You have just returned from your dream vacation on the coast. You and your extended family rented a lovely home with magnificent views of the water. You spent your days soaking up the sun, swimming in the property’s in-ground pool, and enjoying all the water sports you don’t get to do at home. Now you are thinking about buying your own vacation property.
According to U.S. News & World Report, vacation home sales are up more than 57% this year. That is pretty impressive given that sales of existing homes as primary residences are up by just 20%.
It seems like everybody and his uncle wants a vacation home these days. Some say the COVID crisis is responsible. Apparently, people are choosing to invest in vacation homes and forego traditional travel. At any rate, buying a vacation home is fraught with potential peril. From a financial perspective, there are a number of things to consider.
Double Your Current Expenses
You are currently paying a mortgage for your primary residence. You’re also paying insurance, taxes, mortgage interest, and routine maintenance costs. Take on a vacation property and you are now paying two of everything. You’re likely to double your expenses, at the very least. You could go higher.
The Rental Market
Real estate brokers often pitch vacation homes as investments. They remind buyers that the properties can be rented out whenever owners are not there. That’s true. So if renting is something you’re thinking about, consider the local rental market very carefully. Does the property have 12-month potential? And if not, are you willing to rent for fewer months every year?
Park City Utah’s Sparano + Mooney says that their local area is an example of a great rental market. The architectural firm spends a lot of time designing vacation properties for people who appreciate skiing. Likewise, coastal Carolina offers a strong rental market for people who enjoy beach vacations.
You might be interested in buying a vacation home that is fully furnished. If so, be prepared to pay a higher price. And if not, you are going to have to invest in the furnishings necessary to make the home comfortable. You’re going to need a dining room set, living room furniture, and sets for all the bedrooms.
You are also going to need to stock the kitchen and linen closets. You will need bed sheets, towels, and so on. You will need to more or less stock the home with everything you and your guests might need while on vacation.
Potential Renter Damage
If you do choose to buy a vacation home with the hope of renting it out, remember this one fact above all else: renters don’t care about your property or its furnishings. Be prepared for renter damage. It is part of the business.
You are going to arrive for your annual vacation and find broken things. You’re going to find scraped paint, cracked windows, and dings in the door frames.
One way to minimize renter damage is to hire a property manager willing to stop in and check on the place once or twice per week. Guests who know a property manager is coming will take extra care to be on their best behavior. A property manager can also look for damage so that guests can be billed accordingly.
All the Hidden Costs
Underscoring everything else in this post are the hidden costs of home ownership. There are so many expenses for which you cannot budget. Needless to say, owning a second home isn’t going to be cheap. Even if you rent, it is going to cost you.