Investing in a Vacation Home: Is it Worth It?
You have your primary residence, a nice retirement savings and a little extra money in the bank. You’ve been giving more than a passing thought to invest in a vacation home and you are wondering whether or not that would be a wise thing to do with your extra cash? The real estate market has been picking up steam of late, making this the perfect time to banter this thought about.
Rental Property or Personal Use?
First and foremost, a vacation home only makes sense if you are willing to use it as a rental or have the means to absorb all the costs and keep it for you and your families own pleasure. Assuming you intend to use it as a rental, you need to think seriously about how much is involved with keeping the home in rentable condition. As a rental, you have two choices; you can hire a management company to handle the property on your behalf for a sizable fee (8%-10% of rental fees), or you can invest the time necessary to do it on your own.
Understanding the Responsibility of Owning a Rental Vacation Home
Regardless of how you intend to use a vacation home, location should be your number one concern. If the property were in a prime vacation area, it would certainly have appeal as a rental. However, its proximity to your primary residence would become a relevant concern if it were a substantial distance away. That would make managing the property more of a challenge, which could force you into hiring a management company.
If you don’t hire a management company, you would have the responsibility of marketing the property, scheduling, preparing rental agreements to protect your interests, collecting deposits and rental fees, making sure the property is well-maintained, distributing keys and following up with customers to make sure everything is acceptable. Maintenance could become a major issue because renters who are paying fair market prices rightfully expect everything to be clean and in perfect working condition. That could be a problem if you’re hundreds of miles away, especially if they call you in the middle of the day because the air conditioner broke down.
Understanding the Responsibility of Owning a Non-Rental Vacation Home
If you intend to purchase a vacation home for your own personal use, it really comes down to nothing more than a dollar and cents issue. Can you afford to maintain a second home? The primary logistical issue would be checking in on the property during the year to make sure everything is in good shape. You would want to make sure you hire people to keep the house clean and the landscape maintained if applicable. You also want to have the ability to make sure the job is getting done. These are all potential headaches worth considering.
Breaking Down the Pros and Cons of Investing in a Vacation Home
When it comes to a significant investment like a vacation home, it makes sense to list the pros and cons to help come to the right decision.
Pros: -While considering the positives, it’s important to remember everything is contingent on having a successful rental program or the financial means to absorb costs on your own.
- Rental Income – In the right location, a rental vacation property could provide a steady stream of income. If the income stream is sufficient enough to cover all expenses, including the mortgage, it can be a real moneymaker.
- Tax Advantages – As a rental property, there are certain costs you can write off to offset your rental income and maintenance costs.
- Fun Family Destination – If the property is for family use only, you have a locked in vacation destination without the hassles of securing reservations or paying rental costs.
- Appreciation – Like any other property, there is always the possibility your property will appreciate over time.
Cons: – As is the case with any other type of investment, there are risks that need to be considered.
- Economy – If the economy takes a turn for the worse, your vacation property will most likely decrease in value. If you are using it as a rental property, the revenue stream could dry up as travelers put travel plans on hold.
- Costs – This is a home. It requires furnishings and maintenance like any other home would. The costs could be significant, especially if you don’t have rental income and tax benefits to offset the costs.
- Convenience – Unless you have a lot of free time, it might become taxing to oversee the home from a time standpoint, especially if you are attempting to run a rental operation from a remote location.
Is it worth it? Only you can determine the answer to that question. Much depends on how you intend to use the property. If the financial or recreational value exceeds the costs and burden, it’s a good deal. However, anything short of a guaranteed positive return makes it a risky proposition at best.