Do you dream of escaping it all to your very own luxury cabin in the mountains? Or maybe your ideal escape is a beach-side bungalow overlooking the ocean.
Regardless of what your idea of a dream vacation retreat is, buying a vacation home is often called “lifestyle investing” because a vacation home is not just an ordinary piece of real estate – it’s a lifestyle choice. While owning a vacation home has its benefits, there are some potential drawbacks. You should carefully consider whether this type of lifestyle investment fits your long-term financial plans before making this big-ticket purchase.
Here are some thought-starters to help you consider whether or not buying a vacation home is right for you.
Questions to Ask
Owning a vacation home is a big purchase – you will want to figure out whether it’s going to be a wise long-term decision for you. Here are some questions you can ask yourself to help determine whether your financial picture supports this purchase:
- How strong is your income?
- Does your vacation home have rental income potential?
- Are you maxed out of your mortgage indebtedness?
- Do you need to finance the vacation property?
- Do you plan to own your vacation home for at least five years?
- What is your current net worth allocation?
Evaluate Your Long-Term Goals
If you’re looking to capitalize on your vacation home investment, you are likely wanting to make a return by renting, selling or retiring at the property. You should know ahead of time whether you are buying a vacation property for a better lifestyle, to make money, or a little bit of both. Some key things to evaluate are how often you will use the property yourself, what your travel patterns are currently and will be in the future, whether you need rental income from the property, and how the property may appreciate over time.
If you’re considering a vacation home purchase, you should keep in mind that many factors can drive the local market up or down, including: major employers come and go, weather events can leave lasting environmental changes, and zoning laws are always subject to change.
Understand the Current Market
While most of us have lived through the peak and subsequent burst of the 2008 real estate bubble, many of us still seem conditioned to believe that real estate is a guaranteed “win” after nearly another decade of rapid growth. But it’s easy to make emotional – and irrational – decisions when it comes to real estate. If you’re considering a vacation home purchase, you should keep in mind that many factors can drive the local market up or down, including: major employers come and go, weather events can leave lasting environmental changes, and zoning laws are always subject to change. We recommend working with an agent knowledgeable in the area you’re exploring so you can get a good idea of market activity and pricing trends.
Consider What Type of Vacation Home You Want
There are several types of vacation properties to consider, each with its own set of unique advantages and challenges. Some of these include:
- Waterfront houses – great views and access to the beach, but there can be red tape regarding any property changes, and insurance requirements can be expensive
- Mountain cabins/ski condos – potential access to larger acreage at a lower cost than other types of homes, but weather elements can greatly impact your property
- Urban condos – easy access to city amenities, but costs associated with HOAs and other property management fees can be pricey
And don’t forget the adage, location, location, location. You want to make sure the location is not only accessible to you, but provides the types of activities you want available to you and your family.
Think About Expansions, Renovations and Remodels
Many experts consider location to be the most important factor for buying a property with long-term appreciation value, but expanding a property also gives you another way to make money in real estate. Property expansion entails creating additional living space that gets input into the property’s value when it’s sold. However, there is a tradeoff when it comes to this, and you’ll want to calculate the cost of expansion in relationship to the value add. And don’t forget, property taxes are based on the value you’ve created.
Remodeling and renovation are not the same as property expansion, and investing in these will most likely not get you a return on your investment when/if you sell. But it doesn’t mean these aren’t worth it; buying a cheaper vacation home and then remodeling over time is one strategy to save money. In addition, renovations may give you the chance to rent out your home for more money, if that’s an avenue you choose to pursue.
To paraphrase Frost, the woods may be lovely, dark and deep, but you have long-term financial promises to yourself – and to your family – to keep. There are countless factors to consider before making this type of purchase. So make sure you do the legwork to determine whether buying a vacation home is the right decision for you.
Personal Capital financial advisors can talk you through the factors to consider when making these decisions and help you determine how a vacation home purchase might impact your overall financial situation. Learn more about the wealth management services we offer here.
Personal Capital Advisors Corporation is an investment advisor registered with the Securities and Exchange Commission (“SEC”). Any reference to the advisory services refers to Personal Capital Advisors Corporation. Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC. Past performance is not a guarantee of future return, nor is it necessarily indicative of future performance. Keep in mind investing involves risk.