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9 Reasons Not to Buy a Vacation Home

{ Posted on Aug 27 2010 by Marcus Alston }

My general view on whether you should buy a vacation home is short and sweet: No, do not buy a vacation home.

Of course it’s more complicated than this.  In this blog post I have listed 9 reasons not to buy a vacation home.  In my next blog I will list reasons to buy a vacation home.

9 Reasons Not to By a Vacation Home

Each individual circumstance will vary, but below are my 9 reasons not to buy a vacation home are:

1.  Can you Afford it? Can you afford the vacation home?  Most can not.  A common rule is that your housing costs, including your primary residence and other homes, should be a third of your overall income.  You also need to make sure you are staying within your budget and taking care of major financial goals such as a security fund, retirement, education, etc.  Assuming you meet this test . . .

2.  A Risky Investment. Vacation homes can appreciate very quickly in a hot market, but are the first things to depreciate in a cold market when no one has disposable income to buy them or make the current payments on them–just ask folks in Arizona, Florida and Las Vegas.  But the risk is nationwide and worldwide, and not just limited to those frequently highlighted vacation spots.  If you are going to buy, buying in a cold market is the best time because at least if you sell in a cold market, you bought in one too, which will help insulate you from a loss.

3.  Renting for Profit is Tough to Do Now.  Renting for a profit will be tough to do in this economy.  There are few places you can buy and then turn around and rent them to cover your costs of ownership.  The market is a buyer’s market, but it is also a renters market.  You could buy now and maybe when the market turns around rent and make a profit.  If you are thinking about renting, consult a realtor or property management firm about how much you could expect to rent the property for and the best time periods.  Look for comparable rentals online and in the classifieds.  Additionally, inquire about appreciation for the past 10, 15, 20 and 30 years to see what you can expect—but take what you hear with a grain salt.  Real estate has been pretty volatile lately and no one can predict future performance.  Also, with regard to renting, you have to juggle your days in the vacation home and the renter’s days and deal with someone else living in your home from time to time.

4.  Huge Commitment to a Vacation Spot and Community. Buying a vacation home in a town is a huge commitment to the house and the area.  Make sure you want to be committed to the area (and community) for at least 5 years (10 may be the safer test).  You usually need to be in a place at least 5-10 years to make it make financial sense.

5.  One Location.  Having a vacation home also means you are locked into one vacation spot for your vacation home.  Choose to go somewhere else instead means you are not getting the maximum use out of your vacation home.  Go to vacation locations beside your vacation home and now your budget for vacations becomes pretty large.

6.  Renting is Often Cheaper in the Long Run. You may not spend enough nights at the location to justify the expense.  Add up annual expenses and divide that sum by the total nights you will spend there (a $2, 000 mortgage inclusive of taxes and insurance alone would mean $24,000 per year divided by 10 vacation days equals $2,400 per day).  You may find that it is cheaper to stay at a five-star resort.  There are also so many great deals you can find for short and long term rentals in the U.S. and all around the world or right where you might want to buy.  This analysis of course does not factor in appreciation or depreciation or pride in ownership or other intangibles.

7.  Purchase and Maintenance Cost. Buying a vacation home can cost a lot of money and tie up your resources and ability to get a loan if you need it.  Vacation homes, like primary residences, will need to be repaired, insured, and maintained; plus utility bills (electric, heating, water, telephone, internet) will further burden your cash flow and budget, and could increase your debt.  It’s also worth noting that you will face higher rates on mortgages and home-equity loans for your vacation home versus if it was your primary residence.

8.  Furniture. Like any home, you have to buy furniture for your vacation home which means more expenses.

9.  Travel.  To maximize your use of a vacation home, it should be no more than 3-5 hours away.  Is this distance enough to give you the vacation spot you would really like?  A further destination might be more desirable that you could visit less often, but you might not get your money’s worth from the home if you visit it less often.  In this case, consider renting for the vacant times of the year to maximize your financial benefit.

To be fair, there are several reasons to buy a vacation, especially in this economy, which I will address in my next blog post.

Do you have any reasons to buy or not to buy a vacation home?  Write me and tell me all about it.

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