The concept of owning a vacation home continues to gain in popularity. A second home could be a sanctuary from the daily grind, a launching pad for exciting nearby activities, or simply offer an entirely different rhythm of life. Beyond their role as retreats, vacation homes have emerged as potentially lucrative avenues for real estate investment. This article explores the allure of vacation homes, delving into their benefits as well as the considerations involved in ownership.
The Retreat from Routine
For many, the modern world is marked by its relentless pace and constant need for connectivity. Amidst the noise, responsibilities, and commitments, the appeal of vacation homes lies in their promise of an escape. These homes provide an opportunity to break away from familiar surroundings and immerse oneself in a different environment that promotes relaxation, reflection, and rejuvenation.
- A Change of Scenery: Vacation homes are usually located in areas that look and feel very different from our main residence, be it by the beach, in the mountains, in the heart of the city, or at a serene countryside. The change of scenery alone can have a profound impact on our mental and emotional state, allowing for a refreshing change of perspective.
- Privacy and Tranquility: Unlike hotels, vacation homes offer privacy. They provide a space where individuals and families can unwind without the intrusion of noisy neighbors or the bustle of hotel staff.
- Home Away from Home: Vacation homes are designed to provide all the comforts of home, with the added benefit of being in a different setting. This balance allows individuals to have a homey atmosphere while also indulging in the luxuries of a getaway.
Investment Potential of Vacation Properties
Beyond their role as a haven for relaxation, vacation homes have gained prominence as a potentially lucrative investment option. With the rise of platforms like Airbnb and VRBO, property owners can now rent out their vacation homes to travelers, generating income when the property is not in use. Here's why vacation homes are increasingly seen by some as an attractive investment:
- Rental Income: Renting your vacation home during times when you're not using it can be a significant source of income. Travelers often seek unique and immersive accommodations, and vacation homes often fit the bill perfectly. On the downside, if you do plan to rent your home, you should not expect your tenants to take care of the property as well as you would. This means you should plan for higher maintenance expenses. As a result, it may be best to target longer-term rentals of thirty days or more rather than shorter-term weekly rentals.
- Appreciation: Just like primary residences, vacation homes purchased at an attractive price can appreciate over time. Desirable locations and well-maintained properties are the most likely to increase in value during good economic periods. As with any investment though, there can be no guarantee of profits.
- Tax Benefits: Depending on your location and how you use the property, there might be tax benefits associated with owning a vacation home. A consultation with HCM’s Tax Advisors can provide insights into potential deductions and advantages.
- Diversification: Investing in real estate, including in the form of a vacation home, may help diversify your investment portfolio. Real estate often behaves differently than other types of assets, providing a possible hedge against market volatility. Again, a number of factors including but not limited to location, entry price, and market conditions should be considered before taking any action.
Considerations Before Buying a Vacation Home
While the allure of vacation homes is evident, their ownership comes with a set of factors that potential buyers must consider:
- Location: The adage "location, location, location" rings particularly true for vacation homes. The appeal of the area, its proximity to attractions, and its accessibility all play a pivotal role in the desirability of your vacation home and its potential for appreciation.
- Maintenance: Vacation homes, just like primary residences, require regular maintenance and managing the upkeep from a distance can be challenging. Having a reliable local property manager or maintenance service is strongly advised.
- Initial Affordability: Higher home prices and the recent increase in mortgage rates suggest that vacation homes may not be as good of an investment now as they were a few years ago.
- Costs: The costs associated with vacation home ownership extend beyond the initial purchase price. Property taxes, insurance, utilities, maintenance, and potential homeowner association (HOA) fees should be factored into your budget.
- Rental Management: If you intend to rent out your vacation home, you'll need to consider the responsibilities of being a landlord. This includes marketing, managing bookings, ensuring property cleanliness, and addressing guest concerns. Again, consider employing a rental management company to relieve you of this burden.
- Seasonality: Depending on the location, vacation homes might have peak seasons and off-seasons. During peak times, you might enjoy higher rental income, but you'll need to account for potential periods of low or no occupancy.
- Regulations: Some locations have zoning regulations or HOA rules that affect vacation home rentals. It's crucial to understand and comply with these regulations to avoid legal issues.
- Unforeseen Surprises: Ask friends who own property stricken by hurricanes or wildfires. Cleanups and rebuilding from a distance can be challenging.
The Hybrid Approach: Renting vs. Personal Use
One of the most significant decisions vacation homeowners face is whether to use the property exclusively for personal vacations or to rent it out when not in use. Striking a balance between personal enjoyment and income generation is key:
- Full-Time Rental: Opting for full-time rental can maximize your income potential. However, this means sacrificing the opportunity to use the home for your vacations when you please. HCM clients often choose this option in the years before a retirement move. They capture the tax benefits of “rental property” that is 100% business, then at retirement remodel and switch the property to a 100% personal use retirement home.
- Part-Time Rental: Many owners choose to rent their vacation homes part-time, allowing for personal vacations while generating income during other periods. This approach provides a blend of personal enjoyment and financial gain. Complex tax rules need to be understood. Also, to capture the most income you will need to rent your home during the “best” seasons. This means you will be shoveling snow while someone else is enjoying your beach house.
- Personal Use Only: If your primary goal is a private retreat and using the vacation home solely for personal vacations whenever the whim strikes, 100% personal use might be the best option. However, you'll need to account for the costs of ownership without any rental income.
As William Cowper said, “Variety’s the spice of life.” Vacation homes provide variety in life as they embody the desire for escape and the yearning for a different way of life, if only temporarily. They offer a sanctuary where relaxation and reflection take center stage, away from the demands of daily life. Moreover, they represent an intriguing avenue for investment, allowing owners to earn income while possibly capitalizing on the appreciation of a valuable asset. However, owning a vacation home comes with a set of considerations and risks that require careful thought and planning.
Whether for personal enjoyment, financial gain, or a combination of both, the appeal of vacation homes remains strong. Their ability to offer an escape from routine, a space for cherished memories, and a potential source of income cements their status as more than just physical properties – they are gateways to relaxation and opportunities in the ever-evolving landscape of real estate.
| Mike Hengehold, CPA/PFS MST RICP®
Mike is the Founder and President of HCM Wealth Advisors. Over the last 30 years, he’s provided financial planning guidance to a myriad of families to help them realize their financial dreams. Mike is an avid homebrewer and animal lover, and when he’s not at work you can often find him on the golf course working on his short game.