• Selwyn Dias

Does Owning a Vacation Home Make Sense?

A big secret that is becoming less of a secret these days is vacation homes in Florida. Investors are hitting the Sunshine State hard and buying up properties. Some buyers use vacation homes exclusively for themselves, some utilize the homes to rent. Regardless, if you are planning to invest in Florida vacation homes, it is helpful to know the challenges of owning these properties to help you avoid problems that can be encountered during your ownership period.

Recent statistics on vacation home ownership confirm my realization. I’ve seen reports that only about one-half of vacation homeowners are able to cover even three-quarters of their mortgage payments by renting their home. And that doesn’t include management or maintenance costs. The reason that vacation homeowners struggle to cover their costs is simple: occupancy rates are very low. Don’t be fooled by statistics about occupancy rates “during season.” You’ll own your vacation home, and pay its costs, year-round. If you buy a vacation property, there is some possibility that you can defray your expenses by renting it out occasionally. But there is little realistic hope that it will pay for itself entirely while not burdening your finances or free time in some form. Plus, owning a second home also means owning a second set of expenses (utilities, HOA dues, property taxes, maintenance, etc.). Oh, and don’t forget flood insurance that’s needed in areas around the coast.

Tax advantages are plentiful when you own vacation homes. The depreciation of the property can be deducted each year as an offset to rental income that you have received. My personal opinion is that you should not invest in a vacation home if you have to borrow any of the purchase cost. My guidance is that a vacation home should be an investment – similar to investments you make in equity funds, 401K accounts, IRAs, etc.; your source of cash should come from savings.

As with most real estate decisions, there is no simple rule of thumb for buying vacation properties. The odds are stacked against you financially though. But ultimately you’ve got to run your own numbers on renting versus owning, and consult your heart. Many of the arguments for home ownership, vacation or otherwise, are more emotional than financial. There are reasons why you could choose to own a vacation home despite the costs: pride of ownership, repeat vacations, the joy of sharing with family and friends, as a fixer-upper hobby, or to “lock-in” an ideal retirement location for the future.

Just be advised that liquidity and investment capital are more important than home ownership to a successful retirement. Many boomers are finding themselves with most of their wealth stuck in property — house, furnishings, cars, and other “stuff.” Trying to prepare for retirement by buying still more property years in advance could be an exercise in futility. It’s critical that you truly understand where you want to retire – it may take months or years exploring until you make that decision. And if you don’t want to feel tied down to a location specific location, renting is an ideal option. Nobody knows what the future will bring….

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