Should You Rent or Buy a Vacation Home?
There are two times of year when the buy vs. rent a vacation home question comes up. The first is during winter when many clients travel down South or out West to enjoy warm temperatures while the rest of us battle the cold winter.
The second is in summer when clients rent vacation homes in beach or lake communities.
I know this dilemma all too well. We rented in Chatham, MA for 15 summers before purchasing our first home there in 2011.
When you’re in the middle of all the fun, it’s hard not to allow your mind to wander. You pass homes with “For Sale” signs and start wondering “what if?”
You scour the internet for all homes in the area where you’d like to rent, look at photos, watch videos, and visit open houses.
Sound familiar?
I have had dozens of these conversations over the years and I’ve seen different conclusions reached.
I’m in the middle of helping someone evaluate whether to continue renting a home on Cape Cod vs. buying their own home. I thought it would be helpful to provide the same checklist I shared with them to help you evaluate and make a rational decision based on your individual desires.
Making a decision about buying or renting a second home is a big one – and an emotional one. It’s important to first take a rational step back to look at the big picture.
The main question always centers around buying vs. renting, and because there are so many factors involved, there is no correct “rule of thumb” answer.
My first recommendation is to start by reflecting on and answering these five questions:
Questions To Ask Yourself
- How many days in a year can you really see yourself spending time at the second home? If the answer is two weeks, you know which option to choose. Rent!
- Do you have family members or friends who would take advantage of it and use it when you were not there? (Another justification for owning)
- How long can you see yourself owning it? How many more years can you see yourself traveling to this location on a regular basis? five years…10 years…20 years?
- Who will maintain the property while you’re not there? Is it part of a condominium complex where a service is available for a fee?
- Are you going to rent it while you’re not there? If so, do you want to be a long-distance landlord? The big downside is that the time of the year you want to be there, i.e. winter months, is exactly when someone would want to rent it from you. There’s not much of a market for renters in Florida or Arizona in July! Ditto for renters in beach communities in January and February!
Many times, if you rationally answer these simple questions, you can determine the best option for yourself.
Advantages of Buying and Owning a Vacation Home
Let’s begin by weighing the advantages and disadvantages of purchasing and owning a vacation home:
- You expect to live in the second home for an absolute minimum of four months per year, and you want it to be your home.
- You can develop real friendships with neighbors and residents so it feels like home to you. **This is an often overlooked and an important benefit which is hard to know unless you’ve owned a second home. I have heard many say they have a completely new and different circle of friends at their second home. I concur 100%.
- Freedom and Control: You can come and go as you please with no limitations and leave belongings behind such as clothing and a car.
- Family and friends can use your vacation home for their vacations while you’re not there, or you can host family and friends.
- You lock in the price of a home, especially at depressed prices.
- Income Taxes: if you’re going to live there for more than six months, you may establish residency there and potentially reduce your state income taxes, i.e. in Florida, where there are no state income taxes.
- Real estate appreciation: Owning an asset that could increase in value can be beneficial. It’s important to consider the risks involved, as there are no guarantees that the property will always appreciate.
- Pride of ownership.
Disadvantages of Owning a Vacation Home
- Costs: You’re responsible for condo fees, real estate taxes, insurance, utilities, maintenance, and upkeep.
- Lack of control over rising real estate taxes: This has become a challenge with second-home buyers in Florida for whom this is not their primary residence. Unfortunately, you have no control over your town’s evaluation of your property. They have the power to increase your property taxes.
- Lack of control over rising condo fees, which are controlled by the association (assuming that you live in a condo). Speak with other condo association members about their experience with the association.
- Having to care for and maintain the property from a long distance: While this may not sound like much, imagine what it is like for those who own homes in Florida during hurricane season.
- Being caught in a buyer’s market when you want or need to sell.
Take a moment to write your thoughts about each of these, and the questions above.
Advantages of Renting
Let’s now weigh the advantages and disadvantages of renting a vacation home. When we’re done, we’ll pull it all together so you can make an educated decision.
- No large upfront costs to rent. No property taxes or condo fees.
- There are several costs outside of rent that can include utility and service fees.
- You’re not locked into one destination. This is a big one that you have to carefully weigh. While some love the consistency and friendships developed in one location, others get bored and need variety.
- You have no other responsibilities other than paying the rent and preventing damage to the property while you’re there.
- As needs, desires, priorities, and life circumstances change, you have the flexibility to change plans without the hassles of selling.
Disadvantages of Renting
- No control over future rent increases (you could get priced out of the location).
- No equity buildup if real estate values increase.
- Must live by the owner’s rules (no pets, etc.).
- Unless you drive to the destination, you may have to rent a car which is expensive.
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As you can see, there are strong advantages and disadvantages to each. Much of it comes down to your answers to the initial five questions.
If you plan to be in your vacation spot four months per year, you’ve been to this location before and you know you like it, you have family who will also use it, and you have friends who live in the same community, ownership is the likely answer.
The all-important initial step is to de-emotionalize yourself from the situation so that you can calmly and rationally make a decision-based fact rather than emotion and opinion. (i.e. try not to make a purchase decision when you’re sitting in a real estate sales presentation at the newest condominium complex in a town you’ve been to once in your life).
Your emotions are running high at that point Treat this like all of your other financial decisions – as part of a carefully thought-out plan, not an isolated decision in a vacuum.
Visualize the next 20 years of your life. Can you vividly see yourself living a good portion of your life in this location? That’s the real test.
If you’re seriously thinking about buying, rent initially for an extended time (minimum of four weeks) so that you can get the feeling for what it is like to actually “live” in this location as opposed to “vacation” there. Go to the grocery store. Walk to the park. Attend church.
Then make a rational decision that can make you happy for many years to come.
Jack Phelps
Financial Advisor / Managing Director