Tips & advice

Pros and cons of vacation homes as an investment

Published Date: January 25, 2024

Exterior of a Palm Desert second home with indoor-outdoor living, a walled courtyard, pool and modern design
Is a vacation home a good investment? The answer is not always a simple yes or no. Whether owning a vacation home is a smart financial move depends on a lot of factors, including the location of the property, the home’s characteristics, market conditions, your financial situation and whether you plan on using the home as a vacation rental. 

Luxury co-owned vacation homes

When you’re considering whether you should buy a vacation home, here are a few financial considerations to keep in mind. Before you make any purchase, be sure to consult with your financial advisor, accountant and tax professional about your specific situation. 

Potential benefits

1. Equity gains

Like any home you purchase, your property may appreciate over time, allowing you to either access your equity with a home equity line of credit (HELOC) or a home equity loan. Of course, you will also realize all your equity gains upon selling your vacation home. But there’s no guarantee that your property will appreciate. Market conditions and broader economic trends can dictate how much you pay for your second home when you buy it, and whether you’ll turn a profit upon selling. 

2. Rental income potential

The potential to earn extra income is one of the reasons many people find vacation homes appealing. Plenty of second home owners take the route of renting out their property when they’re not using it personally, as a way to offset ownership costs. Be sure to do your research before assuming rental income will completely offset your monthly mortgage payment, property taxes and maintenance costs. Many second home destinations are highly seasonal, so while you may have plenty of rental income during the peak tourism months or over the holidays, low periods throughout the year may cause cash flow issues. A best practice is to make sure you can afford the mortgage and associated costs without relying on rental income. That way, any money you do make is simply icing on the cake. Also, you'll want to research the destination you’re considering to check on local regulations that might prohibit or restrict short-term rentals. 

3. Personal use and comfort

Hotels and other types of accommodations are typically one of the most expensive parts of any vacation. If you enjoy visiting the same location every year (or multiple times each year), buying a vacation home in that location can make more financial sense than shelling out your hard-earned money to the same hotel over and over again. Plus, it’s nice to have a “home away from home” where you can truly enjoy your vacation time in a place where you’re comfortable and have everything you need. 

4. Investment diversification 

Talk to any financial planner and they’ll tell you that diversifying your portfolio is a must. That means if you have too much of your nest egg in one asset type, you should move some money to a different type of investment to minimize risk. That’s one reason people choose to invest in a second home. It’s an investment vehicle you can enjoy while it has potential to increase in value over time. 

5. Tax advantages

Depending on how your vacation home is used, you can deduct your property taxes and mortgage interest on a second home, same as with your primary residence (though there’s a cap to how much you can deduct each year). If you choose to rent out your vacation home, you may be able to deduct expenses like repairs, maintenance, property improvements, cleaning and more. Be sure to talk through your options with a tax professional. 

Potential drawbacks

1. Costly down payments

Potential second home owners who apply for financing are sometimes surprised at the higher down payment and credit qualification requirements for vacation home purchases. Because second home loans are considered to be riskier for banks to underwrite, down payments of at least 10% are almost always required. This is in stark contrast to buying a primary residence, where down payments as low as 3.5% (or 0% if you qualify for specific government-backed lending programs) are sometimes available. 

2. Ongoing costs 

The more homes you own, the more you’ll pay in regular expenses, including mortgage payments, property taxes and homeowners insurance. You’ll also want to factor in regularly required maintenance that keeps your home in tip-top shape and helps you avoid unexpected repairs. One more thing: Many vacation homes are located in locations where a bit of extra TLC may be required, such as snow removal in winter or summer pool maintenance. 

3. Property management costs

If your second home is far from where you live, you may need local, on-the-ground support. It’s common for second home owners who rent out their home to use property management services, which can run between 25% and 35% of your nightly rental cost. But even if you don’t rent out your home, it can be helpful to have local resources available in case of maintenance issues.  

4. Unexpected expenses 

Every homeowner has experienced the sting of an unexpected repair bill, and vacation home owners aren’t immune. Despite taking great care of your property and doing all the necessary preventive maintenance, sometimes problems arise. Unexpected expenses can quickly gobble up any vacation rental profits and vacation time, so it’s best to have an emergency fund established from the very beginning. 

5. Seasonal fluctuations

As we mentioned earlier, many vacation destinations see the bulk of travelers during a relatively short season — think winter ski resort season or summer boating season. If you’re counting on rental income to cover the ongoing costs of your ownership, you may run into cash flow issues during times of the year when you don’t have many renters. Similarly, you may not want to sacrifice a week’s worth or rental income to use the home yourself, which means you may be relegated to using your own home during less enjoyable parts of the year. 

6. Regulatory and legal challenges

If you plan on renting out your home, you’ll want to be aware of some logistical hurdles you may encounter. First, individual cities, towns and jurisdictions have different rules related to short-term vacation rentals. Some places forbid them entirely, as a way to preserve the local community for full-time residents, while others require you to jump through some hoops to rent your property legally. You’ll also want to make sure you’re legally protected, which includes things like paying for plenty of homeowners insurance (which can be more expensive on rental properties than primary homes) and having a lawyer review your rental agreements. 

Another path to second home ownership

If you’re interested in owning a vacation home for personal enjoyment without the hassle of managing a rental, consider Pacaso. Available in destinations across the United States and abroad, Pacaso homes are co-owned by up to eight individuals and reserved for use by owners and their guests. Because you split the cost of ownership with others, it can be a more affordable option compared to buying a property on your own and relying on unpredictable rental income. Plus, Pacaso takes care of furnishing, maintaining and managing the home so that you don't have to stress about the details when you spend time at your home.

Luxury co-owned vacation homes

What’s more, Pacaso owners enjoy real estate ownership, as you are purchasing a share of a property-specific LLC. When it comes time to sell, Pacaso shares have historically sold for an average 10% gain. Explore the destinations and homes where Pacaso co-ownership makes investing in a vacation home the smarter choice.
Jen Headshot

Jen Lyons

Author

  • Share this post:

Don't miss out

The best homes sell fast. See the latest luxury listings, inspiring second homes and buying tips.

I give Pacaso permission to contact me & agree to the terms. This site is protected by reCAPTCHA and the Google privacy policy, terms of service and mobile terms.

Want to chat? Contact us.