Should You Buy a Vacation Home? What to Consider First

The idea of owning a vacation home can be incredibly appealing, especially for those who dream of a scenic getaway or a potential source of rental income.

As a Registered Investment Advisor (RIA) offering comprehensive financial and retirement planning services, we frequently guide our clients through this exciting yet big decision. Our goal is to help clients make the most informed decisions possible.

If you’re considering a vacation home, it’s crucial to carefully weigh the pros and cons before diving in.

Why do you want to own a vacation home?

The first thing to establish is your “why.”

Why exactly do you want to buy or invest in a vacation home?

Vacation homes can be more than just a place to relax and unwind. They can also serve as an investment vehicle with the potential for appreciation in property value and rental income. In popular destinations, the demand for short-term rentals can be high, providing a steady income stream.

Owning a vacation home also means you have a personal retreat that’s available whenever you need a break from the hustle and bustle of everyday life or, in retirement, to live as a snowbird relocating to somewhere warm during the winter months.

Having a firm understanding of what you want to get out of a vacation home can guide your decision-making process.

Are you looking for:

1. a profitable investment;
2. a personal sanctuary or;
3. a future retirement residence?

Clarifying your goals will help you evaluate properties more effectively and ensure that your purchase aligns with your long-term objectives.

Financial implications

Before you start searching Zillow (although if you’re reading this, it’s probably too late), think through all the potential financial implications.

Here are some key points to consider:

Upfront Costs

The initial cost of purchasing a vacation home is just the beginning, whether you’re buying it with cash or taking out a mortgage. You also need to factor in closing costs, home inspections, possible renovations and furnishings.

Ongoing Expenses

Owning a second home comes with ongoing expenses, such as property taxes, insurance, maintenance costs and possibly homeowners’ association fees. These costs can add up, especially if the property is in a high-cost area. If you partner with a vacation rental company, there are costs associated with that as well.

Rental Income Potential

If you plan to rent out the property, consider the rental income potential. This income can help offset some of the costs, but it’s important to be realistic about rental frequency and pricing. Income will fluctuate depending on the season, so you will need to plan for the highs and lows accordingly.

Market Volatility

Real estate markets can fluctuate. While property can appreciate over time, there are no guarantees. Economic downturns, natural disasters or changes in local regulations can impact property values and rental potential.

Tax Implications

Owning a second home can have various tax implications that you need to consider. This includes higher property taxes, potential rental income taxes, and capital gains taxes if you sell the property for a profit.

If you use your property as a true second home – rather than renting it out – you could get a tax deduction for mortgage interest and property taxes. However, this deduction is capped at $750,000 of total mortgage debt on both homes.

Lifestyle considerations

Investing in a vacation home isn’t just a financial decision, it’s also a lifestyle choice.

Consider how often you’ll use the property and whether you’re prepared for the responsibilities of owning and maintaining a second home.

If your lifestyle doesn’t allow frequent visits, the property might become more of a burden than a retreat.

Making the decision

So, should you invest in a vacation home?

The answer depends on your financial situation and lifestyle preferences. But here are some steps to can help you decide:

Assess Your Finances

Ensure your primary financial goals (like retirement savings and emergency funds) are on track before taking on a significant investment like a vacation home.

For this step, consider working with a financial adviser to help run the numbers.

Research the Market

Understand the real estate market in your desired location. Look at things like property values, rental demand and historical appreciation rates.

Avoid Acting on Impulse

Think deeply about why you want a vacation home, and then sleep on it. If you buy on a whim, you could end up with a second home that doesn’t adequately meet your needs.

Location, Location, Location

Buying a second home in a town by the ocean or in the mountains might seem like a great idea, but if you live very far from that town, getting there might be so much of a hassle that you won’t go there often.

If you plan to share the space with family members, it might be wise to buy a home that’s convenient for short weekend trips.

Financing Your Second Home

You can pay all cash or get a mortgage that allows you to keep your cash – or use a combination of these. Keep in mind that rates for second homes are typically a bit higher than rates for a primary residence.

Hire a Trusted Real Estate Agent

Buying a home outside your area or out of state can be tricky, as residential real estate is extremely localized. Hire a local agent who will be in the best position to advise you on the market there.

Experience Living There

Even if you’ve been visiting the same vacation spot for years, you need to view it from a nontourist perspective. Consider renting for a while in the off-season to see how you like it, and talk to locals about the pros and cons of living there.

Renting Out Your Second Home

Collecting rental income creates cash flow and can be a smart way to subsidize your vacation property, but not always smart to buy investment real estate with borrowed money. If you want to own a rental, you may want to pay cash.

Also, learn the laws governing rentals as they vary by state, city,\ and even neighborhood. Consider using an on-site leasing company to help you find qualified renters and to help manage the property when you’re not there.

Get Professional Advice

Consult with a real estate agent experienced in vacation properties and a financial adviser to help you understand the pros and cons of this financial decision.

Bottom line: think long-term

Ultimately, consider your long-term goals and how a vacation home fits into your overall financial plan. Investing in a vacation home can be rewarding, but it’s not a decision to be taken lightly. Careful consideration and thorough planning are key to ensuring that your investment brings both financial rewards and personal enjoyment.

By considering all the financial and lifestyle factors, and seeking professional advice, you can make a well-informed decision that aligns with your long-term goals.

If you want to speak with an adviser about this or any other financial goal, schedule a free financial consultation today.