How to know when “enough” is too much

Is a vacation home right for you, and when will homebuyers know that a “good enough” price is too much for them?

Imagine a cozy cabin near a mountain lake where there is fantastic skiing in the winter. The beach by the lake is heavenly in summer. The setting is a quaint town where everyone says “Hello!” when they see each other on the street. The whole family spends long weekends and summer holidays in this haven of peace. The children frolic in the yard, explore nature, and the parents relax, far from the pressures of their work. This second home is much more than an investment – it represents happy times and refreshing vacations.

It’s easy to dream for hours about a property like this. However, people less often consider the financial aspect, but it is worth considering.

Related: Ready to Take Action? These are the best states in which to buy a vacation home

Buying a vacation home as an investment

“Let’s buy a vacation home and rent it out on Airbnb when we’re not using it!” or “We can invest in a second home and resell it when the property increases in value”, are only part of the daydream. Reality isn’t always so kind. While these tactics work for some people, they are also not a guarantee. Buying a vacation home is often a bad financial investment.

Earning money by renting through Airbnb is more complicated than it seems. If it’s a part-time vacation home for the owners, they probably don’t live nearby. This means hiring a property manager for the maintenance and cleaning service. Finding honest and hardworking people can be difficult. Then there are the tenants. They sometimes cause considerable damage. Even if the insurance covers the deterioration, the resulting delay is inconvenient.

Anyone hoping to resell a vacation home for a profit will need to be a shrewd businessman. Some people make money from real estate transactions in tourist areas, but house prices in these destinations can be extremely volatile. They depend on the economy and the news. In March 2021, there were a record number of borrowers who took out mortgages to buy second homes, according to Forbes. Just a year later, in March 2022, that statistic fell to a two-year low. This reflects people’s reactions to the pandemic and post-pandemic.

Related: These Are the Best Countries to Own Vacation Homes, But It’s Not as Easy as You Think

So, shouldn’t I buy a second home?

Vacation properties are rarely good financial investments. That doesn’t mean people shouldn’t buy them. A second home is an investment in happiness. Potential buyers can focus on improving their lifestyle with this new acquisition. Sam Dogen, the financial samurai, writes: “If you can view your vacation ownership as a lifestyle investment rather than a financial investment, you will find your asset much more rewarding.” Here are some things to think about before you splurge:

How often will my family use our vacation home?

This can be difficult to estimate. People believe they will spend more time in their lakeside cottage than they actually do. Few vacationers have more than four to six weeks off work. Only freelancers and teleworkers have the luxury of traveling more frequently.

Many holiday home owners imagine the time they will spend with their children. Toddlers love the idea of ​​heading to the beach house every weekend. However, once the kids are teenagers, vacations become less appealing. Adult children have their own busy schedules – finding a time when everyone can get together is easier said than done.

If people think they will be able to enjoy their vacation home for a reasonable number of days each year, then the purchase is worth it. If not, they might be better off renting.

Will I get tired of always going to the same place?

Acquiring a vacation home ties travelers to a single destination. After shoveling in the money, they want to justify the expense by using it. What happens when the wanderlust grabs them and they want to go somewhere else?

Rentals and hotels give people the ability to go anywhere in the world. They never have to visit the same place twice. On the other hand, travelers can frequently return to their favorite destinations. It takes a large number of nights in hotels and Airbnbs to match the price of a vacation home and pay the property taxes on it.

Not everyone wants to travel to new places. Some people find stability and comfort when vacationing in the same destination. Habit means they know where the best restaurants, shops and beaches are. They befriend other regulars. They have fun in their second home.

How much does a vacation home cost?

It’s hard to figure out how much to spend on something like a second home, but Sam Dogen has a rule of thumb for this. He says a vacation property should represent less than 10% of a family’s net worth. He learned this the hard way.

The best-selling personal finance author started writing after buying a vacation property. The second home was about 25% of his net worth, then it quickly devalued. He got stressed and lost sleep over his bad investment, but he realized that if it had been a smaller part of his total value, he wouldn’t have worried so much. He reframed it mentally as a lifestyle investment.

Still, he recommends that only families with more than $500,000 even consider buying a second home. According to his rule, they could spend $50,000, which probably wouldn’t bring them much. Dogen writes that it only makes sense to buy a second home when a person’s net worth is over $3 million. This excludes most of the American population and underlines the fact that vacation homes are truly a luxury that only the wealthy can enjoy.

How lucky some people are to become owners of a second home in a beautiful destination. Most people, however, can still dream of a comfortable vacation home. After all, the mental image probably looks as good as the real thing and costs a lot less.

next: Home Swapping: What to Know About Affordable and Mutual Vacation Options

Grace Hotel in Santorini

Top 10 best rated hotels in the world

About the Author