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Our favorite vacation spots can often feel like a second home, a place where we belong and can unwind and relax. At some point, you may start to think: “Why visit here when we can live here part-time whenever we want?”
Whether you’re dreaming of a beachfront condo or a mountain getaway, the idea of buying a vacation home is an exciting prospect, but it’s a serious financial commitment that comes with many considerations.
For instance, does buying a second home make sense for you in the long run? What kind of property interests you the most? A beach home, a place in the city, or a rural cabin?
If you’re serious about pursuing this idea, consider working with your financial advisor to see how this fits into your overall financial plan and with a real estate agent who specializes in buying and managing vacation homes.
Ahead, let’s go over a few key questions you should ask yourself before making a decision.
Figure out your plans for the vacation property: Is it purely for you and your family, or are you looking to rent it out during the off season?
How much time are you going to be spending there? For example, if you think it’s going to be only once or twice a year, you may want to consider renting a property instead because the overall expense of maintaining a vacation residence will likely exceed the home’s usefulness.
But if you plan to use the vacation home as a frequent getaway, rather than booking expensive hotel stays or rentals during peak seasons, then the potential savings could help offset some of the ownership costs.
As you may know, with real estate, location is everything.
First, consider how easy it will be to get to your dream vacation home from your primary residence. Will it be a chore to get there on weekends? Will the distance or traffic discourage your use of the home? For many people, a four-hour commute is about the limit.
Second, think about whether your vacation home’s location offers year-round or seasonal appeal. Is this a place that overwhelmingly delights you no matter how often you visit? If so, that can be a real plus. But if you’re someone who prefers to travel to different destinations for vacations, then it might not make sense to commit yourself to one locale.
Next, see what the community has to offer. Is this a place where you can make friends easily? Are there amenities in the area that have become indispensable, like good restaurants, entertainment venues, and boutique shops?
And finally, for those who are not too far off from retirement, think about how you want to spend those years. Is this a place you’d like to retire to eventually? If so, that could be another plus.
Putting aside the emotional and practical appeal of having your own vacation home, you’ll need to consider the realities of cost and maintenance as well.
Here are some key questions to think about.
Can you afford a vacation home? If you’re already carrying a mortgage, you’ll have to take a look at your budget to see if you can accommodate a second mortgage. It’s a common practice for lenders to require you to put down a larger down payment for a second home (usually at least 10% down for a conventional mortgage).
What is your debt-to-income ratio? Your debt-to-income ratio (DTI) is essentially a snapshot of how much of your monthly income is already taken up by existing debt obligations. It’s a key factor that lenders look at when you apply for a second-home mortgage, as vacation properties are typically considered riskier investments than primary residences.
Generally speaking, lenders are looking for a lower DTI, typically 43% or less of your gross monthly income. In other words, you’ll likely need more breathing room in your budget than you might expect.
What is the true cost of ownership? Beyond the mortgage, you’ll need to plan for other costs, which may include:
Are you planning on renting out the property? If this is something you’re exploring, would it be easy to rent out your home? You’ll want to think about whether you can manage the property on your own as the landlord or outsource it to a property management company.
If you’re on the fence about buying, you might want to rent a place for a while at your dream destination. This could help you get a better sense of what it’s actually like to live there, and you can see if you enjoy being a member of the community.
Here’s another litmus test: Let’s say you buy your vacation home now. Do you think you’ll be happy with your decision a year from now? Is your enthusiasm just momentary zeal, or are you ready to make the commitment?
Buying a vacation home is not a decision you have to navigate by yourself. Consider working with a financial advisor, who can help put this purchase in the context of your broader financial picture and help you decide if this idea makes financial sense right now.
This article is for informational purposes only and is not a substitute for individualized professional tax advice. Individuals should consult their own tax advisor for matters specific to their own taxes. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates, subsidiaries or divisions. Goldman Sachs Bank USA and Goldman Sachs & Co. LLC are not providing any financial, economic, legal, accounting, tax or other recommendations in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates. Neither Goldman Sachs Bank USA, Goldman Sachs & Co. LLC nor any of their affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements of any information contained in this document and any liability therefore is expressly disclaimed. You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format without the express written consent of Goldman Sachs. This foregoing restriction includes, without limitation, using, extracting, downloading or retrieving this information, in whole or in part, to train or finetune a machine learning or artificial intelligence system.
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