If you spent this last holiday week in the mountains, you may have consumed a good amount of your vacation time in traffic. I imagine that the seed of many vacation homes were planted near Georgetown while crawling down I-70 – suffering through a frustrating coda to a wonderful weekend.
The vacation home logic generally goes like this: Traffic is maddening so we should consider purchasing a place in the mountains. We can drive up Friday afternoons and return Monday mornings, thus guaranteeing smooth driving. Instead of paying high hotel or rented condo costs, we will enjoy the benefits of second home ownership including the ability to deduct mortgage interest and property tax. Plus we will be able to rent our place out while we’re not using it, which will cover our mortgage payments.
It’s an alluring proposition to be sure. But is it really all that it seems? Consider these points before plunging into vacation home ownership.
The closer it is, the more it makes sense. We’re lucky on the Front Range to have wonderful vacation destinations within an hour or two. A corollary of vacation home ownership is that the closer your second home, the more often you use it. One rule of thumb is that if your getaway is twice as close to where you live, you will use it twice as much.
Don’t bank on appreciation. When running financial projections for your second home, avoid lofty assumptions for it to appreciate in value. It can be a challenge to do this as Summit County property prices have been soaring over the last few years. But you can make the feeblest of investment propositions look good with a 7 percent appreciation baked in your model, and can be motivated to spend more than you can afford.
Begin with the end in mind. Before driving around with mountain real estate agents, think about your potential holding period. Is this something you would like to do for the next five years or a multi-decade proposition? If your thought is to own a property for a few years, remember the costs of selling your property. Between brokerage fees, loan costs, and furnishings, you may end up spending 10 percent of the value of your property to sell it. Also consider that mountain properties usually take much longer to sell than primary residences and decline more in value during economic downturns.
Research before depending on Airbnb and VRBO. Many a vacation home investor dream has been kindled by dreams of revenue from short-term vacation rentals. But many investor plans have been undermined by local regulatory changes and HOA limitations. Before you purchase a property, become aware of the local licensing needed for renting out your place by the night. Also talk to the head of the HOA of your target property to determine if there are any existing or pending rules that could impact your future cash flow.
Will you be able to travel somewhere else? A key question is that if you purchase a mountain vacation home, will you feel wasteful if you travel somewhere else on vacation? While many second home owners are happy to vacation there almost exclusively, there are many others who like exploring other areas whether it’s trips abroad or escaping to the beach in the winter. Be careful that your vacation home choice will not work against your overall travel enjoyment.
In spite of these caveats vacation home ownership can be rewarding, but perhaps not in a material sense. In my experience the happiest owners are those who really love going to their second home and enjoying it with friends and family. In fact it may be an enduring gathering place for loved ones long after the kids have left the house. That may be the most worthwhile reason for a second home rather than an investment thesis.