3 Options for Investing in a Vacation Home

For those who tend to enjoy vacationing in the same location, the decision of where to go to relax and unwind might be easy—and if you invest in a vacation home, even easier.

For those considering making that move, every option with regard to investing in a vacation home presents its own upsides and downsides, making each individual’s choice different.

Take a few minutes to ponder the following to see what direction might make sense for you:

• Timeshares can be cheaper and require less maintenance than a second home while offering the flexibility to travel to various locations. They can also be illiquid and typically have steep recurring fees. While timeshares typically fit the lifestyle for the younger and more flexible, consider what happens when lifestyles change. Older people can become challenged with closing out or selling these investment vehicles. Their children do not want the burden of paying maintenance fees and property taxes, and charities will not accept them as donations, leaving few viable options to get rid of the investment.
• Buying a second home can provide for a lovely vacation spot in the mountains or near the ocean. This option allows for a getaway with the convenience of having all of your "stuff" while potentially taking advantage of lower real estate costs and historically low mortgage rates. But what about the transaction fees and the potential headaches associated with maintenance/repair work that will be your responsibility? Many people will purchase the second home with the idea of renting it when they are not using it (Vacation Rental by Owner - VRBO), or use a management company to find renters and manage the property. This can help offset the monthly expenditures, but be careful as you might be dedicating more money, time and energy than you expected for the venture. Also, will you able to cover the monthly outflows if rentals are not as good as you hoped, and do you have the liquidity to cover mortgage payments when the property is vacant?
• Buying a vacation house with a bunch of friends, family or investors splits these options down the middle. This option, called a fractional, reduces the upfront cost, keeps the convenience and takes away the need to rent the property in the offseason. You can get potential tax deductions and a steady place that you can consider "home." With this option, just be sure to go into the arrangement with the proper documents that lay out "household rules" and what happens if someone wants or needs to exit the venture.

So How Do You Choose the Option That's Right for You?

After the market downturn of 2008, many began moving away from the idea of buying a second home and the complexities of ownership. They instead transitioned toward simply renting a place as-needed. Plain and simple renting, whether through VRBOs or on-the-market apartments, enables one to take advantage of visiting different cities and scenes without the responsibilities of property ownership.

Renting or "paying as you go" can help secure a posh pad in the middle of town or a great house right on the water for less than what you might have otherwise purchased outside of town, while giving you fewer headaches and less responsibility.

Second homes or additional properties can be great, but conversations about them are best had once you properly secure your financial future. A CFP® professional can help you take full advantage of tax-deferred or tax-preferred investment options, along with ensuring you have done everything necessary to properly protect your family before seriously considering a purchase of additional property.

Makes financial sense to me … how about you?