Imagine a comfy cottage near a mountain lake where there's fantastic skiing in the winter. The lakeside beach is paradise in the summer. The setting is a quaint town where everyone says, "Hello!" when they see each other on the street. The whole family spends long weekends and summer vacations in this haven. Kids romp through the yard, exploring nature, and parents relax, away from the pressures of their jobs. This second home is so much more than an investment--it represents joyous moments and refreshing vacations.
It's easy to daydream for hours about a property like this one. Less often do people consider the financial side, though, but it's worth considering.
Buying A Vacation Home As An Investment
"Let's buy a vacation home and rent it on Airbnb when we aren't using it!" or "We can invest in a second home and sell it when the property goes up in value," are just a part of the daydream. Reality is not always so kind. While these tactics work for some people, neither is a guarantee. Buying a vacation home is often a poor financial investment.
Making money by renting through Airbnb is more complicated than it seems. If it is a part-time vacation home for the owners, they probably don't live nearby. That means hiring a property manager for upkeep and cleaning service. Finding honest, hardworking individuals can be difficult. Then, there are the renters. They occasionally cause extensive damage. Even if insurance covers the deterioration, the resulting delay is bothersome.
Anyone hoping to resell a vacation home at a profit will need to be a shrewd business person. Some people make money off real estate deals in touristy areas, but home prices in these destinations can be tremendously volatile. They depend on the economy and current events. In March 2021, there were a record number of borrowers taking out mortgages to buy second homes, according to Forbes. Just a year later, in March 2022, that statistic dropped to the lowest in two years. This reflects people's reactions to the pandemic and the post-pandemic.
So, I Shouldn't Buy A Second Home?
Vacation properties are seldom great investments financially. That doesn't mean that people shouldn't buy them. A second home is an investment in happiness. Prospective buyers may concentrate on improving their lifestyle with this new acquisition. Sam Dogen, the Financial Samurai writes this: “If you can view your vacation property as an investment in lifestyle instead of as a financial investment, you’ll find your asset much more rewarding.†Here are a few things to think about before splurging:
How Often Will My Family Use Our Vacation Home?
This can be difficult to estimate. People believe that they will spend more time at their lake-side cabin than they actually do. Few vacationers get more than four to six weeks off work. Only the self-employed and remote workers have the luxury of more frequent travel.
Many vacation homeowners imagine the time that they'll spend with their children. Little ones love the idea of heading to the beach house every weekend. Once kids are in their teens, though, the vacations become less attractive. Adult children have their own busy schedules--finding a time when everyone can meet up is easier said than done.
If people think that they'll be able to enjoy their vacation home for a reasonable number of days each year, then the purchase is worth it. Otherwise, they may be better off renting.
Will I Get Tired Of Always Going The Same Place?
Acquiring a vacation home ties travelers to one destination. After shoveling out the cash, they want to justify the expense by using it. What happens when wanderlust catches them and they want to go somewhere else?
Rentals and hotels give people the flexibility to go all over the world. They never have to visit the same place twice. On the other hand, travelers can return to their favorite destinations frequently. It takes a huge number of nights in hotels and Airbnbs to equal the price of a vacation home and paying property taxes on it.
Not everyone wants to travel to new places. Some people find stability and comfort when they vacation in the same destination. Habit means they know where the best restaurants, shops, and beaches are. They make friends with other regulars. They have a blast in their second home.
How Much Does A Vacation Home Cost?
It's difficult to work out how much to spend on something like a second home, but Sam Dogen has a rule of thumb for it. He says that a vacation property should be less than 10% of a family's net worth. He learned this the hard way.
The best-selling personal finance author began writing after buying a vacation property. The second home was about 25% of his net worth, and, then, it quickly devaluated. He stressed and lost sleep over his poor investment, but he realized that if it had been a smaller part of his total worth, he wouldn't have worried so much. He mentally reframed it as a lifestyle investment.
All the same, he recommends that only families with more than $500,000 should even consider purchasing a second home. According to his rule, they could spend $50,000, which probably wouldn't get them much. Dogen writes that it only makes sense to buy a second home when a person's net worth is more than $3 million. That leaves most of the U.S.'s population out of the picture and highlights the fact that vacation homes are truly a luxury to be enjoyed only by the wealthy.
What great luck some people have to become owners of a second home in a beautiful destination. Most people, though, can continue daydreaming about a cozy vacation home. After all, the mental picture is likely just as beautiful as the real thing and it costs much less.