By James I. Moore, CFP®

Do you have a dream vacation home? Maybe you just enjoyed a relaxing getaway somewhere and would love to make that trip a reoccurring event but without the scheduling hassles. Maybe you want to leave a legacy to your family and friends by creating a place where great memories are made.

But is buying that dream vacation home even a possibility? It can be difficult enough to afford a primary home in Orange County. How do you know if you can afford a vacation home?

Can a Vacation Home Be a Good Investment?

In addition to benefiting from potential property appreciation, many people who own a second home also choose to rent it out when they are not using it. Could doing this make a vacation property a good investment? It is important to understand the risks and consider the costs involved with owning a second home.

Like any real estate property, there is no guarantee that the home will increase in value. The recent housing crisis should remind us how volatile real estate can be and how it can be dangerous to rely on property appreciation in projections about the future. If you are buying a vacation home, it is important to think about the local real estate market and how a recession might affect the area.

In addition to having conservative assumptions about property appreciation, it is also important to consider all the costs involved with owning a home:

• Mortgage principal and interest

• Property taxes

• Insurance

• HOA fees

• Utilities

• Maintenance and repairs

The last bullet point can be the hardest to predict. Is there enough buffer in your budget for an emergency roof repair or plumbing disaster? These are potential costs that come along with owning any property, but the risks can be higher when you might have multiple strangers (aka renters) living in it. Also, most people usually do not live geographically close to their vacation home, so it can be difficult to keep an eye on the property. If you choose to hire a property management company, that is an extra cost to consider.

If renting out the property, it is important to have conservative assumptions about vacancies. Many vacation properties are more attractive during certain times of the year. A property next to a popular skiing location will probably be in higher demand when there is snow. A property next to water will probably be in higher demand when it is warmer. And generally, there is a higher demand for vacation properties during certain times like the summer and holidays. It is important to consider that these high-demand periods are also the times when you probably want to use the property too.

For these reasons, it is usually best for most people to think of buying a vacation home as a lifestyle decision, not as an investment.

Can You Afford It?

Is your primary house paid off? Some of the same guidelines that apply to owning your primary home also apply to owning your second home. A rough guideline is that your combined monthly housing expenses, along with any other debt, should be less than 33% of your gross income. Make sure to consider all expenses including those listed above, leaving some wiggle room for unexpected repairs.

In addition to considering how a vacation home fits in your budget now, you also need to determine how it fits into your overall financial plan. Do you know what your long-term financial goals are? Do you know if you can still reach those goals if you buy a second home?

Besides just the housing expenses listed above, there is also the opportunity cost of what you lose by not investing the money used to buy and maintain the vacation home. If you spend a portion of your retirement savings now to purchase a vacation home, how long will your savings last?

People are living longer. For a couple that is age 65 today, there is about a 48% chance that at least one person will live to age 90 or beyond. Put another way, if you are assuming that your money only needs to last until age 90, then you will be wrong about half of the time. Along with longer life expectancies come higher health care expenses later in life.

It is important to have a retirement spending plan in place so you can be confident that you are on track to meet your goals. This plan should consider other goals you may have, such as helping kids or grandkids pay for college.

Does a Vacation Home Make Sense for You?

For most people, it will be less expensive to rent a vacation house than to buy it, especially if they are spending only a couple of weeks there every year. Renting gives you freedom. You can choose a different vacation rental every year, and you do not have the financial burden and expenses that come along with owning the home.

However, nothing provides you with the flexibility of owning a vacation home. There will be no scheduling hassle of waiting until a property is available for you to rent it. The property is yours, so you can go any time!

Bottom line, buying a vacation home should be viewed as a lifestyle decision for your enjoyment rather than an investment decision. Before making your decision, consider all the expenses involved, make sure you are not relying on significant property appreciation or overly optimistic assumptions, and determine how the vacation property fits within your overall financial plan.

If the trade-offs are worth it for you, then go for it! A vacation home may not always be a great investment from a financial perspective, but it can provide years of family enjoyment and lasting memories.

Schedule a 15-minute discovery call with a fee-only financial advisor to discuss your personal situation.