Time to Invest in a Vacation Home?


Vacation season is getting into full swing, which means millions of Americans spending time in lovely, stress-free spots at the beach or mountains will have the same thought: “Gee, wouldn’t it be great if we owned a place like this?”

Let’s count the benefits. It would be there whenever you want. You could decorate, renovate or expand just as you pleased. You’d create a family tradition. In retirement, you might live there full time. You’d have an asset to pass through the generations.

There’s no question about it, millions of people love their second homes. And this could be a good time to buy, with interest rates at rock bottom and prices still in the basement because of the recession.

But to be on the safe side, consider a second home to be a luxury, not necessarily a great investment. Even a primary residence may not be a very good investment when interest, maintenance, taxes and insurance are considered, and a second home offers additional financial burdens.

If the summer place is far away, you’ll probably have to pay pros to do a lot of the chores and improvements you might do yourself in your main home. And if the second home will be rented out to offset costs, it will probably have to be in tip-top condition all the time. Part of your rental income may have to be spent on an agent to get renters and oversee the place.

To get the most income, you’ll have to rent the property out during the prime season, when you most want to use the property yourself. And if you rent, you’ll have to limit your own use or you’ll lose some of the tax deductions available on a rental operated as a bona fide business.

Can’t you make money by eventually selling? Maybe, if you own the property long enough. But many property owners mistakenly figure profits by subtracting the original purchase price from the eventual sales price. When all those other costs — mortgage interest, maintenance and so forth — are added, an apparent profit may turn into a loss.

Prices in second-home markets can be especially volatile. Since a second home, unlike a primary residence, is not a necessity, demand can drop suddenly in an economic downturn.

And many vacation areas now have an overabundance of supply from the building frenzy of a few years ago. While that makes prices attractive today, it could take years for those excess units to be soaked up enough for prices to rise. And rental rates could be depressed in the meantime.

Of course, things don’t look so gloomy if you look on this as a permanent acquisition and won’t depend on high rental income to make the numbers work.

But buyers with a super-long-term view should weigh two other issues.

First, do you really want to vacation in the same spot year after year?

Second, will your heirs look on this property as a blessing or a burden? Will they want to vacation in the same spot every year? And how will the property’s benefits and hassles be shared if it is owned by an ever-widening circle of children, grandchildren and great grandchildren?

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