By Tom Rasmussen, CFP®
To buy a vacation house sounds like a lot of fun—a place you can get away to with no reservation needed. To many people, their vacation home is a sanctuary. And not only does the home serve as a getaway and sanctuary, but it can also be a great investment at times.
But understandably so, purchasing a vacation home, and possibly taking out a new mortgage to do so, is not on the forefront of many people’s minds during this pandemic. If you are considering buying a second home, there are some factors that you should consider. They are covered below.
The information covered in this blog is intended for educational purposes only and should not be considered a recommendation for your specific situation. For that, we recommend you meet with your financial planner.
Things to Consider
How you intend to use the property will be a big determining factor in whether you buy a vacation home.
It is without a doubt that the COVID-19 pandemic has wreaked havoc on the short-term rental (STR) market. If your intention is renting out your vacation home and depending on the income, that alone may have already deterred you from buying investment property when you had previously planned to.
It is a different story if you intend to use the vacation house primarily for yourself and family members with a few rental days or periods here and there throughout the year. You will not be relying on the income from this property and rather will own it with the purpose of using it yourself.
Regardless of how you use the property, you need to consider the fact that you will have the same expenses that you do with your primary residence—utilities, property taxes, insurance, upkeep, and maintenance.
If renting the home out, you also have the expenses of cleaning services and property management if you do not take care of those yourself. It is not a secret that vacation homes are a very expensive commitment.
Another determining factor in deciding whether to buy a vacation home will be your cash flow.
For example, if you plan to rely on the income, can you weather spotty reservations or mass cancellations should there be a second coronavirus wave and more shutdowns? Although people are beginning to travel again, the level still is not where we typically are during the summer.
If a second wave hits, those reservations will stop almost completely. The COVID-19 pandemic has caused cash flow from vacation rentals to turn spotty and unpredictable, unlike in years past.
The flip side of the cash flow coin is if you intend to use the property yourself. Ask yourself: “How do the added expenses work into my cash flow, and what does that do to my financial plan?”
If you are able to afford the purchase and if the added expenses don’t ruin your plan, you may feel like proceeding—especially when considering that property values in some of the most desirable vacation spots seem to be staying steady or are predicted for a slight decrease.
The purchase needs to make sense from a cash flow perspective, and as I mentioned, STR incomes right now are unpredictable. Regardless of whether you rent out or use the property, this home should be a long-term investment, and the purchase needs to be carefully considered.
Our Vancouver and San Mateo-based wealth management firm works with clients on big expenditures like second homes to assess how the purchase fits into their financial picture. We suggest that you talk with a financial advisor if you are unsure of how the purchase would affect your financial planning.
As with any financial decision, it is vital to consider the taxes involved with your second home. When it comes to vacation homes, there are three ways they can be taxed: as a vacation rental, personal residence, or mixed-use property. To simplify, I have provided the following table:
As with any significant financial decision, you have a lot of factors to consider when purchasing a vacation home, especially right now. Remember that this should be a long-term commitment—at minimum, five years.
You also need to consider the taxes involved and whether you feel that future reservations and rentals will be predictable, which they currently are not.
Should you be considering purchasing a second home or vacation rental, we recommend meeting with a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional to discuss the effects the transaction and added expenses will have on your financial plan.
Schedule a complimentary meeting with a wealth advisor to discuss your personal situation.