When is the right time to buy a vacation home?

Maybe you’re into skiing. Maybe you’re a spelunker. Maybe beaches are your thing. But regardless of what you enjoy in your free time, maybe the one question that’s been on your mind the last couple years is whether or not it’s time to buy a vacation home so you can be closer to the things you love to do when you’re not working. And every time you start to get excited about pulling the trigger and going for it, the questions start again.

How much are you going to use it?

How much house can you afford?

How much maintenance do you have to do?

Should you try to rent it out when you’re not using it?

It’s normal to ask yourself those questions since you’ll need to answer them in order to decide whether to buy a vacation home today, tomorrow, or at any time in the future. So let’s walk through some of them.

How much are you going to use it?

This is the one question that you need to answer first before you go any further. I love skiing, so let’s use this as an example. In the last two years, I got married and bought a house, so my budget for skiing was somewhere around $0. Because of this dilemma, I was only able to make it to the slopes a couple days each year. If what you’re passionate about in your free time is something that happens inconsistently from year-to-year and doesn’t typically account for at least 10% of your time over the course of the year, you’re probably better off staying away from owning a second home that’s meant to get you closer to that fun but ever elusive winter sport. Let’s say I bought a ski home for $200,000 a couple years back. With a mortgage, home upkeep expenses, and other items like taxes and insurance, I could very easily be stuck paying $20,000 a year for this property. So if I get four days of use over that two-year period, I’ve paid $40,000 for the privilege of those days, which means I’m spending $10,000 per day to ski before I even get on the mountain. That doesn’t make a ton of sense. I could stay in some really, really nice hotel rooms for $10,000 per night if I really wanted to, and I wouldn’t have had to worry about all the upkeep and hassle associated with owning a house. This is the precise reason why I didn’t even think about buying a ski house. I knew I wouldn’t use it enough. So the first question you need to address before you seriously think about buying a second property is whether or not you are realistically going to use it as much as you think you will.

How much house can you afford?

Much like buying a primary residence, buying a second home has questions of affordability once you get past the issue of usage. Banks will typically allow for a debt-to-income ratio of 43% in most cases, but going that high can put a significant squeeze on your finances, especially if something unexpected happens. Imagine that you and your spouse are both making $50,000 per year, and let’s say that you’ve decided to max out that debt-to-income ratio. We’re talking about 43% of your gross income, so you’re spending $43,000 per year on servicing your debt. Now imagine the economy tanks and one of you loses a job. Your debt service costs are now more than you take home after taxes. The math doesn’t work.

So while banks will allow you to borrow up to that 43% debt-to-income ratio maximum in a lot of cases, you’ll want to try to keep that number under 25% in order to give yourself a cushion in the event of unexpected bad financial news (especially if you’re talking about buying a second home). Now, there are ways that you can try to work the numbers into this range. You can refinance your current mortgage to a lower payment if possible. You can pay off car loans or credit card debt before buying a property. You can look at adjustable-rate mortgages to try to keep your payment lower. At the end of the day, affordability has to be part of the equation here. Otherwise, you’re setting yourself up for some tough decisions if your budget ever changes for the worse.

How much maintenance do you have to do?

This one really should be read as, “To condo, or not to condo?” If you own a home outright, you’re handling all the maintenance duties yourself. If you live in Georgia and want a ski home in Denver, that could be a tough putt. You might have to hire someone local to handle the maintenance or fly out yourself to handle issues, which adds cost, or you might just cross your fingers and hope you don’t have to do much, which tends to add cost in the long run because you aren’t keeping up with the maintenance you should be doing. If your second property is within driving distance, this becomes a whole lot easier. However, you still have to decide if you want to handle maintaining two properties on your own. Do they both have lawns to mow? Who is going to clean the gutters each fall? Do you have to deal with hurricanes or coordinating snowplows? Think about the realistic maintenance costs and time commitment.

And if you decide you don’t want to handle that yourself, look into condos that may handle some or all of these issues for you. Yes, you’re going to pay for this in your monthly condo fee, and you always need to be on the lookout for assessments from the condo association for big items they might not have budgeted for. But if your heart is set on having a second home and you know you’re going to use it (and you also know you have the budget for it), looking into condos could make sense if you just want someone else to handle all of those maintenance issues so you can just scuba dive or ski whenever you want to.

Should you try to rent it out while you’re not using it?

Ah, yes. Passive income. Talk to anyone who has ever been a landlord and they’ll tell you there is nothing passive about the income they earn. Whether dealing with short-term tenants through a service like Airbnb or long-term tenants that rent for months at a time, there are always things you have to deal with as a landlord. It’s one thing to deal with these issues when you live across town. It’s another to deal with them when you live in another part of the state or across the country. So before you build in some rental income to offset some of the cost of owning the property, make sure you consider whether or not you want to be a landlord. You’ll also want to figure out whether you realistically can be a landlord based on the location of the property. You may find that you need to hire a management company to take care of issues at the property, and that adds additional cost as well. And if you’ve answered the previous question by saying you want to own a condo, make sure you check the condo regulations to confirm whether or not you are able to sublet the unit on either a short-term or long-term basis.

Conclusions

I get why people want to own second homes. They can be fun, create great family memories, and give you a consistent place to return to on a regular basis.

Hotels and rentals provide this as well.

When you decide to buy a second home, you are buying everything that comes with home ownership, only you are buying it farther away and with less accessibility than you’re used to with your primary residence. I say this not to dissuade you from buying a vacation home if you want to own one, but to ensure that you go in with your eyes open and understand the costs, time commitment, and potential risk associated with owning a second property.