Thinking of Buying a Vacation Home? First Evaluate the Pros, Cons, and Alternatives

With the worst of the pandemic (hopefully) behind us, many of us are feeling the allure of new surroundings—especially after being stuck at home for so long. Like many others, you may be making up for lost time by traveling to your favorite vacation destinations. You may even be thinking about buying a vacation home so you can return time and again.

Yet purchasing a second home isn’t just a major commitment. It’s also an investment and should be evaluated as such. If you’re considering owning real estate in another part of the state, country, or world, it’s important to understand the pros, cons, and alternatives to buying a vacation home.

Advantages of Buying a Vacation Home

A vacation home can be a valuable investment.

Many people buy real estate with the expectation that it will appreciate in value over time. Depending on where you live and how long you own your home, you can potentially earn a substantial return on your investment.

Historically, an investment in real estate earns 3-4% annually, on average. However, some markets—particularly popular vacation spots—may generate a much higher rate of return.

Buying a vacation home gives you the opportunity to generate extra income.

If you don’t plan to live in your vacation home year-round, you can create a passive income stream for yourself by renting it out to others. Earning a stream of income can help offset or cover your mortgage payment, taxes, and other fees each month. It also makes buying a vacation home a more valuable investment opportunity over time.

Again, some markets are more attractive than others when it comes to vacation rentals. AirDNA’s Free Rental Property Calculator can help you estimate how your dream vacation home may perform as a rental property before you buy it.

You may save on travel expenses in the long run.

If you tend to vacation in the same spot every year—or several times per year—you may ultimately save money by buying a vacation home. Indeed, lodging expenses can add up over time.

You’ll still have to pay for gas or airfare to get to your destination. However, if you own a vacation home, at least you won’t have to worry about paying a premium to stay there.

Buying a vacation home may improve your overall quality of life.

According to APA’s 2021 Work and Well-Being Survey, burnout and stress are at all-time highs across professions. If you’re feeling burnt out by your day-to-day responsibilities, owning a vacation home may help you recharge by taking longer breaks and spending more time with loved ones.

Buying a vacation home isn’t just a financial decision. In addition to weighing the costs of purchasing a second home, be sure to consider all potential benefits. The enjoyment you get from owning a vacation home can be just as important as the financial gain.

Potential Disadvantages of Owning a Vacation Home

The housing market is still relatively hot right now.

Home prices soared during the pandemic as demand for larger, more affordable homes increased alongside limited supply. Although the housing market is cooling off in some parts of the country, many states are still experiencing high demand.

According to Bankrate’s Housing Heat Index, the five states with the hottest housing economies as of the first quarter of 2022 are Utah, Montana, Florida, Arizona, and Tennessee. In fact, home values are up at least 25% in each of these states.

Depending on where you’re thinking of buying a vacation home, you may pay top-dollar right now. And buying at the top of the market may make it harder to recoup your investment if you want to sell your home one day.

Interest rates are on the rise.

Inflation reached a new 40-year high in June, soaring to 9.1%. Although the Fed began raising interest rates earlier this year, the latest inflation reading opens the door for more drastic rate hikes in the future. That means mortgage rates are likely to rise in tandem.

Currently, the average rate on a 30-year fixed mortgage is just under 5.6%, according to data from Zillow. This compares to an average rate of 2.96% in 2021. If you plan on financing a new vacation home, be sure to consider all potential expenses to avoid taking on more debt than you can handle.

There may be opportunity costs involved with buying a vacation home.

Depending on your stage of life, you may have other financial obligations and goals to consider when buying a vacation home. For example, you may be saving for retirement, putting children through college, or paying off an existing mortgage.

Indeed, you may be able to afford a second home right now based on your income and expenses. However, make sure that doing so doesn’t preclude you from reaching other, potentially more important financial goals.

You’ll need to maintain your vacation home and keep it secure throughout the year.

Lastly, one of the advantages of going on vacation is being responsibility-free. On the other hand, buying a vacation home means you’ll need to maintain it—even when you’re not there.

In addition, you’ll want to make sure your home is secure. While you can solve a lot of problems through technology and outsourcing, setbacks can happen unexpectedly. Unfortunately, these setbacks can cost you time, money, or both.

3 Alternatives to Buying a Vacation Home

As you weigh the pros and cons of buying a vacation home, it’s also worth considering alternative solutions. Ultimately, you may decide that you can achieve your vacation goals without owning additional property.

Extended Vacation Rentals

In addition to private rentals, companies like Airbnb and VRBO make it easy to find and rent your dream vacation home. In some cases, you may be able to extend your stay for several weeks or even several months.

Of course, vacation rentals can get expensive, especially when considering additional costs like service and cleaning fees. However, renting also gives you the opportunity to vacation in a variety of places without the commitment of ownership.

Fractional Ownership

If you’re thinking of buying a vacation home in a condominium or resort community, you may want to consider fractional ownership. This is a method of purchasing an interest in a property with others to share the overall cost.

In most cases, fractional ownership properties limit ownership to 6-14 parties per unit. And unlike a timeshare, you’re issued a deed for the property—not a time that you can use it. With fewer owners, you may be able to spend up to five weeks or more at your preferred vacation resort. In addition, your share of the unit rises and falls in value just like it would if you owned the home outright.

That said, fractional ownership can get expensive, especially considering potential fees on top of your investment. You also need to come to a consensus with the other owners when making decisions. Lastly, you may have difficulty finding a buyer if you eventually want to sell your share.

Timeshares

Unlike buying a vacation home, purchasing a timeshare gives you the right to use a vacation property for a specific amount of time. In other words, you have repeatable access to a vacation destination. However, you don’t have equity in the property.

According to data from the American Resort Development Association, the average cost of a timeshare is $22,942 per interval. Meanwhile, annual maintenance costs about $1,000, on average.

While the overall cost is typically less expensive than buying a vacation property, a timeshare is not an investment. Since the secondary market for timeshares is small to nonexistent, you shouldn’t expect to sell it for a profit or even recoup your costs one day.

If Buying a Vacation Home Is One of Your Financial Goals, Consider Working with a Trusted Financial Advisor

If buying a vacation home is on your bucket list, you may want to develop a financial plan that can help you work toward that dream along with your other financial goals. A financial advisor can help.

SageMint Wealth is a Southern California-based wealth management firm for high-net-worth individuals, families, and business owners. We are passionate about supporting women, the LGBTQ+ community, and individuals in the technology space. If you’d like to schedule a call with a member of our team, please contact us. We’d love to hear from you.