Rent is a waste of money, isn’t it? That is what we have been conditioned to believe for the past few generations. Even when the housing market is more stable and prices are constantly increasing, buying a vacation home may not be the best decision for your pocket.
Should you buy a vacation home that you will only use for a few months out of the year? Let’s take a look at a simplified example to highlight what it costs to own a vacation home. You buy a vacation home and the monthly costs, including mortgage payment, property taxes, insurance, Homeowners Association, or other maintenance and utility services, are $ 3,000 a month. You use the house for three months out of the year, even though you are paying for 12. So, you are paying $ 3,000 a month for 12 months or $ 36,000 a year and you use the house for three months at an effective cost of $ 12,000. per month ($ 36,000 / 3). You could seasonally rent a similar home in the same area for $ 4,000 per month or $ 12,000 for the season. You would pay an additional $ 24,000 a year to own the home rather than rent it ($ 36,000- $ 12,000). Over five years, you would have spent $ 120,000 more to own the home ($ 24,000 x 5 years). Yes, the home could appreciate, but you would have to subtract the closing costs for buying and selling and a possible real estate commission from any appreciation.
Let’s say you bought a home for $ 400,000 plus $ 8,000 in closing costs for a total initial investment of $ 408,000. Suppose it increased in value by 5% per year (higher than normal market conditions). It would be worth around $ 510,500 at the end of the fifth year. If you sold the house and subtracted a 6% commission and $ 8,000 in closing costs, you would get approximately $ 471,900. Your approximate profit would be $ 63,900, but remember that you would have spent an additional $ 120,000 on the property instead of renting the house during those five years, which would actually mean you spent $ 56,100 more in total (- $ 120,000 + $ 63,900) .
Keep in mind that the home may have needed repairs and renovation work, which would have increased your cost as a vacation home owner. However, you would pay off part of your mortgage balance, which would be a benefit of owning versus renting. But keep in mind that for the first few years of a 30-year mortgage, typically 75-80% of each mortgage payment is interest, not principal repayment. You may also be able to deduct the interest on the mortgage on this second home, but the bottom line is that, for this vacation home, the overall financial costs would outweigh the benefits.
Every situation is different, but now you have the tools to do your own financial analysis. Sometimes it makes financial sense to buy a vacation home instead of renting it, and sometimes there are non-financial reasons to influence your decision. However, it is better to make a big financial decision with “eyes wide open” rather than blindfolded. You can avoid financial disappointment or hardship later.
Please note that all information in this article is educational and should not be construed as financial advice. For advice specific to your needs and circumstances, you should consult a financial or tax advisor.