Vacation Home, Savings or Spending?

Published On: June 4, 2021

Written by: Ben Atwater and Matt Malick

With vacation season heating up, we thought it an appropriate time to share some brief thoughts on vacation homes.  Aside from retirement, the most consistent inquiry we have received from clients over the years is regarding the viability of purchasing a vacation home. 
 
It is common for people to approach the idea of acquiring a vacation home from the standpoint of an investment.  In other words, the logic goes that the home is not an expense, but rather an investment. 
 
In most scenarios, a vacation home is both an expense and an investment. 
 
Purchasing a vacation property is not only a current expense but also an obligation to incur future annual expenses (property taxes, mortgage, upkeep, etc.). 
 
There is nothing inherently wrong with a vacation home.  As a matter of fact, it is a great thing, but you need ample money to truly afford one without impacting your retirement plan. 
 
Our experience is that for the mass affluent a vacation home is culturally ingrained. Financially successful people see a vacation home as an inherent milestone, a symbol of achievement and a reward for hard work. 
 
However, too many people make funding retirement several degrees more difficult by acquiring a vacation home. 
 
If you plan to rent the second home to cover its expenses, be careful that your analysis of revenues and expenses is realistic. 
 
Also, if you plan to rent the home, think carefully about the time you can truly enjoy the home versus the time and aggravation spent as an Airbnb or VRBO host.  Remember, “time is money” and the opportunity cost of your time is an expense. 
 
People approach vacation homes with great optimism and often reaffirm their decision in hindsight by overestimating the rate of return on the property. 
 
Say you purchase a vacation condo for $500,000 and ten years later it is worth $1,000,000.  That sounds great and it is a tangible gain.  However, taxes, upkeep and interest (for starters) might be $25,000 per year.  Over ten years, that is $250,000.  People can conveniently overlook these costs.  In this example, your average annual return over this period, after carrying costs but before even considering capital gains tax or selling costs, is 3.52% – nothing like what many owners perceive.
 
That said, we have clients who purchased shore properties thirty and forty years ago and now these places are worth a small fortune.  But, again, depending on rental income, carrying costs, capital gains taxes and selling costs, the average annual return over these many decades might be robust or could be modest. 
 
If nothing else, in many cases, vacation properties serve as “giant piggy banks” for forced savings over time. 
 
From an emotional standpoint, although it sounds overly simplistic, it is a great idea to find a long-term rental or find a series of rentals in the area where you are considering a vacation home.  Spend a combined couple of months there and then evaluate whether you are still compelled to buy. 
 
From a financial standpoint, if the question occurs to you – “Can I really afford a vacation home?” – then a detailed retirement income analysis modeling retirement with a vacation home and modeling retirement without a vacation home is most definitely necessary. 
 
No doubt, vacation homes can provide families with great joy and fond memories, but they can also create stress and financial difficulty in the wrong situation.  And even in the best cases, they should be bought primarily for pleasure, not as a guaranteed home run investment.