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Are Vacation Homes A Big Waste of Money?

Rent is a waste of money, or is it? This is what we have been conditioned to believe over the past few generations. Even when the property market is more stable and prices are steadily rising, buying a vacation home may not be the best decision for your wallet.

Should you buy a vacation home that you will only use for a few months a 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, HOA, or other maintenance and utilities, are $3,000 per month. You use the house for three months a year, even though you pay for 12. So you pay $3,000 a month for 12 months or $36,000 a year and 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 $24,000 more per year owning the house than renting it ($36,000 to $12,000). In five years, you would have spent $120,000 more to become a homeowner ($24,000 x 5 years). Yes, the house could appreciate, but you will need to subtract the buying and selling closing costs and any real estate commission from any appreciation.

Let’s say you bought a house 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 selling fee, you would earn approximately $471,900. Your approximate profit would be $63,900, but remember that you would have spent an additional $120,000 to own instead of rent the house during those five years, which would actually mean that you spent an additional $56,100 in total (-$120,000 + $63,900).

Keep in mind that the house might have needed repairs and renovations, which would have increased your costs as a vacation owner. However, you would be paying off part of your mortgage balance, which would be an advantage of owning rather than renting. But be aware that for the first few years of a 30-year mortgage, typically 75-80% of each mortgage payment is interest, not principal repayment. You can also deduct the mortgage interest on that second home, but ultimately for that 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 more financial sense for you to buy rather than rent a holiday home, 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 blinders. You can avoid disappointment or financial 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.

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