We’ve been helping Abio Properties clients buy or sell vacation homes in the San Francisco Bay Area and nearby recreation destinations recently, which got us thinking about the BIG question that always comes up in these situations…

Why buy a vacation home when you can just rent one?

If you search online for advice about investing in a home-away-from-home, you get discouraging headlines like “Don’t Buy a Vacation Home” and “7 Reasons Why Buying a Vacation Home Is No Holiday.”

But is it really that bad of an investment?

For Abio Realtor Elisabeth Watson, who owns a second home in Sea Ranch on the Sonoma Coast and recently represented a seller there, it boils down to one thing:

“It’s an emotional decision, not an economic decision,” says Elisabeth, who bought in Sea Ranch in 2012. “We did it because it’s wonderful. We have a retreat that is all ours.”

Abio co-founder and Realtor Linnette Edwards, who bought her Tahoe home in 2004, agrees. “It’s a passion project. It’s a lifestyle project,” she says.

What they mean is a vacation home investment probably won’t line your pockets with lots of extra cash. In fact, you are more likely to break even, like Linnette does. But maybe some things are more important to you than cash…

Here’s what to consider before buying:

CONS

Your financial planner probably hates the idea.

A good financial advisor will look at whether this second home will eat into your retirement savings and ask if you considered not only the purchase price but also the costs for insurance, property taxes, and property management.

Know that mortgage rates are higher on second homes. And lenders often require a higher credit score and larger down payment than on a first home.

The three most common ways to finance a second home are: refinance your first home, get a home equity line of credit on your first home, or take out a conventional loan for the second home.

Unless you can pay all cash. Nearly 30 percent of vacation homebuyers pay upfront, according a 2017 report from the National Association of Realtors. However, keep in mind that the national median price for a second home was about $200,000 – which probably doesn’t reflect our sky-high Bay Area prices.

Maintenance costs time and money.

Owning a property means taking care of it.

Whether you buy an oceanfront cottage or a ski cabin, ongoing maintenance will be part of the deal. Ocean air and wind can peel paint, rust metal, and leave a salty haze on windows. Mountain homes must be winterized so pipes don’t freeze and burst, roofs need regular inspection, and chimneys need cleaning. Lake houses need new docks to replace rotting ones.

Elisabeth says it’s not uncommon for buyers who are closing in on a vacation home to get spooked by potential maintenance costs and drop out.

Renting out your vacation house part-time won’t make you rich.

Renting your vacation home when you’re not there can be a great way to pay down the mortgage. If you are lucky, you’ll break even or make a little cash.

If you aren’t lucky, renting out the place will cost you money.

Consider expenses like monthly utility bills, cleaning fees, restocking, routine maintenance, and ongoing wear-and-tear by strangers. A property management company can help you with those headaches for a fee of about 30% of the rental price (or more). Linnette, who represents the occasional home seller in Tahoe, urges owners also to consider the cost of a good umbrella insurance and liability policy.

Wait, are you even allowed to rent out your vacation property?

Learn the laws of the land before you buy, because local tolerance for short-term rentals is shrinking in certain tourist hubs. Bans are popping up in areas including South Lake Tahoe and Sausalito. Elsewhere in California, cities including San Francisco, Santa Monica, and Palm Springs have added a patchwork of (less strict) regulations.

The Lonely Planet just got a little lonelier

You know that desire you once had to explore new places? Well, your passport might start gathering dust because you feel committed (financially and emotionally) to your vacation home.

PROS

Enough with all the negative stuff. Now let’s look at the reasons to buy a vacation home…

You get all the comforts of home.

Owning a vacation home means spending less on hotels and restaurant meals. It means cooking in your own kitchen that you stock with the pans and spices you love. It means keeping a set of vacation clothes in a closet so you can pack light for each trip. It means you have a television (or none) and sound system set up just the way you like it. The sheets are yours. If all that is important to you, buying a vacation home is the right choice.

You know where you want to retire.

Forward-thinking home buyers purchase a second home before they retire for ease of financing and relative financial flexibility. They often target the town where they want to retire. Years into the investment, they might spend more and more days in this second home and become part of the community, until one day they just settle in for good!

It’s a way for city dwellers to buy their first property.

If you are a longtime renter in an expensive metro area like San Francisco – and especially if you have a low rent-controlled apartment – you may never be able to afford to buy a house. (The median price in SF is nearly $1.3 million!)

But you might have enough savings for a moderate home in less expensive Sonoma County, Shasta, or the Sierra Foothills that could become your weekend and vacation retreat, and maybe your retirement home some day.

Elisabeth’s says she knows an SF couple who rent a $2,000/month apartment in the city, where they work and live during the week, and bought a $485,000 home in Sea Ranch for their days off.

Tax advantages

Yes, you will pay tax on rental income if let your home for more than two weeks a year. But the IRS allows deductions for rental expenses including maintenance, utility bills, and insurance.

Location Location Location

If you buy in an up-and-coming hot spot, your investment might gain significant value.

Wonder which locales are hot? The vacation rental management website Vacasa studies the top 25 U.S. destinations to buy a vacation home, based on median home cost and capitalization rates (potential return on investment). Only one California town made the most recent list – Fort Bragg, where the median home sale price was $509,500 and the capitalization rate was 5.9%

See the full list here.

You’ll create memories that last a lifetime.

You can’t put a price on all the holidays, birthdays, family vacations, and girls’ weekends that you’ll share in your second home with friends and family. Imagine all the s’mores melted. The puzzles completed.  The wine bottles emptied. The meals cooked together while singing and dancing à la “The Big Chill” (gratuitous ’80s movie reference).

Elisabeth sums it up like this: “The real reason to buy a second house is because you are in love with it.”

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Want more real estate investment tips? Reach us at 888.400.ABIO (2246) or hello@abioproperties.com.