Dreaming of a Vacation Home

Consider making it part of your retirement plan.

When you take time off, do you like to experience a variety of destinations or does getting away and relaxing at your own vacation home provide more appeal to you? Either way, planning ahead and considering the vast array of options will insure full enjoyment for your rest and relaxation.

If you like to experience different cultures, the thrill of different adventures can be extremely enjoyable. You can travel via airplane, boat, automobile, recreation vehicle, train, or camel. Every year, you can spin a world globe, close your eyes, and randomly place your finger on a heretofore unknown part of the map that can open up a new and unique experience.

Of course, this opens you up to travel hassles. Who hasn’t experienced long airline delays (Houston was always a favorite airport to get stuck in but I think Denver’s new terminal extension has couches that are very nap worthy!). There could be long car rides (Oooooh, let’s stop at Bucees!) You may have to wait to check into hotel rooms (the hazards of red eye flights), snarf down ten day old food from vending machines, and have uber drivers drop you on the south side of Chicago instead of the north side.

If however, you like to avoid those ordeals and getaway to more comfortable surroundings, relax by reading a good book, take naps on the hammock after morning walks, enjoy good food at friendly restaurants you can trust, bake your own cookies, or have a central location to meet with family and friends, then buying a vacation home might be more your style.

While saving for vacations is really a repeated pursuit that renews itself each year or two (a week long vacation for four at Walt Disney World will require savings of $500 per month for twelve months), saving for a vacation home is more of a long term pursuit that takes much longer to reach.

The prime consideration in a vacation home is, “How much time are you going to spend in the home. Can you work remotely from the home? Are you going to rent the dwelling when you are not there?” If you are going to leave the place vacant for 320 days per year, it’s probably not worth the purchase.

Renting the place out as an AirBNB or Vrbo allows you to depreciate the place and generate some income but letting a place lie empty for the vast majority of the year just exposes you to surprise maintenance costs, high property management costs, and more headaches than enjoyment. (Think of your primary home and its maintenance. Do you want to double that effort in absentia?)

Because of the use consideration, a vacation home should be within three hours of your primary residence. However, if you are considering a vacation home that could ultimately become a retirement home, that changes the long term equation.

Consider current home and condominium prices in the following resort areas:

Saving for a $750,000 second home may be out of your budget but if you have the desire, remember that with inflation of 3½%, that home will be $1,000,000 in ten years. You’ll need to save a down payment of at least $200,000 (lenders may require higher downpayments), which means saving about $16,000 per year for ten years. A loan of $800,000 at 5% yields a payment of $4300 per month for thirty years.

In an age where first time home affordability is increasingly out of reach for more Americans, qualifying for a second home is available only to those whose total debt payments are under 43% of their income. For example, if you already have a mortgage payment of $4500 per month, second homes are restricted to those whose household earnings are more than $250,000 per year.

If you haven’t reached that threshold, it doesn’t mean a second home is unaffordable, you just need to
1) reduce your price point or 2) diligently save a little more each month and/or 3) utilize the expanding equity in your first home to help purchase a second home.

Consider looking in different areas. If you want a mountain cabin, consider the Smoky Mountains in Tennessee, the Blue Ridge Mountains in North Carolina, the Poconos in Pennsylvania, or perhaps Big Bear in Southern California. If you prefer the beach, consider Pascagoula, MS, Sunset Beach, NC, or Newport, OR. All of these areas are more affordable than the ritzier vacation areas like Aspen, Nantucket, or Destin and possess unpretentious little dives with good food that are both affordable and don’t require sun dresses or slacks.

If you’re not sure where you’d like to purchase a second home for vacation / retirement, I suggest that you take a vacation, rent a home in an area of interest and sample the community and the region before you select a place to settle. Be sure to take day trips within a 150 mile radius to get the full flavor of an area. Over several years, while you’re saving your down payment, you can immerse yourself in several locales and see which area appeals to you most.

While searching for a vacation home, consider the following tips:

Homes that are in snowy winter communities (i.e. ski areas) are subject to higher maintenance costs. Rain and snow finds its way into every little crack (particularly decks and porches). Water freezes and expands and can gradually cause wood damage and eventual leaks. Wide variations in temperature can play havoc with painting on exteriors. I have friends with Lake Tahoe cabins who spend $10,000 every spring for maintenance. Look for places with plastic wood decks and more modern building materials.

Homes that are near beaches require more exterior maintenance because the sun and the blowing sand can do a number on exterior paint and outside metal. Homes that are on lakes could be subject to flooding so consider that likelihood. If you’re away from the property, slow leaks or settling water can cause dry rot that causes structural damage.

Nobody cares about your property like you do. If you rent out the property, there will inevitably be damage that needs repair. Be sure you have enough property insurance to account for larger damage. If you hire a property manager, please be aware that many property managers will take short cuts. Make sure you review the contract reviewing their duties. Don’t be afraid to place standards in the contract. Be scrupulous when you check their references.

One advantage of vacation homes versus varietal vacations is that the second home is an asset and real estate appreciation can be part of your retirement nest egg. However, in the event of a prolonged economic downturn, people may be forced to sell their vacation home because of job loss or savings depletion. In 2009, prices for homes in traditional vacation areas dropped 23% from 2008 as vacation homes became subject to fire sales from owners needing money. Another consideration is that of the 76 million Baby Boomers, 80% own their own home and 15 – 20% of all Baby Boomers own second homes. With the oldest baby boomers now reaching age 80, many of these 50 million primary homes and 6 million second homes will be placed on the market by the owners or the heirs and conceivably could, in the future, drive prices lower as the supply of homes for sale increases. Of course, that might be an opportunity to purchase your second home!

Should you take vacations or buy a vacation home? Personal preference will dictate your answer but if your dream is to own a second home, make sure you’re going to utilize the home, consider its purchase as part of your retirement planning, and make sure that you scrutinize the structure, the management, and its function before you purchase.

By the way, you can purchase a hammock for less than $100!