You’ve got a little extra cash and you’d like to find a place to escape.
Should you buy a property and build equity with the potential for rental income? Or should you rent a getaway with no fixed costs, maintenance or hassle?
“Vacation homes tend to be the kiss of death for most people’s financial plan,” says Patrick King, certified financial planner at Transformative Financial.
During the buying process the assumptions around expenses, rental revenue, taxes, insurance and property management tend to be wildly optimistic, King says. “One kitchen remodel or a new roof could blow a hole in your return on investment calculations.”
But even if a vacation home does turn out to be a terrible investment, it might provide years of family enjoyment, and many consider it a labor of love.
Here’s how financial planners, homeowners and investors have approached the decision to buy or rent a vacation home.
Asset or liability?
The economics of owning a second home rarely work because there are so many unexpected costs, says Eric Gabor, a certified financial planner and founder of Eagle Grove Advisors.
“People think they are buying an asset, but often, with all the cash outflows, it’s more of a liability.”
If a buyer is paying all-cash, that’s one thing, but likely the second home will add debt to a family’s balance sheet and more expenses including property taxes, maintenance and insurance.
“With all these expenses, you would likely be better off staying at a hotel or using a service like Airbnb or VRBO,” says Gabor. “I’d rather you earmark $15,000 and do a seasonal rental and mitigate your risk.”
Given the risk and expense of real estate, he says, an investor would do better putting the money in the stock market.
But in some circumstances, buying vacation properties can make sense, says Jirayr R. Kembikian, a certified financial planner with Citrine Capital.
“If an individual can buy a property and still have a diversified portfolio, and can also cover the mortgage, insurance, and taxes with rental income, it could make sense,” Kembikian says. However, this is only possible if they have substantial assets or the vacation property is very inexpensive.
“Usually it is a purely emotional decision for these individuals and it makes zero financial sense,” he says.
A sweet home, but a terrible investment
Wendy Marsden plants flowers around her vacation property on an island off the New England coast every spring just so she’ll have a beautiful bouquet to leave for rental guests, along with a bottle of wine, when they check in. The house has become a refuge during the off-season, is in a place she’s been coming to for years and to which she’s considering retiring.
“However, it is a terrible investment,” she says.
Since Marsden is also a certified public accountant, certified financial planner and registered investment adviser at ProsperiTea Planning in Massachusetts, she knows all too well that the costs do not add up.
She says she has earned as much as $14,000 a year renting out the place. But the taxes alone on the property are $8,000. Another $4,000 goes to utilities and fees for listing her property for rent. When she adds in mortgage i