first, if your vacation home is rented 14 days or less a year or second, if it is used more than 10% of the days that it is rented out.

    http://www.shilozitting.com

    Reply
  26. Jim Strong

    Really appreciate your balanced and common sense approach to owning a vacation rental.

    Reply
  27. Luke Yancey

    It’s awesome that most people who own vacation homes have a household income of $85,600. I just got a new job that will put me around that number. Hopefully, if I save for a few years I can own a vacation home as well!

    Reply
  28. Patrick Freeze

    Having a vacation home that can be used as a rental property when unoccupied is big dream that many people have. And, without enough information backing this large investment decision, many people find themselves in hot water after making a vacation home purchase. Discussing considerations like yours – how the property will be financed, when it will be used, whether it has rental potential, and if you plan on using it during retirement – are all important things every property owner should think about before jumping into vacation home ownership. After all, a vacation is a luxury and there is a lot that goes into having the finer things in life.

    Reply
  29. Guy Hatch

    It is important to consider the financial impact of insurance coverage when purchasing a vacation rental. Insurance premiums can significantly affect any income you expect to make. Needless to say, with having a trusted, experienced insurance agent to provide this you can also avoid potential pitfalls. There could be things that sites like Airbnb don’t cover.

    http://www.parkcityvacationplace.com

    Reply
  30. Wyatt

    My wife and I are trying to purchase a retirement home that we will use a few years down the road. In the meantime, we plan on renting it from May-September. We have been looking at homes in the 249K Range and have approximately 10% to put down. In the meantime, we want to maintain our present home. We are on the deed but not on the note as a result of a chapter 7 bankruptcy over two years ago. Our credit has been excellent since and current mortgage payments on time every month (even though we do not get credit for them although technically we still owe the money – we are protected to just walk away – which we do not want to do)

    My question is, will any bank allow us to keep both homes? Will our current home be figured in on the debt to income despite being legally able to walk away from it under the stay protection in the BK7? Do we have a chance of qualifying with 10% down, credit scores in the mid 600s and a debt to income of about 45%.. Are there banks that would pre=qualify us?

    Any comments would be greatly appreciated.

    Reply
  31. Jade Brunet

    Thank you for providing this information about if one should buy a vacation property. It is good to consider how much time will be invested in using this property. It would need to be in a location that is convenient to reach and desired to visit. Something to consider would be to look into how the property will be cared for when you are not there. It might be wise to seek professional help.

    Reply
  32. Erika Brady

    I never knew that there were 8.0 million vacation homes and 43.7 million investment units int the U.S. It makes sense that the median age for a vacation-home buyer is 43 years old. By that age he or she will have worked for quite some time and is able to afford something like that. It is my dream to own some kind of a vacation home or condo one day. I will just have to save up the money for it!

    Reply
  33. Derek Mcdoogle

    In your article, you mentioned that according to a 2014 survey, vacation-home sales accounted for 13% of all transactions in 2013. My cousin has been looking for some way to invest in the money he has saved over the years and someone mentioned purchasing a vacation home. Are there real estate agents that specialize in vacation rental homes? Hiring a professional agent might be a good idea.

    Reply
  34. Ridley Fitzgerald

    Thanks for the tips on buying a vacation property. I definitely agree that you need to look at your income before making the purchase. For me, I feel financially comfortable enough to go looking for a property.

    Reply
  35. Burt Silver

    This is a really interesting article about vacation properties. I have dreamed of buying a beach condo somewhere as a vacation home for years. We are saving up to make it happen. I like that you mentioned that it is wise to consider if your vacation home could be rented out when not in use. This could provide a great source of income, and potentially even end up paying for the condo.

    Reply
  36. Phillip

    I’m sorry, but $86,500 annual household income is a ridiculously low amount to be considering a “vacation” home. My wife and I are both 33 , bring in $250k/year, and our primary residence has $100k in equity. My point is, I still think we’d be pushing it.

    I do understand everyone has different circumstances, however, lf these statistics are true…You should mention how much savings these $86,500 HHI/ 43 year old’s have in the bank. Either they are crazy conservative OR looking at cheap properties in unappealing locations which would cause for a bad investment/ rental property IMO

    Reply
  37. Ridley Fitzgerald

    Thanks for the tips for buying a vacation property. I have always wanted to own some property on the beach, so these are some great considerations. I hadn’t thought to look at rental income potential, but that would be nice!

    Reply
  38. Troy Blackburn

    That’s a great point you make about how vacation rental income is a great way to keep sustaining your income in addition to your regular income. I’ve heard, too, that it’s so important to consider the location of your property within the city that you’re looking at. If you’re buying in a beach city, you’ll want to buy a property that’s close to the beach! I’ll be sure to keep this great information in mind as my wife and I look into the possibility of buying a vacation home that we can use later on in life.

    Reply
  39. Braden Bills

    It would be nice to have a vacation property that I can hang out at. It could even be a great investment in the long run! I’ll make sure that I get the right kind, though. I wouldn’t want to get one in a place that I won’t ever go.

    Reply
  40. Thomas Anderson

    this been a great idea but it is rarely possible I think it’s not because these types of place are most costly to survive but it makes possible your dream easily only by a professional property management company.

    Reply
  41. Harper Campbell

    My husband and I are wanting to get a vacation home, but are curious to know if whether or not this would be the right choice for us. I like how you mentioned that one of the things that we need to think about is how much we actually plan on using it, and if it would be some place we want to go to all the time. Personally, I feel it is somewhere we have enjoyed going to in the past and would love to keep on visiting, then it will be some place we would use a lot of the time.

    Reply
  42. Violette Lebrac

    I like the idea of buying a vacation home before you retire if you have the means. My dad wants to retire in 5 years, and he loves to fish. Maybe it’s a good idea for him to find a vacation home for sale for him to live in when he retires now when he has the money to spend.

    Reply
  43. Properties costa del silencio

    We understand that BUYING OR SELLING can sometimes be a very stressful situation especially if you do not understand the language. We, here at RD Properties speak English & Spanish and here to assist, not only purchasing or selling your property, but with all legal documentation during the process.

    Reply

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