By Eric Rosenberg, WCI Contributor
A vacation home can be a fantastic lifestyle purchase, giving your family a place to get away and relax while enjoying the comforts of home. In addition to skipping the hassles and costs of booking a hotel or Airbnb, some savvy owners rent out their vacation home to others, turning it into a source of cash flow. Here’s a closer look at the pros and cons of owning a second home and what you should consider before making this six-figure purchase.
Is a Vacation Home a Good Investment?
If you’re considering buying a second home and think it would be an enjoyable option for your household, you may be wondering about the finances of a vacation home and whether it’s a good investment. The answer is nuanced and comes down to several factors about the specific property and how you handle the financing.
- Property maintenance and appreciation: A general consideration with any home purchase is the specific property, whether it’s your primary residence or a vacation home. The location, negotiated purchase price, and maintenance costs significantly influence whether you can make money from the home in the long term. If you overpay, buy in an area with flat or falling home prices, or need to perform expensive maintenance regularly, it could become a money pit. If you get a good deal in an up-and-coming area, you could be on track for a lucrative investment.
- Taxes and insurance: Property taxes and homeowners insurance are a must. Some states and counties levy high property taxes, while others are comparatively a bargain. Further, some high-risk areas could have you paying high insurance rates or require you to add on expensive earthquake or flood coverage.
- Financing costs: If you buy a vacation home with a loan, you’ll be subject to current market interest rates. Monthly interest costs can be significant depending on your property value, down payment, interest rate, and points.
- Rental income: Renting out the home using a service like Airbnb or Vrbo could earn you more than your expenses. Rental demand, cleaning costs, and additional wear and tear influence whether renting is worthwhile and how much money you’ll make.
Every home is unique, and there are no guarantees in real estate. But if you understand real estate well, a second home can be a fantastic investment.
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Can You Afford a Vacation Home?
To decide if you can afford a vacation home, consider your budget, savings and investment goals, and what your desired vacation home would cost.
A home is a significant expense. Like your primary residence, a vacation home requires many short-term and long-term costs. Becoming “house poor” from a vacation home certainly isn’t worthwhile.
Be very realistic about what you would spend on the second home. Factor in a mortgage payment (including taxes and insurance), utilities, internet, maintenance, upgrades, furnishings, appliances, and unexpected repairs. It would be a shame to have buyer’s remorse shortly after sinking so much money and paying closing costs because you didn’t budget properly.
Pros and Cons of Owning a Second Home
If you’re on the fence, weigh these pros and cons of owning a vacation home as a medical professional.
Why Buy a Vacation Home?
- A reliable escape from home: A vacation home is a comfortable place to go whenever you’re free from work. You can set up a wardrobe at your second home, making it a quick escape without packing a suitcase.
- Set up roots in a favorite location: If you love skiing, boating, or visiting a specific place, buying a home there gives you a foothold and effectively guarantees you’ll return again and again.
- Sharing with family and friends: Some owners like sharing their second home with family and friends or using the home to host loved ones for the holidays. You can use it and share it however you choose when it's your home.
- Earn additional income: If you rent it out, the home can become an income source, helping pay some of the costs or even earning a profit in some situations.
Cons of Owning a Second Home
- Monthly mortgage payment: Even when you’re not there, you’ll have a mortgage payment as long as your property is financed with a loan.
- Taxes and insurance: Even if you buy the home in cash, you’ll still need to pay property taxes and insurance indefinitely. If you buy somewhere with an HOA, plan on those costs, too.
- Maintenance and repairs: Homes require ongoing maintenance. Weather, regular use, and critters can all lead to expensive repairs. Climate-related damage is always a risk, even when you're not using it. Lawn care may be necessary.
- Security and damage: If you’re not living in a home, it could catch the eye of criminals looking for a low-risk smash-and-grab. If a pipe bursts when you’re away for weeks or months, it can cause severe damage you won’t discover until your next visit.
Buying a Vacation Home and Renting It Out
Renting out a vacation home leads to additional pros and cons. On the positive side, it could possibly make you enough money to cover all ownership costs. If you can own a vacation home and earn a profit, you’re making a sound financial decision.
However, renting out the home generally means more money and work for you to have the property cleaned, and people you don’t know will stay in the home, potentially causing damage or drawing noise complaints from the neighbors. You won’t want to leave valuables or clothes for your next visit if others spend time there, and it could be booked when you want to use it. Peak rental season could overlap with your family’s school vacations or holiday weekends.
Taxes on Vacation Homes
We’ve already mentioned taxes, but it’s so important we’re going to discuss it again in a dedicated section. Average annual property taxes can range from around $600 per year on the low end to more than $5,000 per year on the high end. But that’s for the average-priced home.
Buying an expensive home in a high-tax county could cost you $10,000 or more in property taxes annually. Fourteen counties in California, New York, New Jersey, and Virginia have a median property tax rate over $10,000.
When a home is used as a second residence, you can generally deduct property taxes, though limits apply. If you already live in a state with high taxes, you’ll likely hit the limits and may be unable to deduct some or all of your property taxes.
If you use the home as a business, you can deduct taxes as a business expense. So, for rental property owners, you could possibly deduct the entire amount as a business expense. The rules here are complex and depend on how much you use the property and how often it’s rented.
Should You Use a Doctor Mortgage on a Second Home?
Doctor loans or physician loans are specialized mortgages for high-income earning doctors with variable incomes, little credit, or unfavorable debt-to-income ratios, thanks to student loans. If you qualify for a doctor mortgage, it could be helpful for getting a second home.
Be aware, however, that doctor loans often incur higher interest rates than traditional mortgages. Just because you qualify for a doctor loan doesn’t necessarily mean it’s the right choice. Your best option is to shop around and compare rates, including traditional and doctor mortgages, to determine the lowest-cost borrowing option for your financial situation.
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Other Alternatives to Buying a Vacation Home
If owning and maintaining a second home is too costly or overwhelming, you definitely don’t need to buy one. One of these alternatives could be a good choice:
- Fractional ownership: If you know someone else considering a vacation home, you can go into it together, splitting the costs and dividing up different days to use the property. You can buy it with three or more others to lower costs, but you’ll also have to give up more days.
- Long-term rental: If you want to stay somewhere for a while but don’t want to buy, you can get a long-term rental one or more times per year.
- Stay in a hotel: Last but not least, you can stay in a hotel. There are no recurring or long-term costs, and someone else does the cleaning.
Vacation homes are not for everyone, but they can be a good choice for some high-earning doctors wanting a place they can visit regularly or a real estate investment opportunity. Stay focused on the costs and potential payoff to decide if it’s a good option for your needs.
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