Every year, I meet more and more people that have bought vacation property or are thinking about buying vacation property. The question I get is whether this is a good idea or not.
It’s in the numbers
I’ve always said there are two influences to every decision we make – the logical influence and the emotional influence. From a logical perspective, the answer often lies in the number so let’s look at an example that is near and dear to my brain.
This summer, we took a family vacation to the Okanagan where we spent a week in Kelowna and a week in Vernon. We loved both places but we really fell in love with the resort we stayed at in Vernon called the Outback Resort. In fact we loved it so much we fell in love with the idea of spending longer summer vacations there and if that was the case, we should explore the option to buy a place there. We called up a realtor and looked at a 2 bedroom option and a 3 bedroom option. Let’s look at the math.
The math of the BUY
The 2 bedroom unit was selling for $300,000. If I put $50,000 down, the $250,000 mortgage would cost me $1315 per month (roughly $9300 of that payment would be interest and the rest would go towards principle).
Along with the mortgage payments is the strata fee of $350 per month and the property taxes at $2500 per year.
Total annual cost to purchase the condo is $16,000 per year. I can take some pretty nice holidays for $16,000 per year not including the $50,000 down payment.
Rent or buy?
Next, let’s look at renting. If I was to rent this unit for a vacation, it would rent for $339 per night. That means I could rent that place for 47 nights a year or 7 weeks to reach a total cost of $16,000.
With four young boys, there is no way I am going to be able to spend 7 weeks of every year in Vernon.
In my opinion, the math is pretty clear . . . rent the place for a week or two and I will be out of pocket a lot less than buying.
But what about an investment?
So my wife says to me “Jim, you are the investment guy. Isn’t investing in property a good idea?”
My response was “Yes but only if the numbers justify a return”.
If I look at the annual cost of $16,000 on a $300,000 property, I need that property to increase by 5.3% per year just to recover my costs. I don’t know if Vernon vacation real estate will increase by 5.3% per year but I know there are a lot of properties for sale and the prices have come down (not up) in the past few years. I also know that prices in Vernon are very much dependent on buyers from Alberta and Vancouver.
I know lots of people who bought property in the US and have not experience positive growth. I’m sure there are others who have made money as well.
Flip a coin on the investment argument. I say 50% chance it will beat 5.3% growth and 50% it won’t. What do you think?
What about renting it out on the days we are not there?
Here’s another argument from my lovely wife who really wants this place in Vernon. Here’s the problem. Let’s say we want the place for 2 or 3 weeks of every year. We are going to pick the summer months when the kids are on summer holidays, which is peak rental season. To recoup our $16,000 annual cost, we will need to rent the place for 60 to 80 nights in the year. Now this sounds like a part time job to me for less money than my real job makes me.
My five cents
I’m not trying to discourage anyone from buying vacation property but I do think it requires careful thought and analysis of the numbers. The math on the $400,000 3 bedroom option is worse and every property has it’s own set of numbers. Run the math, think logically and put emotions aside when making this big decision.
This is a simplistic analysis but a real one. Any thoughts on what I have missed? Do you have an experience (positive or negative) you want to share with others about buying vacation property?
Nice article Jim! Although I would never buy a vacation property (I don’t want to be tied to the same holiday every year), I was thinking that for us to fly the extended family down to Florida and do a one-week cruise it probably cost close to $16K. In that context, having access to a 2-bedroom unit for a whole year doesn’t sound so bad!
Thanks Rufus. I have enjoyed traveling to different places and hope to get back to that one day but with 4 kids it gets really expensive to do (as you know with your cruise) that which is why a vacation home seems appealing.
We have heard horror stories of trying to sell property in Florida (if it was passed down). The hassle for the taxes and extra paperwork doesn’t seem worth it to me (too much risk).
You bring up a great point that buying property in other provinces/states/countries can create more complexity which weighs into the decision. Thanks Steve.
I agree with your assessment- the only way I would invest in a vacation property is if I could rent it out and cover all of my expenses for the year on that income. And my time investment would have to be minimal.
Otherwise, it would likely be more beneficial to invest in standard rental properties close to home. Either that, or start investing in Motels/Hotels in places my family likes to vacation.
Also, like Rufus, I don’t want to be limited to one vacation option, either.
I’ve had some people talk about justification through lifestyle arguments but I think the math has to make sense.
Thanks for your comment Dave
Just sold a Florida Property took less than a week.
We still own another Florida property, we spend six months there, cost wise it is a wash versus renting, but when you own the place, you know what you are getting.
We sold our Canadian Home, down sized, put mega bucks in bank, when the kids are gone and you are only here for six months, you don’t need as much bricks and sticks.
Thanks HHH
Aside from the math, I prefer to own too. I’ll keep my eyes open and find other options.
Jim
This is a really great breakdown! Personally, I only think it would be worth the money and time if the property were in a place I’d like to retire to. The years I’d live there in retirement would hopefully make the cost worth it (and even more if I owned a home now and sold it at retirement).
Motorhome_ It gives you a chance to spend time in different places and if you find you don’t like the place or the weather turns bad you just move on. Fuel is not as bad as you might think, when you consider you are packing your whole house with you. If you find you can’t or don’t want to travel one year, it just sits in the yard and becomes a spare room with kitchen facilities. When we find the ideal place to spend the winters we might sell it and drive or fly to the destination, but for now we get to plan all summer for the winter trip, choosing routes we haven’t traveled before. This may not be for everyone but there are tens of thousands traveling to Arizona to spend the winter so it can’t be all that bad.
I would love to own a vacation property in the U.S. Virgin Islands but the cost of housing there is expensive, and I’d have to find a property management company to take care of the property while I’m not there to keep the maintenance up.
My personal belief is that owning a vacation property is too risky for the average home buyers. It’s much better if you can share the risk with another person/couple or even more than one other family. The fluctuations are just too wild in that type of market. Always a great idea to have a good property management company as well if you are thinking about renting it out while you are not there.
There are both advantage and disadvantage of owning. on one hand where there is freedom and control because of which you can come and go as you please with no limitations and leave belongings behind such as clothing and a car at the same time pride of your ownership, on the contrary problems like Having to care and maintain the property from a long distance and being caught in a buyer’s market when you want or need to sell are involved..So you see, both pros and cons are there.
Jennifer Goldblum
Hi Jim, Thanks for a great article once again. I travel to Arizona, 2 to 3 weeks per year. We have crunched the own vs. rent many times. You are so right on with the numbers. Most people buy on pure emotion.