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8 Reasons to Buy A Vacation Home Now

{ Posted on Aug 28 2010 by Marcus Alston }

As I wrote in my last blog post, I agree with many personal finance folks that a vacation home is generally not a good financial move for most consumers.  However, there are several factors or reasons to buck this conventional wisdom and buy a vacation home–especially right now while prices and mortgage rates are low:

1.  You can Afford it. This should go without saying, but many people overextend themselves because the home is such a great price, or they have to have it, or it will never be available again, etc.  This is done without analyzing whether they can truly afford the vacation home and the financial commitment.  Think of the cost as 2 of everything: 2 mortgages, 2 real estate tax payments, 2 places to maintain, 2 sets of furniture (buy used furniture from places like the Salvation Army, Consignment Shops, Yard Sales, E-bay, Craigslist to save money), etc.  Sounds like a lot?

A common rule is that your housing costs, including your primary residence and other homes, should be a third of your overall income.  Also, 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.  If you fail this test, you should not buy the vacation home. Renting out the home for parts of the year can also help you meet this test, but it means you must now be a landlord and property manager or hire a company to manage the rentals for you.

2.  Doing it for the Memories, Not the Money. You will remember the experiences at your vacation home forever.  If you have kids, extended family or close friends, this only enhances the value and memories.  I recently visited my buddy at his new vacation home (glad he bought with prices and interest rates low), brought the kids and our 2 families had a great time.  If you are buying a vacation home not to make money, but to enjoy it, then you value it a great deal, and it makes it worth more to you.  Making sure it is a sound financial move still needs to be factored in along with the enjoyment factor.

3.  Prices Have Come Down.  Interest Rates are Good. The real estate market in general is cold right now so prices are pretty reasonable and sellers are getting below asking price.  The housing market for vacation homes is even slower than the market for primary residences, so now is a great time to buy in order to get value.   Additionally, interest rates are at or near all time lows.  While banks typically charge a higher mortgage interest for loans on for vacation homes versus a primary residence because of the risk (home owners will default on the vacation home before their primary residence), rates are still good and having a low interest rate means the cost of ownership of the property over time is much less versus the cost if you bought when interest rates were high.

4.  The Buyer’s Market Reduces Risk. If you are going to buy, buying in a cold market is the best time because you are presumably getting a lower price (versus if the market were a seller’s market).  Now, when you go to sell and if it happens to be in a cold market, you bought in one too which will help insulate you from a loss.  Of course, buying in a cold market and selling in a hot one is the best of both worlds and buying now gives you a chance of doing this.  The real question is whether the real estate market will get even colder.  My bet is that if you are going to keep your vacation home for at least 5 years (preferably 10), you will have increased equity in your home and turn a profit when you sell.

5.  Rent to Reduce Risk Further; Tax Deduction. Are you going to use your vacation home year round or every week?  By definition, probably not.  If so, consider renting your home for a few weeks or months.  This could really add up to real money depending on how much you can charge.  The rents you can charge for renting an average vacation house or condo are amazing –$500, $1,000, $1,500 or more a week in some locations.  You may not be able to rent out your vacation home for enough to make a profit, but renting it can help you stay within budget.  On the down side, you vacation home may start to feel more like a vacation rental and you or someone will have to manage the rental and make sure you get good renters.   Your home may also go through more wear and tear.  Note:  You may also be able to deduct the cost of your vacation home on your taxes, but consult a tax advisor.

6.  For a Place to Really Call Your Own While on Vacation. There is nothing like owning your own home or vacation home.  The pride of ownership has value.

7.  You Love the Area. Buying a vacation home means you are committed heavily to 1 location.  Make sure you want to be committed to the area (and community) for at least 5 years, preferably 10.  You usually need to be in a place at least 5-10 years to make it make financial sense.

8.  You will Use it. In order to maximize your use of your vacation home, pick a home you want to return to often.  Travel and distance should not be cost prohibitive or inconvenient.  I suggest no more than 3-5 hours away.  My general rule of thumb is if I can drive to it and back in a day, it’s close enough.  For me that is about 5 hours one way.  Factor travel costs into your budget (especially if you have to fly) and whether it makes sense to buy the vacation home.

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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