With summer upon us and vacation rentals booked, you may begin to fantasize about investing in a vacation home for your family…and listing it on AirBnB when not in use.
Before you contact a local realtor, consider the following:
PROS
- Potential rental revenue and property appreciation
- Sentimental Value / Memories / Family Time
- Aside from the potentially attractive benefits of rental income and tax incentives, there is also the value of having a home for your family and/or friends to gather that is yours, versus a hotel/resort
CONS
- Financial goals: Does this purchase make sense within the contact of your long-term financial plan? Are you 100% on track to meeting your various short-term / long-term goals such that you’re sitting on surplus funds? If not, it may be wise to delay this commitment for a later date.
- Surplus Annual Cash Flow: Unless you are looking at making an all-cash purchase, having a reliable source of income is crucial when owning a vacation property given the inevitable mountain of costs you’re likely to incur over the years – not to mention taking on a new mortgage obligation.
- Maintenance: There are numerous unexpected expenses that come with home ownership, especially a home in the mountains or near a beach where the weather may wreak havoc on the property in the decades to come. You will need to add a maintenance assumption to your budget.
- What business are you in? How much is your time worth? Even if you invest a few hours a month could this time be better spent maximizing your business and/or professional income? You’re effectively taking on a part-time job as a hotel/hospitality property manager. Is the return worth your time?
- Distance: How far is the property from your primary residence and how often will you be able to utilize the home, realistically? In France, the average adult vacations 30 to 60 days per year. Americans vacation a few weeks a year. Unless your family is going to utilize the property regularly – i.e., monthly at least, it could make sense to reposition to your cash elsewhere. For example:
- Upgrade your primary residence where you spend 90%+ of your days.
- Pad your savings and/or investment portfolios to achieve financial independence earlier such that you could spend more time in your vacation home every year.
- If you have an itch to buy real estate, consider a professionally-managed commercial or multi-family investment property or portfolio of properties. Depending on the location and quality of the investment, it is likely to deliver greater cash flow and appreciation over time than a vacation rental.
- Elevate your investment standards
- If you depend on substantial AirBnB revenue for your investment to pencil out relative to 100% passive investment vehicles, it may not make sense to commit your cash to a mostly unused and time-consuming property – especially given the added mortgage and maintenance obligations.
BOTTOM LINE
There’s a natural appeal associated with owning multiple residences. However, considering the myriad of investment alternatives in the marketplace, it often does not make sense financially to own a vacation home – even if leasing it to guests helps to offset some of the costs.
In short, if you’re financially independent and have surplus reserves, you can do it, but keep in mind a vacation home is likely not the most optimal investment vehicle. If you’re not quite financially independent, consider passing on the vacation home for now. Instead, maximize your primary residence, maximize your investment portfolios, add professionally-managed rental real estate if desired, and rent homes or book hotel rooms liberally according to your household budget. Leave the toilets, tenants, and accounting to someone else.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.