Does it make sense to buy a vacation home?
Whether the sun is shining or the snow is blowing, there’s always somebody grappling with the same question: Does it make sense to buy a vacation home?
On the cost side, property taxes, condo fees, and utilities, as well as maintenance and insurance on a property, can easily add up to 5 or 6% of the home's value every year. Expect a big insurance premium, for instance, because the very things that make a vacation home appealing — proximity to water or mountains, distant from civilization — also make it riskier to insure. And, of course, there's the cost of getting there.
Even at today’s rates, holding a 20-year mortgage for the duration will likely cost another 4 or 5% per annum. Plus, the down payment or even an all-cash purchase will add still more to that in opportunity costs, assuming you believe that there are actually still some other investments that produce positive returns.
Sure, if you rent your property out periodically, you can get make some money and get a partial break on the property tax and mortgage interest. The actual benefit will vary with your tax bracket, of course, and you’ll still have to declare the income.
All of which means the annual after-tax cost of the average vacation property is likely in the 9 to 10% range.
On the plus side, there’s no question that real estate does tend to grow in value over time. And, in some areas, that growth has actually translated into double digit returns. But can this continue?
If you spend 9% a year and get long-term gains of even, say 5%, that leaves a 4% gap — which is a good approximation to compare to the cost of renting periodically instead.
Of course, a rental isn’t nearly the same as having your own place — which is why fractional vacation properties are popping out everywhere. On that note, here’s a cost comparison chart to ponder, with the caveat that it doubles as a sales tool for part-time ownership.
What’s your view on the financial merits of a second home?
By Gordon Powers, MSN Money