As if most people need a reason to buy a vacation home in an area that they have fallen in love with. If you have not yet fallen in love with an area, perhaps this article will help move you along in the process.
I have listed 9 reasons to buy a vacation home, there are more depending upon your needs and desires, but this is just a start.
A vacation home as this article will describe is a property that can be used as a “get-away” from your primary residence. Generally, vacation homes are located in fun places e.g. along a beach.
Some families vacation at a lake, beach, or another fun place every year. They rent a vacation home or a hotel during their stay.
Those who have purchased a vacation home did the math (and some emotional math as well). Their calculations indicated that it made sense to invest in a single location that they could visit and call their own. They wanted something very comfortable with their favorite things at their favorite place e.g a beach.
Reason One
It’s your place to go and unwind. You have been paying off others’ mortgages for years and it’s time to pay off your own. While there is a financial reason here, this reason is more emotional. People who have vacation homes can gain a measure of comfort that they have in effect “arrived”.
You need not be a rich person to have a second home. There are many “fishing camps” located all along the U.S. coastline that cost very little, some as little as $25k. If you want more comfort in a popular place you will pay more but you get the point.
During the COVID situation, many people “escaped” the big city for their vacation homes. In fact, at the end of the lockdowns, vacation rentals were booked from coast-to-coast according to the popular web-based booking sites.
I am invested in two full-time vacation rentals and they are booked months out. People call constantly and we have to turn them away for lack of dates. Even middle of week dates is full. This goes to the idea that some people need to get away and relax far from their daily activities e.g. job, yard work, traffic, etc.
You are not crazy for wanting to have a second mortgage payment. If a second home gives you peace of mind, it’s your money and perhaps a good place to spend it as the other reasons will indicate.
Reason Two
These reasons are not in any order as each person who buys a vacation home has a variety of reasons (justifications) for making the buy. There are tax benefits for the second home. You can deduct the interest and property taxes paid. If you are in a modest income tax bracket these deductions will be a benefit, real dollars in your pocket
We will come back to reason two as we summarize the reasons below. More potential tax benefits are lurking just around the corner.
Reason Three
A second property will help you increase your net worth. How? Each month that you make a mortgage payment a portion reduces the amount you owe.
In addition to the increase in equity through the principal paydown, you will also earn as the value of the property continues to increase.
Even in areas with slow property appreciation, inflation helps to push the values up each year. If the property is in the desired area, you can bet that the value will keep up and pass the rate of inflation.
Add the increased equity and the increased value together and at the time you sell the property, you may see a nice profit. Pretty good for buying a place to have fun.
If you hold your property for at least five years, you should have earned enough in appreciation and reduction in principal to overcome the cost to sell the property if circumstances change.
Reason Four
Everyone needs to invest in their future. You have many choices about where you put your money. If you work for someone you may have a 401k. Some have brokerage accounts and buy stocks. Real estate is one of the pillars of a good investment strategy.
Reason number four was created to emphasize the lower volatility of real estate over the stock market. You should have a balanced portfolio that includes equities but you should also include real estate.
If you have a primary home, a second investment can be a valuable addition to your portfolio.
The chart above indicates a period when the stock market underperformed real estate. Yes were periods in the past when real estate took its hits but that is infrequent and did not happen across the country. The hardest-hit areas were CA, NV, AZ, and FL. All of which have made a comeback.
Your takeaway from this reason is that real estate is a good “solid” investment that has less volatility than the stock market on a long-term basis.
Reason Five
Real estate, our vacation home is REAL, you can touch it and feel it. You know where it is and it is not going to move (unless there is an earthquake or hurricane). Unlike equities, insurance policies, and other financial instruments, these are all digital. You can not touch and feel these investments.
Also unlike real estate, your finances are managed by people you do not know. You can work with a broker but that broker has to work with others.
Where is your money at any one time? Some people buy physical gold for the same reason, they know where it is.
The substance concept is not trivial for many people. All of those folks who put money under their mattress do so for the same reason. They want to know where it is at all times. It’s a good feeling to drive by your property or look at a photo.
Reason Six
Let’s discuss another aspect not listed above. The idea is that your vacation home can become a business. How? You buy your vacation home by putting 10-15% down as a second home. You plan to use it during the year perhaps in June and September. Rather than let it sit there, you decide to hire a property manager and rent it out.
At this point, your second home becomes a cash-generating machine. You had decided that you could afford a second home before you decided to rent it when you were not there.
All the income after expenses, therefore, becomes income. You can deduct everything, mortgage, insurance, taxes, property management, maintenance, etc.
Reason Seven
Investing in a second home should increase your wealth over time. The average return on the stock market is about 7%. With inflation now at 7%, you must put your money in an appreciating asset.
A vacation home can increase in value and help you diversify your portfolio. Everyone needs more than one way to invest to hedge against what has occurred over and over again, stock market bust and growth.
Of course, there is a risk that your vacation home may reduce in value but experience has told us, that reductions in value will come back over time.
Reason Eight
You can use your vacation home as a part of your estate planning strategy. You can place it into a trust and when you pass, ownership can be passed along to your beneficiaries. Some people buy a vacation home so the entire family can use it. As children grow into adults and have children, the value of the property to the entire family increases.
You may want to ensure that your family can continue to enjoy the property in the event the worst occurs. You can also borrow from the equity in this property over time if you have a project or want to invest in another property.
Reason Nine
Just because I want to own my own vacation home. It feels good. I can imagine those weekends away from the daily grind. We just load up the car and drive a few hours to our get-away, just because it feels good.
Real Estate is less volitle than the Stock Market
The stock market can change in a day. Real estate values are usually consistant. they grow or in some down markets will drop but not at once. if you miss a window to sell your stock it may take a while to recover. if you see the housing market change, you will usually have sufficient reacton time to sell or buy more.
Are 9 reasons to buy a vacation home enough?
The eight reasons to buy a vacation home detailed above should set you on your path to decide if a vacation home is good for you. Interest rates are still reasonable. Yes, they have increased but they are still historically low.
You should be able to put down as little as 10% plus closing costs to acquire your vacation home. To be clear, the term used in the finance and government industries is “second home” rather than a vacation home`. If you decide later to rent the property, put down as little as possible since the mortgage is deductible even if you live in a high-cost state.
Read more on this and similar topics
This is one of my shorter articles on the topic. I have written extensively on vacation homes and second homes. I have owned both for many years and enjoyed the option to visit when possible. Please read some of the articles that discuss location e.g. Mississippi Gulf Coast and real estate.
Please visit Logan-Anderson, Gulf Coastal Realtors for information about vacation homes on the Mississippi Gulf Coast.
If you own a second home and would like to have it professionally managed as a vacation rental, contact Christies Gulf Beach Rentals here.
Please leave comments about this article and read some of our other articles on the topic.
Photo contributions from Forbes.com, Flickr.com, maxpixel.com, pickpik.com
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