Vacation home market overview
According to Redfin, mortgage rate locks for second homes last summer were down 47% from pre-pandemic levels, compared to a 33% drop for primary homes. And second-home demand has dipped at least 30% below pre-pandemic levels.Mortgage rates for second homes are typically higher, plus the federal government increased loan fees for second homes in 2022.However, financing a second home may be easier than you think if you already own a home. With financing options like home equity loans and home equity lines of credit (HELOC), current homeowners may have more options to begin financing a vacation home amidst the recent decline in second home demand.As always, it’s important to consult with your financial advisor to determine if a second home purchase makes sense. In the meantime, let’s look at the pros and cons of owning a vacation home.Luxury co-owned vacation homes
Advantages of vacation homes
Although there are disadvantages to second home ownership, the advantages can greatly outweigh the trouble of finding and financing a vacation home.
Personal use
When you own your vacation accommodations, you always have a great place to stay (even if it’s a busy holiday weekend). You can keep all the comforts and necessities — clothes, toiletries, outdoor gear and more — at your vacation home so you can get away from it all at a moment’s notice. No suitcase required!Unlike relying on reviews to choose a hotel room or short-term rental, you always know exactly what to expect when you arrive at your vacation home. Plus, buying a second home in a destination you love allows you to experience the place in a whole new way and truly become a member of the community.Your vacation home could become your primary residence once you retire, but you can start enjoying it and building equity long before it’s time to turn in your employee badge. It’s a special place to bring family together for vacations and special events. You can also pass down your vacation home to your heirs.Passive income potential
Although some homeowners prefer to keep their vacation home exclusively for personal use, listing your second home as a short-term rental may also be possible. If you don’t want your vacation home to sit vacant when you’re not using it, you may be able to rent it out to others and use the money toward the mortgage and maintenance expenses.Remember that investing in vacation rentals requires additional considerations like proximity to local attractions, rental competition, local housing rules and possible property management. Your short-term rental can serve as an Airbnb alternative for vacationers in the area, allowing you to generate rental income.Potential property appreciation
Whether you plan to use your vacation home for personal use or earn passive income, your property may appreciate in value. Like a primary residence, a secondary residence can increase equity and value appreciation. In this way, buying a vacation home can be an investment in property ownership. Of course, housing markets fluctuate, so value appreciation depends on where you buy. Adding real estate to your portfolio is potentially a great way to diversify your portfolio and hedge against the ebb and flow of different markets.Tax benefits
You can deduct any mortgage interest paid on up to $750,000 of principal mortgage debt, including your vacation home. Other second home tax benefits may include deducting property taxes and interest paid on home equity loans.If your vacation home doubles as a short-term or long-term rental, you may also be able to claim certain costs as business expenses for your vacation rental business. Consult with a tax professional to ensure which tax deductions you’ll be eligible for.Challenges of vacation homes
Vacation home ownership also comes with a list of challenging cons you should consider.Property maintenance and management
Your second home likely won’t be close enough to your primary residence for you to stop by frequently. Home repairs and regular maintenance (lawn mowing, snow removal, etc.) can become a hassle. And if you’re renting out your second home, you must deal with reservations, clean up and more. A potential solution is to hire a property manager to maintain your vacation property and manage potential tenants. Although this is an additional cost, the expense can potentially give you peace of mind that the business side of your vacation property is taken care of.Income volatility
If you plan to rent out your vacation property, you’ll need to be aware of high and low tourist seasons in your home’s locale. Plan for income fluctuations and charge appropriate nightly rates to curb potential low-season vacancies. To keep attracting bookings, marketing and advertising your property are costs to add to your budget to help decrease income volatility.Local vacation rental laws
Many towns are passing stricter ordinances prohibiting short-term rentals or requiring homeowners to pay hefty fees to list a home as a rental. Check local laws before banking on your ability to rent out your vacation home. Remember that other vacation rental competitors will be subject to the same laws, and consider how this could affect your ability to compete or earn a profit at this destination.Limited location
Once you invest in a vacation home, you’ll probably want to use it to the fullest. That means you’ll be tied to just one second home vacation spot and may not have as many opportunities to travel to new places.Just like an unused gym membership or a new dress in the back of the closet, a distant vacation home can easily turn from a dream come true into a money pit if you’re not committed to using it regularly.5 key vacation home considerations
Apart from the pros and cons of owning a vacation home, there are five key considerations when deciding if now is the right time to buy.
Lifestyle
Examining your current lifestyle is a good way to understand if you’re ready for vacation home ownership. Answer the following questions:- Are you able to manage and maintain a vacation home? Successful management entails regular upkeep, promptly addressing maintenance issues and potentially engaging local service providers for landscaping and repairs.
- Do you see yourself wanting to live there in the future? Evaluate if the vacation home and destination align with your long-term goals, taking into account potential changes in lifestyle, career or family dynamics. Factors such as proximity to healthcare facilities, schools and the overall culture of the area are also key considerations.
- Are you comfortable visiting the same destination? Unlike renting a vacation rental at various locations, buying a vacation home often means vacationing at the same destination multiple times a year. It's essential to weigh the desire for a familiar retreat against the potential monotony of repeated visits.
Financial goals
Purchasing a vacation home is a substantial financial commitment. To avoid making a vacation home mistake, you should determine your financial goals. Take stock of your current financial situation and predict any large expenses that could impact your ability to buy and own a vacation home. Potential purchase deterrents could include:- Paying for college: Calculate the total tuition and fees to attend college for yourself or a loved one.
- Purchasing a new car: Factor in your car payments to your monthly expenses.
- Paying off your primary home’s mortgage: Before shopping for a second home, get a firm grasp on how and when you’ll pay off the mortgage of your primary home.
Location
The location of your future second home is crucial in determining if you should purchase it. Not only can the location affect potential rental income profitability, but it also plays a role in determining the amount of maintenance you’ll be responsible for.For example, mountain getaways subject to high amounts of snow will likely mean paying for snow removal. Buying a beach house — especially on the ocean — will likely mean more frequent painting, thanks to wind and salt air.Profitability
Conduct a thorough market analysis of the prospective destination to estimate its profitability. The following factors are critical components of running a profitable vacation rental business:- Nearby attractions: Choose a home in a destination that attracts tourists for its abundance of attractions.
- Vacation rental competition: Scope out the competition in your area. Check out similar short-term rentals on Airbnb and VRBO to get a feel for price and amenities.
Financing
When buying a vacation home, you’ll find that second home mortgage requirements are stricter. You’ll need a higher credit score and a larger down payment, and you can expect to face higher interest rates than for a primary residence. Your vacation home expenses don’t end with the down payment and mortgage — you’ll also need to budget for utilities, insurance, property taxes, maintenance and possible HOA fees.As you can see, the trouble with vacation homes is that they require careful planning, are subject to limiting vacation rental laws and are susceptible to income volatility. However, vacation homes also serve as a potential means to benefit from value appreciation, generate rental income and qualify for unique tax deductions. And they offer you a retreat from your daily grind and a place to connect with your loved ones.If being the sole owner of a second home sounds overwhelming, consider becoming a co-owner of a vacation home. With Pacaso, you can co-own a fully managed luxury vacation home that is ready for you to enjoy as soon as you arrive. Find a turnkey Pacaso getaway in one of dozens of destinations.The trouble with vacation homes FAQ
Is a vacation home a good investment?
A vacation home can be a good investment, depending on factors like your financial goals, the intended use fo the property and market conditions. If the property appreciates and generates rental income, it can be a sound investment. But consider the short- and long-term costs, potential risks and your financial circumstances.
Is now a good time to buy a vacation home?
According to Redfin, the vacation home market is experiencing a decline in sales and a rise in mortgage rates, so it may not be the ideal time to buy a vacation home as a sole owner.
Is it hard to finance a vacation home?
Although second home mortgages have stricter requirements, first-time home buyers and second home buyers alike have access to unique financing opportunities.
What is the difference between a second home and a vacation home?
A second home does not necessarily need to be in a vacation destination or exist for recreation. A second home can be a secondary residence that fulfills multiple roles for its owner. A vacation home, however, is typically for vacationing or operating a vacation rental business.
