Summer is coming and it may be time to go on vacation. As you head out to the beach or up to the mountains, you may find yourself thinking, “I come here so much, I should just invest in a vacation home.” While having your own home away from home may be nice, is it really an investment?
What Is An Investment?
What is an investment in the first place? An investment is defined as, “the action or process of investing money for profit or material result.” (1) The key here is the word “profit.” Investments are supposed to make you money.
A vacation home has to make you money to be an investment. If it doesn’t, then it’s an expense. Being an expense doesn’t make it a bad thing, though. Your dinner last night was an expense. The difference is what you get out of it, profit or pleasure. If all you get out of your vacation home is pleasure, then you can’t call it an investment.
Profit Or Pleasure?
So, what will a vacation home bring you, profit or pleasure? We know that they can bring a lot of pleasure, so let’s look at the profit. Will a vacation home really be as profitable to you as you want to believe?
Expenses
Vacation homes can be costly to maintain. Even if you purchase one with cash, there are a lot of expenses beyond just a mortgage payment. Property taxes and insurance premiums are due every year, and will probably rise with time. Many vacation properties have association dues, which can be hundreds of dollars a month. Properties need to be maintained, more so the older they get, which can put a big hole in your pocketbook.
Renting
For your vacation home to generate income as an investment, you would need to rent it out when you weren’t using it. When you start renting out a vacation home, you get yourself into the hospitality business. It isn’t much different than running a mini-hotel. You need to communicate with guests, arrange payments, provide for their needs at all hours, and make sure the home is constantly being cleaned and maintained. You can hire a management company to do all of that, but usually at a steep price.
Sometimes renting it out takes some of the fun out of having your own place. You can’t just leave your stuff lying around all the time. You know that strangers are sleeping in your beds and using your things. Also, the times when you want to use the home are probably during the seasons where you can charge the highest rent. Then you will feel torn, trying to decide if profit or pleasure is most important to you.
Taxes
When you rent out your home, you can deduct some of the expenses on your taxes. However, the rules are complicated and you might not get as big of a tax break as you expect. If you use the property more than 14 days a year or 10% of the time it is rented, then you have to allocate your expenses between personal use and rental use, and you can only deduct a portion of your expenses.
In most cases, the expenses and hassle cancel out the profits and a vacation home is a luxury item, not an investment. There are some circumstances, however, in which a vacation home can actually be a decent investment.
When Is A Vacation Home An Investment?
If you can get a great deal on your future retirement home during a buyer’s market, it might make sense to do so and rent it out until you retire. The rental income may be able to cover the expenses until you are ready to move in. Otherwise, as long as you haven’t used the property too much yourself, you can take a loss on your taxes.
Having a vacation home might make sense financially if you’re moving away from a tourist destination and the real estate market is depressed. If you can’t sell your home at an acceptable price, it could be more profitable to keep it as a vacation home that you rent out.
Is A Vacation Home Right For You?
Before buying a vacation home, it’s important to think through the decision from all angles. Does it fit in with your overall financial goals? Do you really want to take all of your vacations in the same place every year? Can you afford it?
A thorough financial analysis is imperative. How do the expenses line up with expected rental income? What happens during an economic downturn when fewer people have money to vacation? Would you be okay if home values drop? Is the property really an investment, or just a luxury item?
If you’re considering purchasing a vacation home, I can help you think through your goals and the financial implications. With decades of experience in finance, I can provide you with a comprehensive analysis so that you can make an informed decision. Call me today at (949) 631-3840 or email jpeters@cfiemail.com. I can help you decide if owning a vacation home is right for you, whether you’re going after profit or pleasure.
About Jim Peters
Jim Peters is an independent financial advisor and the founder of Grace Wealth Management Group, Inc., a full-service financial firm committed to helping people pursue their financial goals. With more than 24 years of experience in the industry, Jim combines his extensive knowledge with his genuine interest in helping people pursue financial independence. Beyond his experience, he is certified as both a Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®), meaning he has advanced training and knowledge in financial planning and insurance. Based in Irvine, California, Jim specializes in working with individuals, families, and businesses throughout Orange County. To learn more, connect with Jim onLinkedIn or visitwww.financialadvisorirvine.com.
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(1) https://www.google.com/search?q=investment+definition&oq=investment+def&aqs=chrome.0.0j69i57j0l4.4132j0j7&sourceid=chrome&ie=UTF-8