By Matthew Glatt – CPA, Founder, and CEO of FLP Financial Group, LLC
Real estate is often considered a great investment, but buying a vacation home can expose you to financial risk. Even if your current income would enable you to pay for the down payment on a vacation property, the annual ownership and maintenance costs, alternative vacation options, and long-term financial uncertainty outweigh the intended benefits.
When I talk to my clients about buying a second home, I ask them a couple questions: Are you still paying a mortgage on your primary residence? Will you need to finance the purchase of your vacation home? Getting a mortgage for a second property can be difficult, especially if you are still paying off your first mortgage.
While a real estate investment may feel like you are thinking about your future, buying a vacation property can cause a tightening of the purse strings in your daily life. If you set aside financing your purchase, there are still other costs to consider. Annual ownership costs of a vacation home, including property taxes, insurance, HOA fees, and maintenance costs add enormous expense to the overall purchase price.
2. A Second Home Is Not a Strong Investment
Since the housing bubble burst, your home is no longer your largest and most safe investment. Before, home equity was considered a large part of your overall savings and buying a second home cemented your hard earned money into a dependable investment. If the housing market takes a turn for the worse, vacation properties often take the hit first and lose their value.
Also worth considering is your current net worth allocation. If your assets are more than 50% wrapped up in real estate your overall financial portfolio may be at risk if another financial crisis hits.
3. Luxury and Hassle
Costs and investment performance aside, no one needs a vacation home—it is a luxury. A luxury that comes with a lot of responsibility and maintenance headaches. In addition, vacation homes are easy targets for vandalism and burglary, as people know they sit empty for the majority of the year. You’ll need to spend extra money on upkeep and security to keep it safe and worth visiting. Why take on the stress of maintaining and securing a second home, when you could have the flexibility to explore the world.
4. Utilization of the Property
Speaking of luxury, most well-off people are able to take 3 to 4 weeks of vacation every year. But what about the other 11 months? Will your vacation property sit empty? The most common misconception of buying a vacation home, is the idea that it can be easily rented out when you are not on vacation to recoup some of the financial burden.
Just because it was purchased to be used as a rental property, does not mean there will be a constant demand. When you buy a vacation home with that intention you run the risk of not being able to rent it out consistently, and you are stuck eating the costs.
5. Vacation Alternatives
Additionally, are you always going to want to take your vacation in the same place? Buying a vacation home locks you into that location for the foreseeable future. Instead, with the money you’d spend on purchasing and maintaining your vacation home, you could travel and see the world. Don’t get stuck visiting the same place every year. Let us help you decide on a better investment strategy for your extra funds.
Hopefully, if you were considering buying a vacation home, the reasons I have outlined above have changed your mind or at least caused you to pause and think about alternative wealth investments. Our advisors at FLP Financial specialize in wealth planning and crafting strategies to build your portfolio and expand your income-earning investments. Contact us today to set up a consultation with an advisor and, in the meantime, start getting a better grasp on your finances by downloading our FREE guide on getting “Back 2 Basics.” It is packed full of tips for improving your financial well-being, reducing debt, and increasing your overall net worth.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional.