Should I Buy a Vacation Home?
I remember the first time I visited Maui. The beauty of the ocean waves was enchanting. Waterfalls cascaded from mountain cliffs onto green hills that rolled into perfect blue water. I completely fell in love with the island. After watching an amazing sunset with my wife at the edge of a pristine beach I said what so many people say when they are captivated a beautiful place: “I’d love to buy a place here…someday”.
Buying a second home is a dream that many consider while visiting a majestic place but it is a challenging decision to navigate. There are important financial, personal, and emotional issues to navigate. The following list of key factors can help you evaluate this decision carefully and avoid downsides. These steps will ensure that whatever you decide you and your family’s finances will be secure.
Check Your Financial Foundation
Before considering a vacation home you need to ensure that your family’s balance sheet and financial future are on solid ground. Here are the key things that should be in place before considering a vacation home:
You have emergency savings of 6 to 12 months of expenses in place for unexpected contingencies.
You have no debt or low amounts of personal debt with monthly payments that are less than 20% of your after-tax income. Or, any debt you have could be easily paid off without creating large tax bills.
You have sufficient insurance to cover life, disability, home, auto, and umbrella (liability) risks. If you aren’t sure if you have the correct amounts you can contact a fee-only wealth planner to help you evaluate your needs without worrying that you’re working with a salesperson.
You have a specific plan for your retirement and major financial goals (such as college for kids) and are funding those goals with current income without any strain on your monthly cash flow. Again, if you aren’t sure if you have enough or are on-track find a fee-only wealth planner for help.
You can afford the acquisition price, down-payment, and/or mortgage costs without compromising your retirement or financial goals or having debt payments that are more than 35% of your after-tax income.
You have sufficient cash and projected income for maintenance, taxes, and major repairs or upgrades. A good rule of thumb is to budget 1-2% of the purchase price of a vacation home in annual maintenance. And yes, you may be able to rent it out and cover some of these expenses. We’ll discuss how to evaluate rental properties later but at this stage just make sure you can cover all of this yourself.
You’ve prepared your estate documents to ensure your loved ones are well cared for in case of incapacity, disability, or death.
This checklist safeguards your financial future. If you pass each step you are financially capable of buying a vacation home. If you can’t affirm each item then work on it until you are ready. I know that the process of reviewing your income and expenses, insurance needs, or retirement planning may seem too boring compared to the excitement and dreams of your perfect vacation home. However, if you skip these steps you are gambling with your family’s financial future. You must ensure that you have a secure financial foundation before making a major commitment like buying a vacation home. Bad things can and do happen that could turn your second home dream into a nightmare. This checklist ensures that won’t happen to you.
Avoid the Downsides
When we visit beautiful places on vacation it can create intense feelings of happiness and intimacy with our loved ones. Part of what makes these experiences spectacular is that they are enjoyed at special times and others take care of things like maintenance and problems. Buying a vacation home can make something special become burdened with real-world issues.
Here is a brief list of some common downsides and how to avoid them:
Downside #1: Vacation homes can require significant time and money to maintain and enjoy. Acquiring a vacation home is one thing. Redecorating and using it is quite another. You’ll need to personally oversee many of the redecorating and repair projects. Stocking a second home with food and personal items such as toilet paper, utensils, and lightbulbs requires multiple trips to stores. Moving things between your primary and vacation home can be an unwelcome addition to “honey-do” lists. Simply keeping it clean with items such as lightbulbs, paper towels, and soap can be a challenge. Of course, the maintenance costs (and homeowners’ dues) can be significant.
Solution: Carefully prepare your estimates of costs and time to avoid nasty surprises. As you evaluate a property ask questions of the realtor, prior home owner, neighbors and (if applicable) the homeowners association to fully understand the costs of the property such as utilities, snow removal, homeowner dues, and annual maintenance. In addition, consult with an interior designer ahead of time to get realistic estimates on renovation costs. Think carefully about how much time the property will require from you for maintenance and repairs. With this information, you can evaluate whether you can handle these costs without jeopardizing your financial foundation.
Downside #2: Vacation homes can make you feel guilty. Families often purchase a second home with plans to use it “all the time.” If you don’t visit it as often as planned you may feel guilty for not using it as much as you “should” or feel reluctant to visit other vacation spots because you own a vacation property.
Solution: Make sure you really enjoy spending time in this area and/or create a plan to rent it. A foolproof way to make sure you really like a certain place is to visit there at least five times at different times of the year. You’ll get to experience different seasons and local rhythms to determine whether you’d like to own a property there. Ask local residents what they love and are frustrated about in the community. How’s the traffic? What’s the trend with property prices? Also, visit other, similar places to see how your special community compares. For example, if you love Hawaii then visit Bali and the Caribbean. If you enjoy a special ski town go and visit ones that are nearby. Visit enough similar places to ensure your special place is really the best place for you. If you aren’t sure if you want to visit the same place repeatedly then consider renting it.
Downside #3: Your friends and family will want to visit. Some people love inviting friends, neighbors, clients, and family to enjoy their special place. For others, a vacation home is a private retreat where others are not welcome.
Solutions: Create a plan for who you’ll invite and your expectations of any guests. Determine who you are willing to invite to join you, who can use it on their own, and what expectations you have of any visitors and what house rules you’d like them to abide by. Good communication helps maintain important relationships and avoid misunderstandings.
Downside #4: It may be a poor investment. Vacation homes are wonderful for building memories but may not build your balance sheet. If they require unforeseen costs, don’t provide planned rental income, or the price drops notably then it may create significant stress and endanger your financial future.
Solution: Ensure your financial foundation is sound and carefully research costs and trends. Research the maintenance, homeowner dues, insurance, and major repair costs of any property you consider. If you plan on renting it make sure you have realistic information on how frequently similar properties are rented, realistic rent rates, and account for additional costs to repair damage from renters and pay for services for cleaning and booking. Be careful assuming a property will greatly appreciate. It may, but you should be financially prepared in case it only maintains its value or declines.
Downside #5: It could create family conflict. While a vacation home can be a great place to enjoy time with family it can also create family conflict as children get older or if the home is provided as an inheritance to multiple children. As children grow up and move away it is normal for some children to use a vacation home more than others. Some adult siblings will want to use it with their children while other siblings don’t have children or will want to invite friends. Resentments between children can arise.
Solution: Parents should involve older children in creating a family plan for using and enjoying the vacation home. Families should work together to create clear guidelines on:
How to allocate time at the property fairly (particularly around major holidays). Many families allocate weeks to different branches of the family with a lottery or bidding system for major holidays.
Whether non-family members will be allowed to use the property and, if so, what the expectations for these guests are regarding costs
Whether to rent the property and how to establish rent rates and ensure the listing and guests are managed well
How to allocate expenses and make decisions on major repairs or potential enhancements
Who will perform regular maintenance and cleaning duties
Who will ensure property taxes and insurance are up to date
How family members can sell their interests to each other or decide as a group to sell the property without major conflict
Buying a vacation home can be one of the most meaningful personal investments you can make. It can allow families to create lifelong memories and build relationships among friends. It can provide a needed respite from a stressful job or opportunity to enjoy a special hobby such as golf, fishing or skiing. If your financial foundation is secure and you avoid the common downsides this dream could become a reality for you.