Is Buying a Vacation Home a Good Investment?
Buying a vacation home can be a good investment, but running a profitable vacation rental isn’t easy. Plus, vacation homeowners often don’t get as much R&R out of the deal as you’d think: Most plan to use their home less than seven times per year, and many won’t use it nearly as much as they’d planned.
If you’re considering a vacation home, read on to learn about the pros and cons of owning that beach house, ski chalet or cabin in the woods. Will the property be a boon to your lifestyle, or just another source of stress? We’ll cover how to evaluate your situation and options for vacation home financing.
A vacation home is a second home that you don’t live in full time. Second homes are often vacation homes, but it’s also possible to buy a second home purely as a rental property and never live in or vacation at your investment.Whether you live in the home full time or part time and whether or not you rent it out is important to both mortgage lenders and the IRS:
| Vacation homes are: | Investment properties are: |
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Is a vacation home a good investment?
Vacation homes are typically located in expensive areas which, on the one hand, means they don’t come cheap. On the other hand, though, they’re likely to grow in value, since the area is desirable.
When you own a vacation home, you can earn rental income from either long-term or short-term tenants. You could even earn enough to make a dent in your monthly vacation home mortgage payment. For example, the average amount made by Airbnb hosts is around $14,000 per year.
Renting does come with increased costs, though. If you plan to use the house primarily for the income it’ll provide, you’ll likely need an investment property loan, not a residential mortgage — that type of loan is typically more expensive and harder to qualify for.
Can I afford a vacation home?
A good rule of thumb is to look at your debt-to-income (DTI) ratio. If you can afford a second home, your DTI should remain under 45% after taking out the loan that finances it.
Another important step is to make use of a mortgage calculator. Can you comfortably afford the mortgage payments on this vacation home, or will they stretch your budget thin?
Here are some additional factors you may want to include in your calculations:
Upfront costs
- Down payment
- Homeowners insurance
- Property taxes
Ongoing costs
- Homeowners insurance
- Property taxes
- Utilities
- Landscaping, maintenance and repair
- Any homeowners association (HOA) fees
- Furniture and appliances
- Cleaning fees (if you don’t want to clean up after each renter yourself)
Pros and cons of buying a vacation home
| Pros | Cons |
|---|---|
| Ownership: A beautiful place to vacation any time you want is just one of the benefits of homeownership — you can also let friends stay or reserve it as an escape when the in-laws stop by. Appreciation: Real estate typically appreciates over time, which means you could still turn a profit even if you never rent out the home. Rental income: You could rent out the property for additional income. If that income helps pay for the house, you can get a vacation home without having to stretch your budget. Potential savings: Longer-term vacations could be less expensive, as you won’t be paying a nightly rate. A vacation home should also eliminate the need for a travel loan. | Two mortgage payments: Juggling two mortgage payments can quickly become a burden if you run into unexpected financial troubles. Expenses: You’ll need to cover property taxes, utilities and insurance, plus deal with repairs and manage maintenance to prevent mold and pests. No guarantee of appreciation: Like any investment, real estate can lose value. Location and other uncontrollable factors — like changes in the broader real estate market — play a huge role here. Lack of flexibility: Unlike an RV, you can’t take a vacation home to Florida one year and Alaska the next. Illiquidity: It takes time to buy or sell real estate, and you’d have to pay significant fees and taxes with every transaction. Time and headaches. Being a landlord is notorious for involving frustrations, problems and good old-fashioned manual labor — it’s not everyone’s cup of tea. |
How to buy a vacation home
1. Understand the minimum requirements
There are several different ways to finance a vacation home, and many of the loan options come with more stringent requirements than typical residential mortgages. Our guide to investment property loans covers your options and how to choose the right one.
2. Find a real estate agent
A real estate agent can help you assess the local market, find desirable properties and negotiate with sellers. Later, they’ll also guide you through the closing process and recommend any necessary third parties, like inspectors and contractors.
If you’ve already picked out the property, know the owners or you’d just prefer to avoid dealing with a real estate agent, here’s how to buy a house without a realtor.
3. Shop for a mortgage lender
It’s important to shop with three to five lenders in order to get your best interest rate. This simple step can save you tens of thousands of dollars over the life of your loan, according to LendingTree data.
Explore LendingTree’s list of the best mortgage lenders.
4. Get preapproved
Having a mortgage preapproval when you submit an offer lets owners know you’re serious about buying and able to purchase the property. You should get one about 30 to 60 days before you plan to buy, especially if you’re in a hot market.
It doesn’t hurt your credit to apply with multiple lenders, as long as you submit all applications within a 45-day window, according to the Consumer Finance Protection Bureau.
Learn about the minimum requirements to qualify for an investment property loan.
5. Gather your down payment and closing costs
Unless you’re using a zero-down loan — for instance, a VA loan — to finance the purchase, you’ll need to come to the closing table with a significant amount of cash. Make sure you’re prepared and that all of the funds can be documented. Cash that’s been sitting under your mattress or in a safe for years won’t be admissible. On the other hand, you may be able to use home equity for your down payment.
6. Seal the deal and enjoy
Once you’ve signed your loan documents and received the key, your new property is all yours to enjoy. Set up the patio furniture and pop open a bottle of champagne — it’s time to start vacationing!
Tip: Find a local property management company
Hiring a property management company will help reduce the amount of labor and headaches you’ll deal with while operating your vacation rental. Real estate agents can often recommend local property management companies.
Alternatives to buying a vacation home
If you’re looking only for vacation alternatives in which you still own your space, here are some ideas:
- Get a construction loan to build your ideal vacation home.
- Buy an RV that fits your needs. This lets you own your own space and still get a change of scenery.
- Love the water? Finance a boat and live on it full or part time.
- You could build, buy or finance a tiny home, which can be as stationary or as mobile as you desire.
You can potentially still make an income from any of these options, by renting out your newly built vacation home, RV, boat or tiny home to others for a weekend or longer stay.