As many of our clients retire or approach retirement, the idea of having a vacation home frequently creeps into their minds.  The notion of having a reliable escape from home or sharing the property with their family and friends is appealing.  I am sure that these thoughts start earlier in their life when they pull up Zillow home listings when they go on vacation to one of their favorite destinations.  “Can we afford this?” is the question that reasonably comes next.

Let’s explore a few concepts that we consider when advising clients on this topic.

 Does buying a second home fit into my financial plan?

Through the retirement modeling analysis work that we do for clients, we estimate the likelihood that they will be able to meet their financial objectives.  Adding the purchase of a second home as well as the corresponding costs to their financial plan allows us to revisit that likelihood.  Sometimes, the analysis will suggest that their plan more than supports buying another property.  In other situations, the analysis might call for a reduction in spending elsewhere in their lives, delaying retirement for a couple of years, or being willing to sell the second home later in life.  The analysis serves as a conduit to a meaningful conversation with the clients about their objectives and priorities.

What is the total cost of ownership?

When people think about the cost of ownership, they often account for property taxes, insurance, utilities, and general home maintenance.  However, they often overlook the opportunity cost associated with the funds that they use to purchase a home.  The opportunity cost is the foregone investment return on those funds.  The table below highlights a hypothetical list of factors that contribute to the annual cost of ownership on a $1,000,000 vacation home.

*Assumes that they would earn a 6 percent return if they invested their down payment.

**Assumes 3 percent annual growth rate in the value of each house.

Let’s assume that a couple envisions spending 60 nights a year at their vacation home.  Another way to view the cost of ownership is that it would cost the couple $1,000 per night to stay in their vacation home.  How do they think about those costs relative to the possibility of renting a very nice short-term rental home or staying in a luxury hotel?  Some people may place a high value on having a place of their own furnished with their personal belongings, while others may not.

What are the qualitative factors that I should consider?

Owning a second home can be great, but it usually means double the headaches associated with home ownership.  If you don’t enjoy dealing with maintenance issues with your primary home, you likely won’t enjoy having twice as many of those issues.

One popular idea to defray the “cost per night” at your vacation home is to rent out the property through AirBnB or similar platform.  While this idea could work, renting brings additional hassles and complications into the picture.

Another consideration is if you would feel that you must limit your vacations to your second home rather than take a vacation to a different destination because of the significant investment you have made.

How We Can Help

There is no one-size-fits-all answer to the question of whether you can afford a vacation home or not. It depends on your preferences for how you want to spend your time and financial resources. We believe it is our responsibility to explain the financial trade-offs that you should consider when contemplating such a significant purchase. Learn more about our approach and how we quantify these trade-offs to help you make a more informed decision.