Should You Buy a Vacation Home? Here are the Regrets to Avoid

What are the advantages and disadvantages of buying a vacation home? In this episode of Friends Talk Financial Planning, John and Bridget discuss both the math and emotions behind owning a vacation home. Is it a good investment? What is your goal? Don’t miss the opportunity to answer these questions and more so that you can avoid having regrets about your vacation home!

Resources:

- Alliance of Comprehensive Planners: https://www.acplanners.org

- John's firm website: https://www.trinfin.com

- Find us on Facebook: https://www.facebook.com/friendstalkfinancialplanning

Check out the Renting a Vacation Home episode: https://www.youtube.com/watch?v=i3GDZpcxKvA

TRANSCRIPT:

Bridget: You're better off renting the same place every year than owning. Yet people really get a lot of fulfillment from owning. It's more of the emotional side than it is the intellectual, this is going to work out for me side.

John: Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget: And I'm Bridget Sullivan Mermel. I’ve got a fee-only financial planning practice in Chicago, Illinois. Before we start talking about buying a vacation home, please subscribe and give us a like. That helps other people find us. All right, John, I've been talking to people about buying vacation homes, and I'm really happy to be talking to you about this because you're one of the people I know who actually has a vacation home.

You can speak from experience on this. So the first thing I want to talk about is just overall considerations. Is this a good idea? And because I think some people think they should have a vacation home but it's different than what they realize it's going. So the first consideration I'm going to say is how far away is it? What I've heard is that you'll visit it a lot more if it's two hours away or less. What's your experience with that?

John: I have not heard that metric, but coincidentally that is how we decided to buy our place. I can't remember if we used a protractor or not, or if that's even a thing anymore. But right through a circle, it's 90 miles away or something like that, and we said, “Okay, we're not willing to drive more than that.”

In short, I think that makes sense. We've got friends, I’m sure you know people, clients probably, who have places that are four or five hours away and they love it. But if you need to go up there for a weekend when something breaks and need to get there, unless you have a really reliable handy person, it can cause problems. So closer is absolutely better.

Bridget: We'll get to that handyperson a little bit later. Okay, so how far is it away? And then how does it impact your overall financial health? So when I'm looking at it, I think of people as having 1/3 of their investments in real estate, 1/3 in stocks, and 1/3 in bonds like this is just kind of a broad average over the time of your life.

So when I'm looking at a vacation home, that's fitting into that real estate thing, so that generally means that people’s principal residence is less of a focus for them than their vacation home. It's not in addition; you don't have more space for real estate just because you're buying a vacation home.

John: Yeah, we don't really focus on the overall net worth necessarily. I'll just say that you need to be able to afford it. Again, your mileage may vary. It depends on your personality and circumstances, but a vacation home is usually after all of the other things are taken care of. We've got, of course, our short-term liquidity, we've got retirements locked in, our kids’ education. And now we've got a position where we can do this. If we look at it more from that perspective, have you achieved the other goals that are higher on the hierarchy for you personally? Then you can take a look at this.

Bridget: Okay, that makes sense. The next thing to consider: what is your measure of success for  it? Because you're spending a lot of money on it pretty much all the time. And so, how do you think about the outflow, how much you're actually spending it on it and how much you're using it and try to figure out if it's worth it? Or do you just not even think of it that way?

John: I've not thought about that particular question before, and I think it's the latter and not the former. So if you look at it by hours used or days or what you could do, that’s not the metric that's really most useful. And what popped into my head, Bridget, was a person that I know who’s a golf pro. And I was talking to him about whether it makes sense to join a country club versus go to the local municipal club, and of course a higher price difference.

And I remember him saying to me, if you do the math on how many rounds you play or what you do, that's not the right metric. It's more a matter of asking do you like that other environment? Does it feel good? Those are not his words exactly, but the meaning is the same. The math doesn't work out.

And I think it's similar with a vacation home. It’s not as much a math equation once you can afford it. Once you say, “Hey, we've got a lot of things taken care of; we could do this,” then it becomes less about the math and more about some of the other things you're talking about. How much do you use it and what are you looking for? What's your goal?

Bridget: Right. Yes. Because I think that if you just do the math, you're better off renting the same place every year than if you own it. Yet people really get a lot of fulfillment out of owning. It’s the softer side. It's more of the emotional side than it is the intellectual side, this is going to work out for me side.

John: And I'll just speak to my personal experience with that. And you'd mentioned something like you're better off renting the same place. I think unequivocally, that is factually true. In general, that’s a better way to do things. And that's coming from somebody who owns a vacation house on a lake.

The potential problem with that is what if you can't rent that place? And that's what happened to us. We had been renting the place that we now own and the owner decided to sell. All right, what if they decide to sell or they decide to stop renting?

Bridget: Right.

John: That's the place that you want, and now you can't have that place. That's one of the flies in that ointment. And that was one of our big decision factors. That place had a number of features that really made sense for us, and if we couldn’t get that place in that spot, that would be a problem. I'd be very happy to be renting that same place right now, but that wasn't an option.

'

Bridget: Yeah. And I think my focus here is how people think about it, like. I think that people have a lot of fantasies about vacation homes. And my question is, how do the fantasy and the reality square up?

John: I can speak from personal experience on this. When we were renting the place that we now own (and we rented other places as well), when we went on our vacation week, that was our vacation week. That was the getaway. Now when we go on up to the cabin, it's not necessarily for very long. We don't have a week blocked off. It's close enough that we can get up and back in a day. So there're more overnight stays as opposed to weeklong stays.

And there are some pros to that. One advantage is that we can go up on a frequent basis should we choose to do that. But there’re also some negatives. Now it doesn't have that that aura that it did before where it was that one special week where we were just at the lake. That’s not right or wrong. But when you're taking a week vacation someplace, wherever it is, whether it's on a lake or some other place, you're not thinking about anything other than enjoying that time.

And then it becomes mixed. It's almost that sort of feeling, to return to my golf pro buddy, where if you're a big golfer and then it becomes your job, do you enjoy it as much when it's work you used to when it was play? Maybe yes, maybe no. But it's not just panacea that your job is your vocation. It could be, but it also could be that you can’t wait to get away from that sort of a feeling. The same thing can apply, I think, to owning a vacation home.

Bridget: And I think also another consideration that people might want to think about is get what's the ultimate disposition of this? Because it can set up issues with their kids if it's a well-loved vacation home. The kids aren't doing as much work typically as the parents are doing on a vacation home, so they might like it more than the parents do. Yet when the parents die, then what? And so that's ends up being really weird and tricky because often there’re different objectives, different income levels of the kids or the descendants and it ends up being more work than vacation.

John: Right. I've got a friend who’s in a very similar situation to what you described. Both of the kids who are our age like going up to the place. But it was always one family who felt like they did all the work, and the other family just didn't do anything. And you go, “Well, geez, when Cindy's up here, she and her husband never do anything. And we come up, we got to do all the work, and they get to enjoy it all.”

And that was while mom and dad were still alive. How do you use it? Who gets to use it? There are some complications. The other thing I'll just point out is that from an investment standpoint, sometimes we'll hear people say, “Boy, it's a good investment,” when we’re talking lake property, which we often do here in Wisconsin anyway. Number one, I've seen places that 10 years after they were purchased, sold for what they were originally purchased for or less. It’s not often.

Usually it's a good deal, but it's not a slam dunk for various reasons. And the other thing is, whatever you pay for a property, unless you sell it, it could go up a ton in value, but you're still out what you paid for it. I've got a friend who paid $300,000 for his place. Now, the neighbor house just sold for twice that in a short period of time. Golly, isn't that wonderful? Your net worth went up. That's awesome. Except for that he's still out the $300,000 he spent. And if his kids love the property, they're going to keep it. And you go, listen, is it an investment?

Yeah, it’s on the balance sheet. It's not like the money is out the door, like $300,000 spent on a birthday party, and then it's gone. There's something there, but yet you're still out that money unless you sell the thing. But if you love the place, you probably won’t do that. In 10 years, you can cash out, but if you don't want to, you still got to think about how that affects your cash flow and those sorts of things, like we talked about earlier.

Bridget: Right. So it's a money outflow with no cash inflow. Although you could rent it out, and we have a whole other on those prospects. So, I think with that, it's a great time to wrap it up. I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.

John: And I'm John Scherer, I've got a fee-only financial planning practice in Middleton, Wisconsin. If you like what you hear on our show, Bridget and I are both taking on new clients, and we'd love to hear from you. But we're also both members of the Alliance of Comprehensive Planners, a national group of fee-only tax focused advisors who think like we do. So if you want to find an advisor in your area, you can check out acplanners.org

Bridget: And don't forget to subscribe.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.