The Pros and Cons of Buying a Vacation Home: Is It the Right Move for You?

Disclaimer: This article is meant to be used for educational purposes only and is not intended to be construed as financial, tax, or legal advice. HomeLight always encourages you to reach out to an advisor regarding your own situation. 

If you need to get away from the stress and hustle of daily life or find yourself returning to the same vacation spot each year, it might be time to buy a vacation home. A place to go and relax. A place where family and friends can gather. A place that is all yours.

But is buying a vacation home right for you?

With the rise of platforms like Airbnb and VRBO, it seems like everyone is a vacation rental owner or real estate investor. But just because you own a vacation home, that doesn’t mean you have to turn it into a business. In fact, Darren Tackett, a top Scottsdale, Arizona agent who specializes in vacation homes, says that the vast majority of his clients don’t use their vacation home as a short-term rental.

As of 2020, 5.11% of the total housing stock in the U.S. were second homes. During the COVID-19 pandemic housing surge in 2020 and 2021, the number of people buying second homes rose as remote work became more common and people sought to get out of highly populated cities, as well as lock in low mortgage rates.

In January 2022, demand for second homes was up 87% over pre-pandemic level demand. This is just shy of the 90% increase from pre-pandemic levels that we saw in September 2020 as many people bought second homes to get out of large cities and have more space while they were under stay-at-home orders. In June 2022, 5% of homes were purchased for vacation use.

With current mortgage interest rates hovering around 5.6%, the demand for a second home has cooled, but lower home prices and slightly higher inventory mean that a vacation home could be the right move for you. However, there’s still a lot to consider.

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To help you weigh your options, we talked with Tackett to discuss the pros and cons of buying a vacation home and whether or not it’s the right choice in the current market.

What qualifies as a second home?

Believe it or not, the qualification of a second home depends on the definition set out by the IRS for tax purposes. In order for a vacation home to qualify as a second home, you must use it for at least 14 days each year or 10% of the total days you rent it out to others, whichever is greater.

There is also a distinction between days you’re there to maintain the property and days you’re there to relax and enjoy the property, so understanding all facets of how and when you can use it as a vacation rental is important.

Mortgage interest rates for a second home are typically lower than those for an investment property. This is something to factor into your upfront and long-term costs of owning a vacation home.

Pros of owning a vacation home

Choice of neighborhood

When you rent a short-term rental, you can’t always predict what sort of neighborhood it will be in. If it’s surrounded by other short-term rentals, you may inadvertently be caught in a party spot where other vacationers are blasting music and making a ruckus. If you buy a vacation home, you can vet the neighborhood and make sure it meets your criteria for the perfect vacation spot.

You’ll feel at home there

If you rent a hotel or short-term rental for your vacation, you risk going without some of your vacation essentials if your room or rental isn’t properly equipped. In a short-term rental, you’re using other people’s things and sleeping in strange beds.

But if you own a vacation home, you’ll be going “home” every time you arrive. You’ll have control over the decor, the supplies, the furniture, and the amenities. You can even leave clothes and other necessities there that will lessen the packing load when it’s time to visit.

It’s always available when you need it

Tacket recently rented out a vacation rental, but when he asked if he could rent it next year, he was told they won’t be leasing it. “So now,” he says, “we’re back to hoping we can find something versus, if we had our own place, it’s always our place and we can always come back to it.” So whether you’re headed to a cabin in the mountains, a beach house, or a single-family home in a resort town, you’ll always have a place to call your own.

It’s fun!

The process of buying a home will likely come with some stress, but Tackett says the best part about working with clients who are looking for a vacation home is that “vacation homes are always fun…I get to help them not only find a place but then I get to help them figure out what they’re going to do when they get here. So there’s not much more fun than that type of buyer.” If you do decide to buy a vacation home, let yourself have some fun with the process and look forward to spending your vacation in your very own place!

Cons of owning a vacation home

You’ll have all the expenses associated with owning a home

The initial cost of purchasing a home, mortgage closing costs, and property taxes are the obvious expenses you’ll be responsible for when you purchase a vacation home, but it’s important to consider these other costs as well:

• Utilities – You’ll be responsible for paying utility costs year-round, even when you’re not staying there.
• Maintenance – Paying for ongoing maintenance — keeping the lawn mowed and the flower beds weeded, checking for leaks, and making sure pests or animals haven’t invaded can add up over time. You probably do this regularly at your primary residence, but you’ll have to go out of your way to get this done at your vacation home or pay for someone to do this work for you.
• Repairs – Home repairs can be costly, so remember, you’ll have to oversee and pay for repairs at two places.
• Homeowners insurance – Insuring a vacation or second home is around 2 to 3 times more expensive than insuring your primary residence. This is due to increased risks of theft, late-reported damages, and other issues caused by extended vacancy.
• HOA fees and regulations – If your vacation home is part of a homeowners association, you’ll have HOA fees to pay as well as an obligation to keep up with the requirements regarding its appearance.

You’ll have to maintain it year-round

The nice thing about staying in a vacation rental or hotel is that once you check out, you leave your responsibilities behind. If you own the home, you’ll need to make sure it’s maintained throughout the year. This could mean you visit regularly to make sure everything is functioning, or you can hire a property management company or an individual to check in periodically.

If you are purchasing a vacation home in an area with harsh winter conditions, there are extra steps you must take to prepare your home for vacancy in winter months:

• Turn off your water supply and drain water lines
• Turn down your heat to around 55 degrees, but do not turn it off!
• Unplug all appliances

Keep in mind, however, that standard homeowners insurance policies might not cover damage that occurs while the home is unoccupied for an extended period of time. Work with your insurance agent to craft a policy that will include coverage for the times of the year that the home will not be occupied.

Things to consider

Before you buy a vacation home, you should sit down and weigh the pros and cons, but there are a few other things to consider:

• How much will you use it? Think about how much time you’ll be using the home each year. One or two week-long vacations may not be enough to financially justify the expense of your own vacation home.
• Do you want to visit the same place over and over again? Part of the fun of vacations is checking out new locations and scenery. If you own your own vacation home, you may end up feeling stuck with having to go there rather than taking vacations elsewhere.
• How much do you currently, or plan to, spend on hotels and vacation rentals? For the cost of a vacation home, you could probably take a lot of vacations, but you wouldn’t be building equity or taking advantage of the other pros that your own vacation home offers. Consider how much you typically spend on vacations and weigh that against the cost of purchasing a home.
• Is the location far enough from your primary residence? For the home to be considered a second home according to your lender, it must be a sufficient distance away from your primary residence. Chances are, you aren’t going to vacation two blocks down from your primary residence (but that would be ok for an investment property). Lenders often have requirements for how far away a second home needs to be from a primary residence.
• Should you buy your “second home” first? If you’re currently renting, it may make sense to buy your “second home” first while you continue to rent. According to HomeLight’s Top Agent Insights Survey for Summer 2022, 64% of agents have either seen buyers use this strategy or have heard of it happening.

The tax implications of buying a vacation home

While you can deduct the mortgage interest on a second home, it only applies if you don’t use the home as a rental. You can also deduct property taxes on your second home in the same way you can for your primary residence, up to a $10,000 limit.

If you rent your vacation home out for 14 days or less throughout the year, you don’t have to report your income — though the rental platform (Airbnb, VRBO, etc) might have to report the income you made. If this occurs, the IRS could contact you, but all you would need to do is verify that you fall under the 14-day exception.

If you are renting out your home for more than 14 days, there are more tax requirements, so if you do decide to rent it out, be sure you’re well-versed in what you’re required to record and report.

If you’re using the vacation home as an investment property, you’ll also be able to deduct certain expenses like utility bills and depreciation based on the percentage of days that the home was used as a rental. As always, consult your tax professional to understand your tax obligations when renting your property part-time.

Is now the right time to buy a vacation home?

If you’ve weighed the pros and cons and decided that buying a vacation home is the right move, the next question is whether or not now is the right time to buy a vacation home. With the current market conditions cooling and increased inventory, Tackett says, “I think it’s a little more fun to be shopping right now because you can actually look at some homes and you don’t feel that pressure that you have to make an offer on the spot and especially above list price and waiving all contingencies.”

Work with an experienced real estate agent to help you find your dream vacation home, and reap all the benefits that second-home ownership has to offer. With HomeLight’s agent matching tool, you will be matched with a top agent near you in under two minutes to get you started.

Header Image Source: (Brian Garrity / Unsplash)