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Monday, September 25, 2023

Should You Buy a Vacation Home?

The idea of vacationing in a second home sounds idyllic. But while the image may feel dreamlike, the reality can be quite different. 

You’ve just returned from your favorite vacation spot, where the air was clean, the ocean waves pulsed in the background (or insert your favorite alternate experience) and every day felt magical. Ah, if only you could live there, then everything would be so much better! Well, that wouldn’t work, you can’t move … but what if you got a vacation home there? One you could visit whenever you wanted to? A place to call your own that sits right in paradise? 

According to the 2022 National Association of Realtors Investment and Vacation Home Buyers Survey, vacation home sales made up 13% of all transactions. Nearly 11% of primary homeowners also own vacation homes. So all these people must be having the time of their lives. Right?

If this flight of fancy has crossed your mind, it may be that a vacation home would fulfill your fantasy. But it could quickly turn into your biggest nightmare and start to feel like a pair of cement shoes. To avoid this latter scenario, you need to consider a host of factors before you ever buy.

Vacation Real Estate Essentials

  • You can rent it out for extra income. 
  • It’s an investment that may appreciate.
  • It saves you lodging money on your vacations. 
  • You may get tax benefits. 
  • It might be the perfect place to retire. 
  • It’s expensive to pay a second mortgage.
  • There will be unexpected costs.
  • It demands time and effort to rent or weatherize.
  • The down payment could be hefty. 
“I’d recommend that interested buyers consider their lifestyle and how they plan to use their home, how often and who will take care of it when they’re not there,” says Austin Allison, co-founder and CEO of Pacaso, a San Francisco-based real estate service that promotes and manages second homes. “There are nearly 10 million second homes in the U.S. and the majority sit empty 10 to 11 months of the year.”

How Often Will You Be There?

Do you have enough vacation time (or are you retired) to use the place often enough to justify the cost? Will you tire of that particular spot and wish that you could island-hop via rentals to explore new places? Will you love walking along the same beach, seeing the same people, or will you eventually long for a change of scenery?

One person who took the plunge and bought more than one vacation home is Sam Dogen, a personal finance author and financial blogger known as the Financial Samurai. He wrote a whole blog on why you shouldn’t buy a vacation home. Dogen hires management companies to rent out his properties when he’s not there. Even so, he’s encountered damage no one reported, and seasons where there was little snow at his ski property. The COVID-19 pandemic took its toll, and one property purchased before the 2008 meltdown still hasn’t regained its original value. 

However, Dogan notes that if you have children (and grandchildren), owning a vacation home can facilitate family gatherings and form a hub for shared memories. It can be used by other family members and their children themselves as well as for multi-generational reunions. Just make sure your vacation home is located where relatives will want to visit. 

Will You Rent It Out?

Hiring a management company to rent out the property when you’re not there can cover your costs. But ask yourself if the home is in an area with strong tourism and plenty of amenities. Is it furnished for the highly competitive daily rental market? Will the cost of management, cleaning and upkeep be worth the return? 

Before you ever buy your vacation place, find an agent who specializes in second homes. The National Association of Realtors offers training and accreditation for certified vacation home agents, dubbed Resort and Second-Home Property Specialists. They should be able to give you guidance on expected returns and make sure that you’re not running afoul of local laws. 

“They’ll be aware of local regulations and the permitting process, which can be nuanced depending on zoning,” says Daned Kirkham, senior director of real estate at Vacasa. 

Qualifying for a Mortgage

“A lender’s qualification requirements will likely be more substantial for financing a second home than a first,” says Shelby McDaniels, channel director for corporate home lending at Chase. “When applying for a mortgage for a second home, lenders may require borrowers to have higher credit scores, lower debt-to-income ratios, a larger down payment and extra funds in reserve.”

The down payment alone will run from 10% to 25%, and if you intend to rent the property, your mortgage will come with stricter requirements. On the flip side, you may be able to qualify for additional tax savings. Contact your CPA or other tax professional before you buy to talk over your options. 

Don’t forget that you’ll owe property taxes, insurance, and expenses for repairs and maintenance. Pad your expense allowance since you never know when the hot water heater will go out or the roof will need replacing. 

Buying a vacation home requires a lot of forethought and homework. It’s not something you want to jump into, but it could turn out to be the perfect fit for your lifestyle and circumstances. Research the details, and you’ll be set to make a decision on that second dream home!


This article is not intended to be a substitute for professional financial advice from a qualified financial advisor.