I'm a financial planner, and there are 3 things I always tell clients before buying a vacation home

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  • When my clients decide to buy vacation homes, I ask them to consider a few facts.
  • First, it’s more difficult to get a second-home mortgage. Plus, the cost of upkeep is high.
  • It’s also important to consider how much you’ll actually use the home — a rental may be better.
  • SmartAsset’s free tool can find a financial planner to help you take control of your money »

It’s been over a year since the pandemic changed our lives and prompted millions of Americans to abandon their city homes for properties offering more space and access to the outdoors, and the push for vacation homes is on the rise, too. 

But buying a second home is a major financial decision and should not be considered in a vacuum. Before you take the plunge, it is important to put pen to paper and consider the pros and cons. One of the biggest mistakes second-home purchasers make is underestimating the costs associated with owning a second home, especially during the months when the property is not in use.

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To be sure, owning a vacation home can provide you and your family with years of enjoyment and help create some lasting memories. However, there are complexities around taxes, financing, and insurance that should not be ignored, and could ultimately make this undertaking more trouble than it is worth.

1. Is a second home even worth it?

First, consider how many vacation days you take annually. For those who spend an entire month or two at the beach every year, the annual mortgage payments on a beach house could actually be less than what you would spend to stay at a hotel or rent a house.

However, Americans are notorious for working too many hours each week and taking far too few vacation days each year. Even those who work for an employer with a use-it-or-lose-it vacation policy are guilty of letting those vacation days expire unused at the end of each year.

Also, consider how many of those vacation days are spent in the geographical area of where you are considering purchasing. It is a good idea to rent a home for a season in the location where you think you will want to purchase to get a feel for how much use you will actually get out of it. You may find that it is more economical to earmark a certain dollar amount every year for a seasonal rental and just build your budget around that figure.

2. Getting a second-home mortgage isn’t as easy as you think

Then, there is the issue of financing that big purchase. If a buyer is purchasing a second home outright, using “excess” cash, that is one thing. However, it is more likely that you will need to borrow funds to make this dream a reality.

Qualifying for a second-home mortgage can be tricky, as banks charge higher interest rates and require larger down payments than they would if this were a primary residence. And if you already have a loan on your primary residence, you will have to have a high enough income to prove that you can cover both mortgage payments each month.

And thanks to the 2017 Tax Cuts and Jobs Act, the home mortgage interest tax deduction has been reduced from $1 million to $750,000 across all combined mortgages. That means, depending on the size of the mortgage(s) you currently have, adding a second property may not come with the expected tax deduction for mortgage interest paid.

3. If you’re thinking of renting the property out, consider how you’ll manage it

If you have in the back of your mind that you will simply rent the property out to others for a few weeks each year to help recoup some of the costs of ownership, do yourself a favor and dig into the math a bit deeper.

Will you manage the property and your renters yourself, or will you hire a professional? It can be extremely challenging to manage a rental yourself if you do not live nearby.

Also, who will be available and on-call to manage lockouts and late-night maintenance calls? It is important to note that the standard fee for vacation rental managers is 25% of the rent collected. This figure is significantly higher than the 10% industry average fee for managing long-term rentals and reflects how much more time-consuming it is managing a vacation rental.

Aside from the hard numbers of what it will cost to own a second home, there is always an emotional component. Some second-home purchasers consider it a labor of love and see it as a way to make sure that the family continues to spend time together year after year. Others see it as a way to ease into retirement by gradually spending more and more time at the vacation home until it becomes their permanent residence.

Whatever your reasoning for wanting to purchase that second home, just be sure you have considered all the facts and are aware of your options before you pull the trigger. That way, when it is time to pay the bills each month, you will take solace in knowing you made the best decision you could and why, rather than suffering from a lingering feeling of buyer’s remorse.

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