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Consider these Factors Before Investing in a Vacation Home
By Tamara Lowenberg, CFP®
Why a Second Home is Not an Investment
Do you dream of owning a vacation home? Under ideal circumstances, owning a second home in a desirable location is a dream come true. However, all too frequently, owning a vacation home turns into a nightmare. Unexpected circumstances and high expenses such as mortgage payments, utilities, repairs, taxes, homeowners’ association (HOA) dues, and more have the very real potential to put a vacation homeowner in a difficult financial position.
Before buying a vacation home, consider the following:
#1 – Why do you want a vacation home?
The most common reason to purchase a second home is for vacations. A dream home in your ideal setting that is used solely for family fun can be a very worthwhile purchase. However, be aware that a second home is a long-term financial commitment and be sure you know what you are getting into. From the moment you purchase your vacation property, you are giving it priority over other financial goals, such as achieving financial independence. You automatically commit yourself to the expense and upkeep of a property that, most likely, is located far away from your primary residence.
Determine whether you are considering this purchase because you need a home or because you need an escape. If your true objective is to escape and relax, consider less stressful ways of visiting your ideal location, such as a short-term rental (Airbnb) or a nice hotel. This allows you to visit an oasis without the long-term commitment of owning a home.
#2 – Your investment priorities
If you are not already financial independent, determine how this purchase will impact your ability to get there as quickly as possible. Financial independence is the point in life when you have enough income (from investments, passive businesses, real estate, etc.) to pay for your living expenses for the rest of your life without having to rely on formal employment. Just like you wouldn’t take medicine without properly evaluating its side effects, you shouldn’t make a big financial decision before fully understanding the impact of that decision on reaching your other financial goals. What if buying a second home means that you need to continue working for five or 10 more years to pay for it? For many, the cost is not worth the sacrifice.
#3 – A vacation home is not an investment
A second home is rarely a good financial investment because it requires additional expenditures and does not pay income. In essence, you are committing your vacation budget to pay for property tax, insurance, maintenance, HOA fees and mortgage payments. In addition, during recessions, vacation homes tend to be the most sensitive segment of the real estate market. According to NY Times Article In July of 2010, a study by researchers from the European University Institute, Northwestern University and the University of Chicago concluded that the strategic default ( a practice of walking away from price depressed vacation properties) trend was “large and rising” among homeowners with an equity shortfall of $100,000. In 2010 strategic defaults accounted for 35.6 percent of al