How much of your net worth should you spend on a vacation home?

Before buying a vacation home, first determine if you can afford it or not. Even if you can rent it or deduct part of the property costs from your taxes, a vacation home is mostly a luxury, not an investment.

How much of your net worth should you spend on a vacation home?

Before buying a vacation home, first determine if you can afford it or not. Even if you can rent it or deduct part of the property costs from your taxes, a vacation home is mostly a luxury, not an investment. You should buy one to add value to your life instead of your net worth. Buyers often underestimate the cost of maintaining a home, especially when it comes to roof work, exterior paint, and other annoying long-term projects that we all like to avoid.

Hehman says a good rule of thumb is to set aside about 2 percent of the home's value each year for maintenance. For professionally managed rental properties, he says, buyers should expect the management company to pocket between 20 and 50 percent of rental income. If you have equity accumulated in your primary residence, you may also be able to borrow against the value of your home to maximize the borrowing power of your vacation home. Whether you maintain the house yourself or hire someone else to do it, you will have to spend money repairing and maintaining the house.

On the bright side, renting your vacation home to others when you're not using it can help defray the costs associated with owning the home and generating income for you. The tax treatment of your vacation home now depends on how much time is allocated to personal use (as opposed to rental use). For example, if you hire an experienced real estate rental agent who is familiar with rental homes and the rental market in which your vacation home is located, you will have to pay a fee. A recent Wall Street Journal article indicated that a variety of developers of expensive vacation homes are strategically responding to the crisis in their market.

The income tax treatment of your vacation home depends on how many days you rent it to other people and other factors. Kelly explains that for investors who currently lack the means to acquire an idyllic leisure retreat, the path to owning a vacation home may begin with a more affordable, utilitarian rental property close to home. Personal tastes and the reason you buy a vacation home will determine the type of home you will buy and its location. Given the facts, as I see them, developers should not expect significant demand from the affluent population for their shrinking vacation homes.

To insure the vacation home itself and get additional personal property coverage, consider purchasing a housing and fire policy. Several of the vacation home developments mentioned in The Wall Street Journal were offshore. While vacation homes can gain value over time, the NAR reports that short-term speculation in residential real estate is a risky business, and most buyers decide on a property they will enjoy for many years to come.

Shawna Fluellen
Shawna Fluellen

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