You’re on vacation, you have a little extra money in your accounts, and you start to think, “this would be a great place to have a vacation home.”
But buying a vacation home isn’t like buying an RV or a pop-up trailer. It’s a big decision, and a wide range of factors should be considered. Vacation-home management company Vacasa found that 55% of buyers in 2022 were making their first dive into a vacation rental property. So the majority of buyers are new and may have little experience to draw on.1
Over the years, we’ve watched several of our clients purchase vacation homes. Our job has been to modify their financial strategy to reflect the new financial goal. Remember, a Timeshare is generally NOT an investment. While we can’t help with real estate transactions, we can help you better understand the commitment you are making and how it might affect other parts of your financial strategy.
As you think about a vacation home, here are three critical questions to ask:
Did you make a pros and cons list?
A good place to start is with a pros and cons list. Below are a couple of ideas to help get your list started. We also suggest that you give careful thought and prayer as you create your list.
- Pro: It may save you money on your next vacation.
- Pro: Depending on its location, it might be a place to consider retiring.
- Pro: It might appreciate over time if the area sees growing demand.
- Con: You may be paying a mortgage, and you’ll want to consider ongoing expenses, such as insurance, utilities, and any property taxes.
- Con: How will the property be maintained when you are not there?
What about rental income?
Planning to rent out your vacation property is one strategy, but it’s best to be prepared for a range of outcomes. One year the rental income might be great, but the next year it may be slow.
What we suggest is keeping separate accounts to help manage the rental income, with a cushion of about three to four months of expenses, including any mortgage payments. Also, understand that local rules for short-term rentals can change, so consider working with a real estate professional who knows the regulations.
Have you considered the hidden costs?
It’s best to prepare for things you can’t control that can surprise your budget. A new water heater, a burst pipe, or roof repairs can happen from time to time. In part, the age of the property can be a guideline to help uncover potential hidden costs. Don’t forget that HOA fees (Homeowners’ Association) will steadily increase over time.
A vacation home can be a great place to create family memories. We can help you better understand the commitment you are making and show you some best practices for incorporating a vacation home into your overall financial strategy.
- Vacasa.com, “2022 Vacation Rental Buyer Report.”