When stressed at work in the ER, I close my eyes and try to imagine the beach.  I feel the clash of the cool wind and the warm sun on my face.  The ocean roars in waves of white noise while I breathe deeply in and out, letting my mind go blank.  Stress literally melts away as my heart rate slows, allowing me to see my next patient in a more relaxed state.

Many homeowners dream of having a second home.  Perhaps it’s a ski chalet, a pied-à-terre in the city, or a rustic ranch.  For my wife and me, it was a house at the beach.  As medical professionals, many of us can do more than dream; we can afford it.  While it’s fun to imagine a vacation home at the lake or in the mountains, is the reality worth the expense?  Is a vacation home a dream come true or a financial nightmare?

beach house

In the first post in this three-part series, I will discuss vacation homes and my decision to purchase one.  In The Realities of Using Your Vacation Home as a Rental, I will discuss vacation rentals and our financial results.  Finally, I will cover the tax implications of renting out your vacation home.

FI Disclaimer

Let’s clear this up right now.  Like other real estate investments, you should only consider a vacation home if you are deep in Step 7 of the Financial Vitals Checklist.  A vacation home is more of a use-asset than an investment, similar to your primary residence.  However, unlike your primary home, it’s hard to argue that a vacation home is a necessity.  Proceed with caution.

Our Vacation Home

I had maybe seen the ocean three times when I met my future wife.  While I grew up in Illinois, she spent her high school and college years on an island in Brazil, where the beach is an integral part of the culture.  It took me many years to overcome my landlocked upbringing, but now this pale, Midwestern guy is obsessed with the beach.

Everyone has a place that helps them relax.  Maybe for you, it’s the fresh air of the mountains or the sparse beauty of the desert.  For me, life is better at the beach.  I eat well, sleep well, and feel more at peace.

My wife lived in California for several years while we were dating.  We would dream about buying something in every place she lived.  Once we could afford a vacation home, dreaming turned to discussion.  We talked about buying in Florida, Brazil, Mexico, and even South Texas.  After years of traveling to many beaches around the world, we fell in love with Kailua, a small town on the windward side of the Hawaiian island of Oahu.

We vacationed there four times, renting homes for a few weeks at a time as there are no hotels in Kailua.  We booked our fifth trip for June 2020.  We planned on spending a whole month there.  Unfortunately, COVID derailed our plans, and I spent the Summer and Fall of 2020 looking like this.

As the end of 2020 approached, my wife began dreamily talking about buying a house in Hawaii.  We lamented the vacation that we missed.  Working in the ER during the early days of the pandemic led me to focus on the immediacy of life.  I traditionally would fend off my wife’s talk of buying a vacation home with the shield of financial practicality.  However, amid the trials of the pandemic, I realized, “If not now, when?”

Covid picture

My wife is efficient.  A few days later, she was on the phone with a realtor, chatting away like they were long-lost friends.   In a few more, we were taking video walk-throughs of homes in Kailua.  Within a couple of weeks, we submitted an offer from Texas.  An enormous downpayment and a loan from the Bank of Hawaii soon followed, and before 2020 ended, we owned our dream vacation home.

What to Consider Before Buying

What is your Purpose? 

The first thing to consider before purchasing a vacation home is its purpose.  Are you looking for a weekend getaway, a summer retreat, or a winter playground?  Do you need something lavish to entertain friends or business clients or something quiet and quaint?  Do you envision a family compound to build memories for generations?  Is this going to be your future retirement home?

Understanding the purpose of your vacation home will help you narrow down options.  It’s a big world out there.  If you want to use the home regularly for holidays and long weekends, it should be close, preferably within driving distance if you have children.  If you want a second home to spend the summer, or you only plan on using the home upon retirement, then location, not proximity, becomes critical.

The purpose of our vacation home was to have a place to spend our summers, build memories for our children, and have a place where we can gather even after they are grown.  My wife had a friend whose family had a home in the Bahamas, where they went every summer and over the winter holidays.  The children grew up always going to the same place, making friends, and creating memories along the way.  They still meet there as adults.  We wanted to recreate this with our children.

To Rent or Not to Rent, that is the Question.

The next major decision is whether to use your vacation home as a rental property.  This is another reason why having a purpose is so important, as it will influence your rental options.  If you are using it only for retirement, you have the option of short-term, medium-term, and long-term rentals.  If you are summering, you can’t take long-term rentals, and if you want to use the property regularly, you are left with only short-term rentals.

The answer to this question is necessary before you can answer the next one.  The financial calculations differ depending on whether you will rent and how often.  We have multiple long-term rental homes and purchased our vacation home with its rental potential firmly in mind.  Although it was not our primary concern, it was certainly a consideration.

Can You Afford It?

Being able to afford something or not is a complicated matter.  Our site should give you enough information to answer this question yourself, so I’m not going to dive deep into the subject in this post.   But this is THE question.  I only offer two pieces of advice.  One, consider all the costs and don’t lie to yourself.  Your vacation home will cost more than the monthly payments.

Consider the following costs when deciding if you can afford a vacation home.

 

    1. Cash spent: downpayment, closing costs, furnishings.
    2. Monthly maintenance costs include loan payments, HOA, lawn care, insurance, property taxes, pool care, utilities, etc.
    3. Repairs:  broken toilets, clogged plumbing, etc.
    4. Capital Expenditures (the amount you will periodically pay for upkeep):  new roof, water heater, pool repairs, etc.
      Two, even if you plan on renting your house out, assume you won’t make any money from it.  Consider it a win if the rental income can cover the upkeep on the property, but plan to make all the PITI payments yourself if you have a mortgage.  This is a luxury, not a necessity, so this is the time to be realistic, not optimistic.

Our Experience

We have owned the house for over 3 ½ years, and the experience from a purely vacation standpoint has been overwhelmingly positive.  We have spent the past three summers in the home and have enjoyed every minute.  We spend more time outside when we are there and more time together as a family.  That may be a little unfair as the kids are out of school, but that is my experience.  As much as I love Texas, it has been great to escape the summer heat.  My kids have turned into little fish in the pool, the beach, and a water sports camp.  We have enjoyed hosting friends from the mainland and making new ones on the island.

beach house 2

Almost all our issues have been related to using the house as a vacation rental.  The house needed some work, and we have been doing it in stages.  Everything costs more in Hawaii and seems to take longer as everyone is on island time.  However, I recognize that home improvement projects are never fun, no matter where you live.  As we approach our fourth summer at the house, I have experienced some pros and cons of having a vacation home.

What are the benefits of a vacation home?

Personal Use

The most obvious benefit is that you can use it whenever you choose!  The closer to your primary residence and the more desirable the location, the more you will use it.

Ease 

Traveling is easier when you’re going to a place you own.  You can leave clothes, toiletries, and hard-to-transport items at the vacation property.  If you use it regularly, you can arrange it so you don’t have to bring anything!

Prestige and Generosity   

Some people may like the bragging rights, but for me, it feels awkward when someone finds out we have a vacation home in Hawaii.  What feels better is offering the house privately to my friends.  Many friends have visited us during the summer, and we let several others use it when available.  In May, I will be hosting the executive team of my urgent care business for a week for our annual Traction meeting.  It’s a great perk that excites the team.

Financial Benefits?

This one should be an easy calculation, but it isn’t.  Staying in Hawaii for weeks and months is a costly undertaking, especially during peak seasons.  Since we have three children and an Au Pair, we need 2-3 hotel rooms when we travel for long periods.  A short-term rental house is almost always a better and less expensive option for us.  We spent $500-$700 per night renting a home in Kailua, so it was up to $10,000 for a two-week stay.  If you want to stay three months, this could be $60,000 or more!  We could never justify paying this much, so we would usually share a house with friends and stay for less time.  But, if you think in these terms, buying a house can start to make financial sense.  Maybe.

family pool

 

What are the Drawbacks of a Vacation Home?

Lack of Variety

Even when you intend to return to the same place year after year, you can crave different experiences.  After spending the first two summers exclusively in Hawaii, we went to Montana for a week last year, and we will spend some time in Europe this summer.

Hassle

There is a significant hassle factor to owning a vacation home, especially if it is far from your primary home.  You can’t just drive over and fix a problem.  You must assemble a team of contractors, neighbors, and friends to help you deal with all the inevitable issues that arise.

Cost

Vacation homes can be expensive, especially if you buy in a desirable location.  If you pay cash for your vacation home, you must weigh the expected appreciation of the home versus the opportunity cost of using that money for another investment.  There is the downpayment and monthly PITI (payment, interest, taxes, and insurance) if you finance.  In today’s high-interest rate environment, you must weigh this decision carefully.  We have a mortgage on our property of 3.25%.  If it were 7%, it just wouldn’t make financial sense for us.

Regardless of how you pay for the home, you will have ongoing expenses, such as HOA, utilities, landscaping, routine maintenance, and repairs.  These costs add up quickly, so ensure you use it enough to get the appropriate value.  One way to offset some of the cost is to rent it out when you’re not using it, which I will discuss in The Realities of Using your Vacation Home as a Rental.  I’ll give you a sneak peek and say that despite our home being rented regularly, our rental income does not cover all our ownership costs.

beach kids

Conclusion

Having a vacation home can be a dream come true . . . if you can comfortably afford it.  Although I am financially independent, I still work.  If I were retired, the financial costs of the house would weigh more heavily.  If I was still pursuing FI, there is no doubt this home would significantly slow my progress.

Purchasing and maintaining a vacation home is not financially optimal.  But in this case, that isn’t the point.  As Paula Pant says, you can afford anything, but you can’t afford everything.  My wife and I don’t drive fancy cars. We don’t live in an extravagant house.  We generally live below our means but will spend money on what we value.  That’s what our vacation home represents – more quality time with family and friends in a place we love.  An invitation to hike, swim, and live life outdoors.  And a needed reminder to slow down and smell the plumerias.

Do you have a vacation home?  Are you dreaming of one?  Share your thoughts and experiences in the comments below.  Click here to read the next article in the vacation home series.

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