Owning a Vacation Property
As real estate values have fallen nationwide over the past several years, vacation properties have been hit especially hard. It’s not too difficult to understand why. If your income was to suddenly decrease due to a job loss, pay cut, or reduction in bonuses, commissions, etc., continuing to own a second home or vacation property might not make economic sense.
Likewise, it hasn’t exactly been the proper environment for people to purchase these types of properties. Over the past few years, the job market has been extremely uncertain, and the constant banter from the national news media has people feeling less and less confident about their finances.
Call me a bit of a contrarian, but does anyone else believe this might be creating a once in a lifetime (or perhaps a once in 10 to 25 years) buying opportunity?
Just as I have been actively looking for investment properties locally, I have also been doing a bit homework on some vacation type properties on a lake about 1 hour from my house. Where I live in the central United States, lakes are fairly common, and one lake in particular is very popular among people from all over the area.
In the summertime, it is commonplace for many people that I know to head to the lake every single weekend. There are only 2 or 3 lakes that allow people to own property right on the water (the other lakes are controlled by conservation entities and all lake front property is publicly owned). The draw for people to own property right on the water is that it creates properties with incredible views, as well as recreational activities. These waterfront property owners are allowed to build their own boat docks, making it very convenient to enjoy all that the lake has to offer.
So that is the “normal” vacation property ownership possibility in the area where I live. I understand that there are likely much better options in other locales such as beach homes, ski lodges, etc.
After doing a fair amount of research, here are some takeaway points, thoughts and questions from my point of view:
- I don’t think I would ever desire to own a property more than 1 to 1.5 hours away from my home. If something were to go wrong, I’d want to be able to get there quickly to remedy the problem. Even at this distance, I might worry about the property.
- Along those same lines, if I did own a vacation property, I’d want to be able to enjoy it as frequently as possible. That simply would’t be feasible if the property were located in Florida, California, or the Caribbean. Even if I had a property that was 1 to 1.5 hours away from home, it might be a stretch to use it very often.
- I have several customers who own properties out of state and out of the country. They might go 3 to 4 times per year max. In that scenario, it seems like it might be much smarter to rent.
- Even owning a vacation property close to home might not make financial sense unless you were able to use it several times per year.
- The biggest advantage I can see to owning a vacation property is being able to be there in a moment’s notice in order to relax for a few days. It would be nice to be able to have this flexibility.
Now let’s look at a couple things from an investment perspective:
- It would certainly be possible to use a local property management service to rent the property out when it is not being used, but I wonder how likely it would be to generate enough revenue to fully offset the costs. I am guessing not very likely. But if it were possible, it begins to look like a very attractive option. You could purchase a property now that you might want to use in retirement, and use rental revenues generated over the years to essentially pay for the property, all the while getting to enjoy the property yourself along the way.
- In order to generate enough revenue, you’d likely have to rent the property out through most of the “peak season”, whatever the peak season might be for a specific property. This would significantly cut down on the personal enjoyment side of the equation, unless you were happy with personally using the property mostly during the “off season”.
- Something that is common around here is for 2-4 couples to all go in together and purchase a vacation property. Your financial burden is reduced significantly, although it is still rather easy to divide the time up where everyone gets to fully enjoy the property. The difficulty comes on holiday weekends when everyone wants to be using the property.
- The market for vacation homes will eventually bounce back, which could lead to significant appreciation on the property. I have no clue how long this will be, but it seems like it will be slow going given the overall housing market is still very slow.
My questions for you:
Have you ever considered owning a vacation property?
What do you see as the positives and negatives of doing so?
There are definitely pros and cons. I would typically lean against buying a vacation property (at least at this point in my life).
Consider the cost of owning the property – hundreds or even thousands of dollars a month for something that you may or may not use all that often. I think early on you may use it a lot, but as time goes on and the novelty wears off, you’d use it less and less. Also, it sort of locks you in to a particular location. If you instead rented every time you wanted to go, it would cost you several hundred dollars per visit but you’d only pay for those visits you actually used. Furthermore, you could rent different houses each time, or go to different lakes. All the while you’d be saving money that you could use to take nicer vacations.
Obviously the economics change significantly if you can expect to rent the place out and have it more or less pay for itself. If you can get it as a good investment, then yes, now is probably a GREAT time to buy.
I have found that the limiting factor in our vacations is not money, but time. Specifically, time off work. While I get a rather generous 15 days of vacation time a year, there are dozens of places my wife and I want to go before we have kids and we’ve only got a year or two left before that happens (God willing). Therefore, we have tried to limit “repeat” vacations so we can see and do more of a variety of things. A vacation home would lead to less variety.
With a family, however, a vacation home would be pretty sweet. My wife’s family had a house on a lake growing up (though about 9 hours from home) and they’d spend months at a time over summers there, and they’re some of her best childhood memories.
It’s like you’re on a msision to save me time and money!
That hits the target dead cneetr! Great answer!
Jonathan –
I think it’s definitely a long shot for me as well, for many of the same reasons you mentioned.
– Don’t want to be limited to the same location for vacations.
– Weekends are usually very busy, so it’s be hard to use it then either.
– Time off work – same here, I get 15 days, but its hard to take them all each year.
The point you made about having the lake house once you had a family is more along the lines I am thinking of. Once we have kids (a couple more years), taking real vacations will be difficult. It would be awesome to have a place we could go that was close by, that the kids would enjoy.
Actually, right now I am looking for a water front lot on the lake because there haven’t been any that have sold in a couple years, and prices have fallen substantially. I would probably hold off on building something on the lot for 5-10 years. But I do feel that now might be a good time to acquire the land if I could find a deal.
You always have a lot of the same thoughts as me…perhaps we are related somehow
Okay I’m convinced. Let’s put it to atcion.
uWVdUk gjcpbyevaung
yMKhcZ , [url=http://dtcnkrhoskab.com/]dtcnkrhoskab[/url], [link=http://bgedtphifsmn.com/]bgedtphifsmn[/link], http://fbewgnurwdre.com/
TYpxJ3 zrebvvnfrnds
Tlaedq , [url=http://rfdonzfhpfhq.com/]rfdonzfhpfhq[/url], [link=http://qfqjvgrkrejl.com/]qfqjvgrkrejl[/link], http://yzjclponceip.com/
Haha, I think we just have a lot of the same interests and perspectives at a similar stage of life. And incidentally, none of my extended family is anything like me in these respects, so it’d be more likely we’re NOT related!
By the way, building sounds awesome! Building a home is a dream of ours. And you’re right about now being a good time to buy land, though I’d definitely put a lot of thought into that decision. Land doesn’t earn an income (unless you could rent it out as a campground or something) and would just cost you in payments and insurance until some undetermined future time when you are able to build. But if it’s cheap enough, those concerns are less important.
We actually built our house earlier this summer. I am going to have to turn that into a full blown post. Lots of good info to pass along.
I would think you could turn that into a whole series of fascinating posts. There’s got to be a TON of aspects of that – from how to pay for it to how to select a lot, design considerations, general contractor or be your own, etc.
Not all of those are directly related to finance of course, so it’s up to you how much you’d want to get into the details.
Vacation property seems to be a net loss in my own risk:reward analysis, especially in regards to the asset’s “intrinsic value.”
The way I see it is pretty simple: vacation property has high turnover making property management more expensive, and you don’t really have all that much control over supply. That is to say that a lot where there are currently 10 beachfront homes could easily become 3 massive condo units with 400 rooms a piece.
In going back to intrinsic value property, in the worst case scenario, is worth only what it is worth as shelter. So, where you may pay…say, 10x cash flow for vacation property, that cash flow is dependent on vacationers. Vacationers may spend $1,000 per week, but live-in people won’t.
And, just for the purposes of risk management, vacation property is highly cyclical; just like your job, and your own personal consumption life. I’m not sure I’d be too interested in weighting my finances so directly to the ability of others to spend on what is not a necessity.
I think residential property that people live in (as in every day) is far more attractive. Then again, there isn’t nearly as much room for appreciation in most pure residential markets as there is in vacation property. I’ll take the margin of safety over the upside in property valuations.
Artilecs like this make life so much simpler.
Too many comlpiments too little space, thanks!
Even though the occupants would be much more transient, I would only need to lease it on average 1 week per month to have it cover all costs. In the summer I could have it leased every week pretty easily, meaning any spring, fall or winter rentals would be pure bonuses.
Its certainly not something to analyze from a strictly investment standpoint. There’s a personal enjoyment factor that cannot be quantified. Sort of like joining a country club…
My in-law’s owns two vacation properties. They live in CA and own a condo on the central coast area of CA. They have owned this condo for 20+ years and use it as a vacation rental. This property has paid for itself and then some and they use a vacation rental property management company that oversees the property. They use this property fairly often as they fly their Cessna to the coast several times a month just to relax and the remainder of the time it is rented out.
Last year they purchased a condo in the Portland area on the water front that they are presently only using to stay when the visit family here in Portland. This is a great place as we use it whenever we want and it feels like being on vacation.
I wneatd to spend a minute to thank you for this.
I cnanot tell a lie, that really helped.
@ IPA
2 vacation properties? Now that’s living it up!
I’ll reiterate to everyone, if you analyze this idea very closely, its likely that it doesn’t make a whole lot of sense from a strictly financial standpoint. But remember Rule #1: It’s Not About the Money.
That being said, it’s highly unlikely that I’ll pursue anything of this nature in the near future. I’m not in the proper stage of life. Currently, all the capital I can gather is going into income generating properties here locally. The only way I could consider something like this is if it was just too good of a deal to pass up, and I could sell in under 3 years and realize a solid gain. I’m not counting on it though.
Just wanted to throw the idea out there to get some feedback. Appreciate the discussion from everyone!
Such a deep awensr! GD&RVVF
IMHO you’ve got the right asenwr!
I’d definitely consider it, but not for the purpose of making money. Consider it for a fantastic lifestyle an a place where you can experiences lifelong memories.
My vacation property in Tahoe is a magical place I’ve been going to for the past 10 years that I will continue to go to for the next 50 years hopefully.
@ Financial Samurai –
I would love to hear more about your decision making process when you bought that property. Did you use debt or pay all cash? How often to you get to use it?
It’s certainly a lifestyle decision….no matter how much I might try to justify it due to income possibilities.