How We Are Buying A Vacation Home Without Spending a Fortune

Let me be clear from the start – I’m not advocating buying a vacation home. A vacation home purchase was our last glorious act of lifestyle inflation. Perhaps you’ve made a similar mistake or maybe you just really want your own vacation place. I’ll share how we own a vacation home without spending a fortune.

I wrote before how it was my dream to own a vacation home. Now that I’m more financially aware and have actually owned one for several years I can confidently declare that a vacation home is not an investment. Do not buy a vacation home for financial reasons. The math rarely makes sense.

(Note: This is very different than choosing to purchase and operate a short-term rental as an investment decision.)

Yet, life isn’t all about math (says the spreadsheet nerd….) Your spending should align with your values and sometimes a suboptimal financial decision can be made to work for you. Here’s how we’ve made buying a vacation home work for us.

Purchase With Partner(s)

We purchased with partners for a simple reason – though we’d grown our income, we were still public educators. I’ve shared before how even though we weren’t smart with money, we were never totally reckless. In this case, that meant that rather than purchasing an expensive vacation home in a prime location, we only purchased half an expensive vacation home in a prime location – ha!

Of course, you don’t need to have a partner if you can make the numbers work on your own. You’ll see that other than the upfront cost, we could own our vacation home for roughly the same ongoing cost without the partner. But, the upfront cost would have been twice as much and we’d have greater risk.

When buying any expensive asset, a smart partnership can help make things work.

Shared Cost

The obvious benefit is sharing costs. We each contributed 10% of the total purchase price. We split the ongoing costs and any necessary upgrades 50/50. 

If you are able to purchase with a partner, or partners, then you can either buy a nicer vacation home or spend less on one that works for you. I have a colleague that splits a vacation house 4-ways. She is able to enjoy a vacation home monthly for very little cost without renting.

Shared Risk

In addition to sharing up front and regular ongoing costs, you are also distributing risk. If there is a major repair needed or unforeseen expense the damage is spread across multiple owners instead of just you.

We’re fortunate that we’ve not had major damage or storms in the years we’ve owned our vacation home. However, after initial purchase we were hit with two major unforseen costs. 

We’d reviewed costs before purchasing the home and built our plans around those estimated costs. Unfortunately, when the house transferred to new owners it triggered both a flood insurance increase (5x) and a property tax increase (3x). (This is a good example of how unprepared we were to actually make a sound financial decision…)

The increases amounted to almost $5000 more per year than we’d anticipated. This additional cost was spread across both partners. It was easier to absorb an unexpected $2500.

As you’ll see in a later section, we also rent out our vacation home. The risk of rental income decreasing significantly or drying up is shared across the partnership rather than by us alone.

Of course, there is an inherent risk in partnership, too. The next two items are my advice on how to manage that.

Select the Right Partner(s)

It’s always risky to pool any portion of your finances with anyone. I’m very careful with friends and family, and refuse to do it with work colleagues. I certainly wouldn’t purchase a vacation home I intend to use with a stranger. That made finding a partner very difficult.

I advise choosing someone who has demonstrated trustworthiness over time, you know is financially stable, and has a similar vision of the future.

In our case, a former work colleague that I’d remained in regular touch with over the years met these criteria. We’d exchanged money through our mutual hobby of sports gambling. (Nothing significant) We were friends and I knew him to be trustworthy, both at work and in life. He and his wife both have stable professional jobs. 

We met and talked the idea through. We all had a similar concept of what we wanted to own, and were flexible on many of the details. 

It appeared to be a good match. The relationship was also such that if things went badly and we had a messy exit it wouldn’t leave a massive hole in our lives. (aka family)

Written Agreement

No matter who you choose as a partner (or partners) make sure you put your agreement in writing. Yes – even with family!

If you have no idea where to start, a lawyer can help you with this. We’d both been involved in enough contracts that we drafted up our agreement as a group and then submitted it to a lawyer for review and clean-up. This cost less.

Some of the things we specified in our initial agreement:

• Term of ownership (We agreed to hold for at least five years)
• Financial terms for exiting the agreement (Valuation, disputes, etc.)
• Survivorship / Divorce
• Usage terms / calendar
• Decision-making process for changes to property
• Rights to grant usage to friends and family
• Annual review / adjustment of agreement
• Rental terms (added later)

Though we believed, and still believe, that we’re on the same page and could work out everything the agreement provides us a framework and some recourse should things go sideways. If it got ugly, lawyers would still be involved but they’d have something to work with.

Do not make a major financial purchase without clear written agreements. Ever.

Choose the Right Home

Once we had built an agreement and agreed on financial inputs and goals – the fun started. We started our search. The right place popped up more quickly than expected. We were glad to have done the front end work so we could move on it. 

After a successful search, and owning and enjoying the property for several years, I believe these are the most important considerations:

Meets Your Needs

If you are buying a vacation home for personal use, your primary consideration should be the needs of your family. Be as flexible as possible on these needs, but also be clear about what is important to you.

A vacation home for personal use is already not an investment. If you purchase one that you don’t personally enjoy using then you’ve simply doubled down on a suboptimal decision!

Driving Distance / Ability to Reach for Short Stays

Owning a vacation home makes the most sense if you can use it regularly. Ideally, you should be able to reach it for weekend use. If you are only going a few times a year and it requires significant travel you are almost certainly better off renting.

Choose a location that is accessible to you. In our case, we were comfortable driving up to 4 hours so that defined our search area. You may have a different driving tolerance or be willing to factor in short flights.

Either way – make sure your vacation home is accessible for regular use. Ours ended up being less than 2 hours away.

Consider Rental Potential

We knew renting to defray costs might be an option. So, although it wasn’t our primary consideration we did view our purchase through rental possibility. Fortunately, our personal wants aligned well with rental potential with one notable exception. Here is what I’d look for now:

Proximity to a Metro Area

Just like driving proximity is important for you, your rental will almost certainly be busier if it can draw from a large number of locals as well as distance travelers. Fortunately, we live near a major metro so this fit with our own driving criteria.

A Desirable Vacation Destination

This sounds obvious – you are buying a vacation home after all! Yet, sometimes family traditions make a destination desirable but it isn’t actually that popular with others. If that’s the case, you can still buy and know that your rental income will be limited.

We chose a common regional vacation destination.

Location Location Location

Here you have a choice – you can spend more on the purchase for a prime location, or spend significantly less to get less rental usage and lower rental rates. If you do your analysis, you can find the point that works best for you.

We didn’t do an analysis. (Remember, we weren’t financially aware and in the middle of lifestyle inflation.) Fortunately, our personal desires combined with our financial conservatism helped us hit a nice balance. We purchased a place in a cheaper area but with beautiful views and direct access to water.

During the high season, it is booked constantly for a rate higher than we’d have estimated. In this case, a prime location increased our personal enjoyment and our rental income.

Find the balance that works for you. 

Year-Round Potential

This is the one we missed. While we enjoy the location year-round, the actual tourist season is about 8 months. Had we chosen a year-round option with similar numbers, we’d actually be making a profit even at our current usage rate.

Look for a location that has both summer and winter activities. You’ll dramatically increase your earning potential.

Renting the Property to Cover Expenses (and maybe make a profit!)

We’d owned the property for a few months when I had my financial awakening. From that point forward, we got serious about operating it as a rental in addition to personal use. 

It was a great choice. As we use it now, it is almost cost neutral. If we chose to give up more personal use during the high season, the income would exceed expenditures.

Property Management

If you can operate the rental yourself, you will maximize income potential. This wasn’t an option for four busy professionals living several hours away. 

We looked at property management options. They range from 20% – 35%+ and cover a variety of different services. Some will operate the property while you handle all of the marketing and bookings. Others will market but you schedule cleanings. The big players will offer to take care of everything.

In the end, we chose to go with Vacasa even though they were the most expensive (35%) for several reasons:

1. Full service – We do virtually nothing related to the rental portion of the property. We approve major repairs. Vacasa handles everything else and will even make changes for personal use when requested. 
2. Maximize income – Vacasa promises to increase your rental income if you are already using another manager. We didn’t have this experience, but the home we purchased was operated as an independent rental before.  We made more in the first year with Vacasa than the previous owners ever had, even net expenses.
3. References – I knew two people who used Vacasa and were happy with their service.
4. Limited options – In all honesty, Vacasa was the major player in the area we own. There were a few smaller operations, but we didn’t have confidence in them.

Overall, we are pleased with Vacasa. On a rating scale, I’d probably offer them an 8/10. Our only complaints are related to frequent employee turnover. We’ve had a few reporting issues, which means I spend more time than I’d like reviewing documents I should trust. We also have had issues with cleaners. To Vacasa’s credit, they’ve been responsive and issued refunds or credits in every case.

Choose a property manager that works for you and supports the level of involvement you desire. 

Rentals Days / Personal Use

In our partnership, we have the following agreements to let each party choose their own balance of income vs. personal use:

1. We each select one week a month that “belongs” to us. So, each party has 12 weeks a year that they fully control.
2. The party can choose to use or rent that week (or any portion of) and receive the full rental income share. 
3. The other 28 weeks are automatically set for rent and all income/expense is shared.

This means that there is always some amount of shared income coming in. If a party needs more income or can’t use the week they’ve selected, it is released for rent. 

We have a four month period where every open day will be booked and rented. A second four months where all weekends, and some weekdays will be booked. In the off-season, about one weekend a month will be rented. During this time, if a weekend isn’t booked we allow friends and family to use. 

This works for us, and provides enough income and use that we feel we are getting personal value from the vacation home while still meeting financial goals.

It’s a reasonable balance of the vacation home dream with financial prudence.

Tax Awareness

Vacation rentals have a unique set of tax rules. I have learned the following:

• Track all personal use days vs. rental days (Vacasa does this for you)
• You can categorize some days as maintenance days if you are working on maintaining or improving the property
• Maximize the days the house is up for rent – if you aren’t going to use it, place it up for rent. 
• Deductions are prorated based on personal/rental usage (see the previous two bullets.)
• Track all expenses, including:
  • Management
  • Maintenance
  • Operation costs
  • Mortgage interest
  • Insurance
• It is useful to consult a tax professional

Our joint rental income was over $36,000 last year but we did not pay taxes on the income. Of course, that also means we are not operating at a profit.

Insurance

Insurance is not something you want to skimp on if you intend to rent your vacation home.

We carry three types of insurance for our vacation rental. 

• Homeowners insurance with rental coverage – Be up-front with your insurance company if you intend to rent the home. Get the right coverage. It’s a bit more, but not prohibitive. 
• Flood insurance – required by mortgage holder due to being in a flood zone. To our surprise, our flood insurance ended up being over $3500/year. Fortunately, we are in the midst of a reclassification and it looks like this will drop to ~$600 a year going forward.
• Umbrella liability policy – Additional coverage should a renter choose to sue you. This is inexpensive and totally worth the peace of mind.

Real Numbers – Our Example

Here are our real numbers from last year – annual numbers represent 50% of totals. 

In 2018, our expenses exceeded income by $3122. We could have released one week of high time for rental and push that below $1000. We used (and enjoyed!) the home for 47 total days, representing a daily use cost of $66.

You’ll also see that the home has appreciated significantly in the 3 years we’ve owned it. It’s something to track, but I don’t consider property appreciation as real gains until they’re realized and transaction costs have been removed. Just a data point for now.

Projections for this year show that our expenditure for owning the vacation home will likely be less than $500. This is due to a decrease in the flood insurance expense, a utilities change we’ve made, and a (very) slight increase in rent. 

In both years, our partners released their high season rental time and made slightly more in income than expenses. We’ve chosen to (slightly) prioritize use.

Cautions When Buying a Vacation Home

That is how we own a vacation home without spending a fortune! By making intentional choices, we are able to use and love our vacation home without it impacting our financial journey. 

It may even save us as we travel there more often, and for less, than we would if we didn’t have the home. 

Yet, it’s important to know there are trade-offs. And, there are factors that may not be sustainable. So, a few cautions for you:

Operating a Rental is “Not Quite The Same” as Owning

Using your home as a rental changes how you perceive it. While it has been very well-maintained by our property managers (we are honestly surprised how good it looks after years of heavy use!) it does not feel the same.

Our co-owners have remarked on this as well. When you arrive and furniture is moved around, dishes are placed in different cupboards, and you are more aware of wear and tear it feels like a rental. We also keep a limited amount of personal use items locked in a cabinet rather than having it set up ideally for our use. 

For us, the financial benefit is worth it, but it does change the “dream” aspect of owning a vacation home.

Vacation Rental Market Downturn

The financials work because we are able to use it as a vacation rental. The explosion of this market coincides with a time of economic expansion and full-employment. 

I suspect that the vacation rental market is very susceptible to a downturn. I believe in a recession that we’ll see both lower rates and less usage. If necessary, we could partially balance this out by releasing more personal use days to rent. 

I do not assume that the rental will always cover expenses. To prepare ourselves for this, we budget as if we are covering the full expenses, and then use any income for additional investment goals. 

I caution against a vacation home purchase that is heavily dependent on rental income. It’s a nice balance, but a risky primary strategy.

Opportunity Cost

We have about $40,000 locked up in the initial purchase of the home. The regular costs are covered and we are purchasing the home for almost nothing now. The home has appreciated by 20% since we purchased it. 

It has not been a financial disaster now that we’ve worked to limit the ongoing costs. However, that original $40,000 would likely have performed better somewhere else and absolutely been more accessible. 

Conclusion – Buying a Vacation Home

We bought a vacation home before we became financially aware and built our financial independence plan. It was part of our lifestyle inflation and not a well-reasoned financial choice.

Now, it’s clear to me that a vacation home is not an investment. We would almost certainly be better off financially if we just rented when we traveled.

Yet, the purchase has been worth it. We enjoy going and find peace from our hectic lives when there. In fact, those trips have become a major part of our financial journey. We go on long walks as part of our regular financial planning check-in.

Would we purchase it again now? Perhaps not, but we’ve made it work for us!

In short – don’t buy a vacation home for financial purpose. If owning a vacation home improves your life, or fits with your priorities, you can make it work without spending a fortune. Here’s what has worked for us:

• Buying in Partnership
  • Select Partners Carefully
  • Create a Written Agreement
• Choose The Right Home
  • Meet Your Personal Needs
  • Buy Within Easy Travel Distance
  • Consider Rental Potential
    • Popular Vacation Destination
    • Proximity to Potential Renters
    • Location – Balance cost / desirability
• Operate As a Short Term Rental
  • Choose Property Management
  • Insure Properly
  • Track Everything
  • Balance Rental /Personal Use for your Financial Goals