By Bryan Lee, CFP®, MBA
The temptation to buy a vacation home can be overwhelming while basking in the sun on a white, sandy beach or enjoying the view from your cabin window. But don’t let your emotions cloud your judgment when it comes to this significant decision. If you desire to turn your daydream of owning a vacation home into a reality, it’s essential to first consider if this is truly a good investment for you and your family.
There’s no one-size-fits-all answer to this question. So before you decide whether or not to buy a second home, ask yourself the following questions, and weigh the pros and cons.
Questions to Ask Yourself Before Buying a Vacation Home
As with most things in life, there is no one-size-fits-all answer for whether you should buy a vacation home. That said, here are three questions that should guide your decision-making process:
Question 1: Does Owning a Vacation Home Make Sense With Your Lifestyle?
If you typically work 60+ hours a week with little time off, a vacation home may not be for you. If you typically like to visit a new city or country each time you travel, a vacation home may not be for you. If your ideal vacation consists of all-inclusive resorts and unlimited pampering, a vacation home may not be for you.
Think about how you like to travel—and how often you can do it—then decide if a vacation home makes sense.
Question 2: Can You Afford a Vacation Home and the Ongoing Expenses That Come With It?
Even if you can pay cash for a vacation home, there are plenty of other expenses to watch out for: property taxes, HOA fees, insurance, utilities, maintenance, etc. Some of these costs can be hard to estimate beforehand, and even if you plan to rent it to help offset costs, you may not know how long it would sit vacantly.
Question 3: What Will You Do With it When You’re Not Using It?
Some people plan to rent their vacation homes out when it’s not in use. Others prefer to keep it all to themselves. There’s no wrong answer, but know that what you plan on doing with your vacation home can impact the deductions and credits you qualify for come tax time.
Pros of Owning a Vacation Home
Now that you’ve clarified your situation a bit, here are five reasons why you may want to invest in a vacation home:
- You could potentially generate rental income. The biggest advantage of owning a vacation home is that you can rent it out with a local company or on Airbnb or VRBO for extra cash assuming it is in a desirable area.
- It could appreciate in value. If you buy the right home in the right location, it could potentially appreciate in value, increasing your personal net worth in return.
- There could be tax benefits. If you keep your vacation home for yourself, you may be able to deduct mortgage interest and property taxes when you file your return. If you rent it out, you may also be able to deduct maintenance, repair costs, marketing, and management fees. (1)
- You’ll have a fun place to gather with friends and family. Most people buy a vacation home because they want to make sweet memories with family and friends.
- It makes “getting away” convenient. A vacation home is just that: your home. You can leave clothes and essentials there, reducing the time and energy you need to spend packing up each time you want an escape.
Cons of Owning a Vacation Home
The benefits of owning a vacation home are enticing, but there are also reasons why you may not want to do it:
- It can get expensive quickly. It’s difficult to accurately project how much you’ll spend on your new home. Utilities, insurance, taxes, renovations, repair costs—these can all add more to your bottom line than anticipated. If you get a mortgage, typically rates are higher for investment properties. Additionally, insurance costs are higher for either being vacant during the year or if it is rented. And furnishing a second home means you’ll likely be purhasing duplicates of many items that you already own, store, maintain, and insure at your primary residence – everything from furniture, clothing, and jewelry, to cars, electronics, dog kennels, and kitchen gadgets.
- It could be a risky investment. There are risks associated with any investment, but vacation homes may be more susceptible to economic downturns and natural disasters.
- You may get tired of visiting the same place. Once you buy a vacation home, you may feel pressured to visit it any chance you get to help justify the cost. You may feel locked in and pass on an opportunity to visit someplace new.
Is Owning a Vacation Home a Good Investment?
Whether or not owning a vacation home is a good investment depends on your unique financial situation. If you have a sizable down payment and can easily afford the additional expense, it may make sense for you. But if you’d need to tap into retirement savings or rent it out for part of the year to cover the cost, it might not. Like most financial decisions, only you can determine if owning a vacation home is a good investment and will align with your other financial goals.
Consult With a Professional
Purchasing a second home is not something to take lightly, no matter what your financial situation may be. Before you make this significant commitment, it’s wise to enlist the help of an objective financial professional who can help determine if the benefits of this investment outweigh the potential negatives.
We at Strategic Financial Planning are here to help you evaluate your finances to see if a vacation home makes sense for your unique circumstances. And beyond this current fork in the road, we’d love to partner with you on your financial journey, putting a big-picture plan in place that empowers you to work toward all your financial goals. Call (972) 403-1234 or contact us online to set up a complimentary get-acquainted meeting so we can see if we are a good fit!
Bryan Lee is the founder and President of Strategic Financial Planning, Inc., an independent, fee-only financial advisory firm. With over 27 years of industry experience, Bryan uses a unique client-first financial life planning approach and process to help his clients get the most out of life. Bryan earned his Bachelor of Business Administration in finance and MBA in international finance from the University of North Texas and is a Certified Financial Planner (CFP®) practitioner. Bryan is actively involved in his community and industry and has served on the boards of several associations and charities, including serving as President and Chairman of the Dallas/Fort Worth Chapter of the Financial Planning Association, the National Association of Personal Financial Advisors, the CITY House Board of Directors President and Chairman, Editorial Review Board of the Journal of Financial Planning, Family Services of Plano, as well as a Junior Achievement Volunteer Teacher. Bryan has been featured in local and national magazines, newspapers, and journals, including The Wall Street Journal, Investors Business Daily, CNNfn, USA Today, SmartMoney, Kiplinger’s Personal Finance, Financial Planning Magazine, The Dallas Morning News, Dow Jones Newswires, and has been recognized as a Five Star Wealth Manager and one of Dallas’s Best Financial Planners in D Magazine every year since its inception. To learn more about Bryan, connect with him on LinkedIn.