Should you buy a vacation home as a real estate investment?
Starting in 4th quarter last year, vacation home sales started to pick up around the nation. Although still not back where they were in 2006, it is a promising sign. With a large contingent of baby boomers stepping into the stage of life where folks usually consider buying a vacation home, would this be a good buy?
About five years ago I got the bug to buy a vacation condo and put it in a nightly rental program when we weren’t using it. My sister-in-law had purchased one in Colorado years ago and they appeared to be doing well with it – using it when they wanted and renting it out when not.
I researched areas of the country that were likely to draw visitors. I looked at how the local governments were promoting their area, how far from us it was, whether we were likely to use it, how much taxes were going to be, what the zoning laws were, who ran the condo association and who ran the nightly rental program, what the charges typically were for management, what occupancy rates were. I ran multiple what if scenarios before settling on a resort area in my own state, about 5 hours from our house. I did end up buying a vacation condo in 2006. Stay tuned for a future post on the financial and other results of this purchase.
Why buy a second home?
Because you can
It is a great feeling to know that you have done well enough to afford a vacation property in the exotic location of your choice (assuming you can of course).
A getaway for family and friends
Being able to get together in a fun place, away from Mom & Dad’s house is great for family bonding, meetings and keeping in touch with the grandkids.
Yes you can rent the property out as a nightly rental or off season rental. You have probably looked for a property to rent on Vacation Rentals by Owner or a similar site. Be aware that they only rent for a few weeks a year, during the in season (when you also want to use the property).
The real estate market will recover. Owning something real can be a hedge against what I believe will be significant inflation in the decade to come.
Use in retirement
Perhaps you want a change of lifestyle when you retire. Buying your future home now and using it for vacations until then not only helps you pay for it but also gives you a better idea as to whether or not you really will be happy living there full time.
Potential tax breaks
In certain situations, you can deduct mortgage interest and other expenses from your income tax. More likely, however, is that you will only be able to deduct expenses against income if you rent your property out more than you use it.
Why avoid buying a second home?
Property can tie you down. If you need to liquidate real estate, it sometimes (especially lately) takes quite a while. There has been talk of a transfer tax being imposed (some states already do) – which means you would pay taxes when you sell the property, in addition to all other sales expenses. In addition, depending on your financial situation, it may have the effect of tying up too much money in a single sector.
No tax breaks
In some areas, if you rent out your vacation property, you are classified as a business for the purpose of local real estate taxation – which could effectively double the real estate taxes due each year. In addition, if you aren’t actively involved in the management of your rental activity, you cannot deduct expenses from your income taxes.
If you buy into a property in an association (condo or home owner), you are essentially entering a marriage with other property owners. Some marriage partners are spendthrifts. At the very least, you won’t always agree with the need or desirability of the potential special assessments that come up (does the complex really need that second pool, for instance?).
Plus, you have year round utility bills, maintenance costs, cleaning costs, travel costs to and from the property and more.
Lack of travel variety
Buying a vacation property implies that you will be vacationing at the property. Will owning the property prohibit you from pursuing other travel desires? Will you be happy returning to the same location year after year? Will your family?
I do think that vacation home sales will continue to increase, at least until the younger boomers get past their mid-fifties. However, buying a vacation home as a real estate investment may not be your best bet. Our financial results have not been stellar. I’ll be posting about them in a few weeks, so stay tuned.
What’s your take on owning a vacation property? Where would you want to have one? Lakeside, mountain retreat, on the beach, in the country, high rise in the big city? Out of the country?