Should I Buy A Vacation Home?

In a previous article, I discuss why it’s important to refinance your mortgage before leaving your job. No job = no recurring income = high risk = no mortgage refinance for you! You won’t even have the ability to compromise and pay a higher lower rate than if you did have a job. When you lose your W2 income, you turn invisible to the banks. Think, “You are dead to me.”

The other important refinancing situation to consider is when you are planning to turn your primary propertyinto a rental or vacation property. You might have outgrown your existing property, but don’t want to sell given you believe real estate is a great long term wealth builder. Perhaps your company is relocating you for a better opportunity and you plan to return one day. Finally, maybe you’ve been forced to downsize and have no choice but to become an accidental landlord.

A VACATION PROPERTY IS BAD FOR YOUR FINANCES

According to a 2014 National Association of Realtor’s Investment and Vacation Home Buyers Survey, vacation-home sales accounted for 13% of all transactions in 2013. Roughly 11% of primary home occupiers also have vacation homes.

It sounds nice to have a vacation home, but I can assure you lots of issues randomly pop up once you own one. For example, I recently went up to my place in Squaw Valley for four days. When I entered, I found blue and green marker doodles all over my sofa and two sofa chairs! I couldn’t believe the tenant wouldn’t fess up to the damages, nor could I believe the housekeeping didn’t report the damage to the front desk and make the tenant pay.

My condo is being professionally managed. If I’m paying 25% of revenue to the property manager, I shouldn’t have to spend time inquiring about this incident.

Rental income is also highly contingent on the weather for ski season. These last four years have been pretty dry, causing very little income growth even as the economy boomed back in the Bay Area. At least there’s strong Spring, Summer, and Fall rental income, otherwise, I’d be losing at least $30,000 a year for the luxury of owning a property I only use at most five weeks a year.

Here are a few questions you should consider before purchasing a vacation home:

1) Do you sleep around? I’m asking you figuratively whether you enjoy sleeping in different resorts. When you buy a vacation property, you are wed to that property until you sell. You’re going to be experiencing the same amenities over and over again for years to come. Alternatively, you can add up the annual cost of ownership, divide by the estimated days you’ll use the property over the years, and figure out where else you can go vacation with that type of money. Once you do, you’ll start get excited by the buffet of vacation options ready to take your money.

2) Are you a work slave? Most American workers average 2-4 weeks of vacation a year, excluding those who are able to work from home. Only after 10 years at one firm did I finally have the ability and the guts to take six weeks of vacation off a year. Before making Executive Director, I knew taking too much time off would be career suicide. Once I realized I wouldn’t be making Managing Director within my desired time frame, I decided to fully enjoy my company benefits. If you can’t escape work for more than four weeks a year, you’re much better off renting.

3) Can you make rental income from your vacation property? Banks are funny. They are much more stringent on mortgages for vacation and investment properties because they assume you require rental income to afford the mortgage. Meanwhile, you’re thinking to yourself, I can afford the place on my own, but if I can get rental income, that reduces my credit risk as a borrower!

Rental income is a great way to offset the ongoing cost of owning a vacation property during the 45+ weeks a year that you will likely not be there. The IRS tax laws even allows you to rent out your vacation home for up to 14 days a year without paying taxes on the rental income generated from those days. But at the end of the day, you must think like the bank and consider any rental income from your vacation place as a bonus. Only buy the vacation property if you don’t need the rental income.