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Buying a vacation home can be a worthwhile investment, but it’s not ideal for everyone. Before investing in a second property, there are a few things you may want to consider. Doing research before signing a second mortgage is the best way to set yourself up for financial success. Here are five pros and cons of owning a vacation home.
Pros of Vacation Home Investment
1. Save Money
While the cost of purchasing a vacation home can vary significantly, there is an inherent value if you invest in a space you hope to spend a lot of time in. Regardless of whether you invest in a multi-million dollar home or a few thousand dollars for a hunting cabin, you could save money on vacation just by having somewhere to stay. Especially if you plan on owning a vacation home in an area you will visit regularly, you will most likely make back your investment by not staying in hotels or other rental properties.
2. Generate Income
If plausible, you may want to consider renting out your vacation home when not using it. If a rental situation makes sense for you, generating income from your property is a wonderful benefit of owning a vacation home. Especially in the first few years of owning it, renting is a great way to pay back up front costs and fees, while also generating additional income.
3. Build Equity
If you are financially stable, you may be looking to diversify your assets. Investing in a second home or vacation home is a sure way to build equity, especially if you are buying an a competitive market. If you are hoping to eventually flip or sell your property, make sure you are investing in a location with high demand.
4. Plan for Retirement
Maybe you are hoping to eventually retire to your mountain home by a lake, or on a beach-front property in Florida. Whatever your long-term plans may be, planning for retirement is a benefit of investing. If you like planning ahead, you can even start paying off the mortgage on a vacation home years before you plan to move there full-time, making it even more advantageous of a situation.
5. Long-Term Planning
Investing a vacation home allows you to consider your financial profile, and be smart about future investments. If you hope to buy a vacation home in an area your family loves to visit every year, you may want to consider how you will use your vacation home in the future. If you would rather invest in traveling somewhere new every summer, you may want to reconsider your investment. But if your kids are ready to go back to the same spot consistently, you can account for the time you’ll spend in your vacation home annually.
Cons of Buying a Vacation Home
1. Upfront Investment
Vacation homes can be a significant investment. Unlike primary residences, there is often not as much support for alternative financing options. If you are not planning on using the home very much, this can add extra monthly bills with little award. You will also want to account for the lapse of time between buying your home and renting it out, just in case you are unable to find a tenant immediately.
2. Additional Costs
In addition to paying the mortgage and any associated realtor fees, there are also the additional unseen costs of buying a vacation home. Insurance, property tax and other unforeseen costs can eat into your savings if you don’t budget properly.
3. Required Maintenance
One of the benefits of buying a vacation home is you get to decide exactly what it looks like, one of the hardest things is maintaining that. If you buy a home that needs a new HVAC system, or the roof needs replaced or the septic pump breaks down, you’re the landlord.
You will want to budget for any expected and unexpected maintenance and home repair that may come up. Depending on how far you live from your home, you may also want to add in the cost of paying someone for weekly maintenance, like mowing the lawn.
4. Difficult Financing
Unlike buying your main residence, buying a vacation home can be trickier to finance. Most banks tend to be a little less willing to loan out money, especially if you still owe a significant amount on your mortgage. Most banks will require a 30% down payment on any loan, and a higher credit score.
5. Unpredictable Economics
When it comes to an economic downturn, it is important to have diversified assets in order to avoid taking a significant financial hit. That being said, real estate accounts for over 80% of total net worth for most Americans, leaving many vulnerable to economic instability.
Should You Invest in a Vacation Home?
Vacation homes can mean summers of fun for you and your loved ones. They can also have significant financial potential if you’re interested in primarily renting out the space. However, as with any major investment, there is potential risk to consider before making the jump.
In order to prevent losing significant investment, be sure you are financially prepared to handle an economic crisis before purchasing a vacation home.