What it means
Buying a vacation home is partly a lifestyle choice and partly a financial one. Costs include the mortgage, property tax, insurance, repairs, utilities and any management fees, and they continue whether or not the property is used.
The owner also bears the cost of money tied up in the property instead of being invested elsewhere. Lenders treat second homes differently from main residences.
They often ask for a larger down payment and a higher credit score, and the interest rate may be slightly higher. If the owner plans to rent the property most of the year, the lender may treat it as an investment property, with stricter terms.
Taxes depend on the pattern of use, and in the United States, for example, if a home is rented for fewer than 15 days in a year, the rental income is generally not taxable and the property is treated like a personal second home. If it is rented for longer, the income is taxable, but the owner can deduct a share of the costs, and personal use above certain limits can restrict those deductions.
Rules differ by country and change over time, so owners should take advice. Renting can help cover the cost, but it adds work and risk.
Owners must market the property, manage bookings, clean it and deal with guests, or pay an agent a commission that is often a sizeable share of the rent. Occupancy is also seasonal, so income can be uneven.
Selling a vacation home may trigger a capital gain, the profit over the purchase price plus improvements. Because the property is not a main residence, the tax relief available on a primary home often does not apply.
A buyer should consider the likely cost of selling, including agent fees and taxes, when planning how long to hold. Finally, owners often forget the opportunity cost.
Money used for a deposit could earn returns elsewhere, and the owner may use the home for only a few weeks a year. Comparing the annual cost with the price of renting a similar place for the same weeks shows whether ownership makes financial sense.
In practice
Real-world examples.
Example
A family buys a lakeside cabin for weekends and holidays. They use it 60 days a year and calculate that the cost per day of personal use is far higher than renting a similar cabin for the same period.
Example
A retired couple rents their coastal apartment to holidaymakers for 12 weeks each summer. The income covers most of the running costs, and they use the apartment themselves for the rest of the year.
Example
A business owner buys a ski chalet and lets a management company handle bookings for a 25% commission. He tracks gross rent, commission and repairs to see whether the property pays for itself.
Formula
Calculation
Break-even rental nights = annual cost of ownership / net nightly rental rate
Suppose a couple's vacation home costs $24,000 a year in mortgage interest, property tax, insurance and maintenance. They can rent it for a net $300 a night after cleaning and platform fees. The break-even is 24,000 / 300 = 80 nights. If they rent it for 100 nights, rental income is 100 x 300 = $30,000, which covers the costs and leaves $6,000, but they must still account for tax on the income and for the nights they cannot use it themselves.Case study
Seen in the real world.
Seabrook Family is an illustrative, fictional household that buys a $450,000 beach house. They put down $135,000, take a mortgage for the balance and estimate their annual costs at $30,000.
They plan to rent for 12 weeks in summer at $2,100 a week, which gives income of 12 x 2,100 = $25,200. After a 20% management fee of $5,040, the net rent is $20,160, leaving about $9,840 of costs for the family to carry.
In this illustrative story the family finds that the true cost of their own stays is about $9,840 spread over 8 weeks, or roughly $1,230 a week. They decide this is acceptable, since a similar rental would cost more, and they set aside a repairs fund of $3,000 a year.
Watch out
Common mistakes.
- Counting only the mortgage payment, when taxes, insurance, repairs and utilities can add a large amount.
- Overestimating rental income, when occupancy is often seasonal and some weeks stay empty.
- Assuming main-home tax reliefs apply, when a vacation home is usually treated differently on sale.
Questions
People also ask.
Is a vacation home the same as an investment property?
Not necessarily, because a vacation home is held mainly for personal use while an investment property is held mainly to earn rent.
Can I deduct the mortgage interest on a vacation home?
In some countries, including the United States, interest on a qualifying second home can be deductible, subject to limits and rules that change.
How do lenders view a vacation home?
They usually require a larger deposit and a stronger credit profile than for a main residence.
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