Oct 17

Five Tips to Consider Before Buying a Vacation Home

By Justin Valadez, Financial Advisor

Over the summer, I was invited by some longtime friends to stay at their Outer Banks beach house. Like so many Americans, no matter how busy the year I always try and make it to the beach for at least a few days. It’s good to decompress from time to time, and this particular beach community had a private beach which was very nice during a busy holiday. Many houses in the area were owned by aunts, uncles, cousins, grandparents and many families knew each other. It was a tight-knit community and made for a nice getaway to have so many friendly people within the 100 or so homes there.

Having a nice vacation and a few episodes of any HGTV show can make us think it would be such a great idea to buy a vacation home. After all, we have many photos of the family throughout the years having so much fun. I can always supplement the cost of the home by renting it out! With the rise in popularity of A‌i‌r‌b‌n‌b, it is now easier than ever to rent a home. But does it make financial sense?

There are many things to consider. Realistically, how much time will I spend at said vacation home? Is it feasible for family to visit (maybe this is not always desirable!)? Will it eventually become my forever home? Could I live in a seasonal community? Vacation destinations tend to be packed in peak season and may be relatively vacant and isolated during other seasons. A‌i‌r‌b‌n‌b works both ways; as easily as we can list our homes to rent, we can also find a place to rent. Buying a vacation home may also limit our ability to visit many other places.

We tend to get lost in the revel to come — great moments with children, family and friends. But let’s not forget, homes take work to maintain. The owners of the house I stayed in left two informational checklists for renters regarding operation of the home — including opening and closing the home, hot water heaters, water treatment systems, gas and air systems etc.  Imagine the annual maintenance for these items. The amount of time and resources needed for upkeep is often underestimated.

Things to Consider

  1. Renting: Is your vacation home in a viable rental market? Beaches, lakes or mountains have varying degrees of desirability. If you want to rent your home out, will you rent it out yourself or hire a property manager? What will a property manager charge? Is the rental market seasonal? How often is the season affected by weather — not enough snow or cold temperatures for a ski-resort to hurricanes along the coast?
  2. How much time will you spend at the home? Be realistic! Will you spend a few weeks, a month or more in the home each year? Divide your annual cost of ownership by the number of days you’ll be able to spend at the home. Sure, you can offset some cost with the rental income but don’t assume a 100 percent rental occupancy. Popular times for rentals are in the summer, and peak rental rates are over holidays. Does this affect when you’ll be able to use your home?
  3. Do you plan to buy a vacation home for generational purposes? Inheriting a vacation home could create a financial and time burden on heirs. Having multiple children inherit a home could potentially strain relationships. Agreeing on decisions such as upgrades, whether to share or rent and how much money to put into the home may quickly become difficult — yes, even when your children are adults.
  4. How much of your financial resources will the property take up? We are only 10 years removed from the financial crises. Be realistic with rental income! Is it a financially feasible or a restraining move? Does it tie up too much of your liquidity? Make sure you fully understand the tax implications of buying a new home, such as how much interest you can deduct and how depreciation works, especially if renting.* I recommend reading the following article: Buying a Second Home – Tax Tips for Homeowners.
  5. Will the home add to or take away from the quality of life I/we want? How much work are you willing to put into the house each year? It can quickly become a part-time job. Should an illness or sickness prevent you from the work, can your spouse easily step in? Would you have to hire someone? 

Buying a vacation property doesn’t have to be a financially efficient move. Sometimes we just want what we want which is completely okay too. However, I recommend you heed the information above before committing to buying a vacation home. It’s also wise to evaluate the purchase with your financial or tax advisor to make sure you know what you’re signing up for. Bon Voyage!



*This information is not intended to be a substitute for individual tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.
Justin Valadez, Wealth Advisor

Justin Valadez, CPWA®

Wealth Advisor

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