I stayed in a friend’s cabin in the mountains in California a few years back and the views and the silence was incredible. A couple I knew bought this vacation home in order to escape the craziness of Los Angeles on the weekends.
As LA traffic worsened, it became harder and harder for them to commute to their cabin on the weekends. Their beloved cabin started sitting empty more and more. This filled them with guilt, more and more.
My friends decided to sell it but despite a hot real estate market, no buyer was willing to pay what they paid for it. Massive developments nearby had corroded the serenity of that cabin which neighbors tried to fight unsuccessfully in the courts.
We gravitate towards vacation homes because they give us more options. They also fill a romantic void of an escape to tranquility.
Some vie for a vacation home thinking that it might make for a good investment. Others want a place to get away to with their extended family.
A few will buy a vacation home because it sounds cool to be able to say that you have a cabin in the woods.
One kind of vacation home might be the 20 acres in the middle of nowhere, priced at $50k, complete with a massive shed.
It’s cheap enough to buy in cash and would make for a wonderful road trip.
The real work is clearing the dead trees. Controlling the foliage. Keeping roads accessible during the winter and clearing brush during the summer to prevent fires.
My friend’s cabin outside of LA was just such an idyllic, exotic getaway in the mountains. Snowy mountains during the winter and green tree-lined hills during the summer.
It had electricity, sewer, parking spaces, and it was only a few miles away from a convenience store.
Without a working community nearby, however, it was more of a destination and not a place one could live at full-time.
New York Apartment
The more luxurious vacation home is the NY apartment. Substitute SF, LA, or Miami for a similar result. Whether a penthouse or just a box in the middle of the craziness.
This would be the kind of place that’s rented out on AirBnb when it sits empty. The rest of the time it would be the perfect vacation home getaway, only a flight away.
SF, NY, and New Orleans have adopted variances ordinances which curb short-term renting through 3rd websites such as AirBnb and VRBO.
Spanish Countryside Winery
For the international travelers, a stone home out in the countryside of Spain or France might be appealing.
This isn’t a terribly expensive purchase and could potentially get rid of the hassle of renting an apartment or staying in a hotel.
Squatters, unfortunately, are a growing problem in many countries where homes are bought by retirees or wealthy expats.
Laws indirectly protect these squatters which means that the next time you return to your Spanish countryside home, you’ll be greeted by unwanted guests whom you cannot evict.
Illiquidity of Primary Residence
Homes are referred to as illiquid assets because unlike a savings account you cannot make a withdrawal of the equity at will.
The rebuttal is that it’s not hard to sell a home. List it with a realtor, have a few people view it, maybe even get a cash offer, and close in 2 weeks.
Though ETF’s, stocks, or bonds aren’t all that liquid, they are quite a bit more so than real estate.
These don’t require advertising, viewing, mortgage approval, inspection, nor contingencies. Barring economic collapse, there is always a buyer and a seller when equities and bonds are traded on major exchanges.
Case of Liquidity
Liquidity can be blown out of proportion, too. How much liquidity does a portfolio need? It’s good to have cash, bonds, and some index funds. Beyond that one needs real estate, REITs, private investments, and other forms of diversification.
Real estate can be a good investment but it has to be just that, an investment. A home that you’re using as a primary residence or as a vacation home just isn’t an investment.
Mixing and investment and a private asset makes for an inefficient and dangerous investment. Just like insurance products and investing don’t mix in the case of whole life insurance, the same holds true for a private residence and investments.
Vacation Home Illiquidity
For as much as a primary residence is illiquid, a vacation home is that much harder to offload. The pool of buyers for such properties is far smaller and their tastes are night and day apart.
My friends bought this cabin because it met every single criteria. They were incredibly picky and talked themselves into it being so amazing that they were willing to pay a premium for it.
The potential buyers who toured the home all found something about it that wasn’t quite right. Some were worried about the patio on stilts. Others were worried about mudslides. The lack of spare bedrooms, the tiny skylight, the spartan kitchen.
The price of this cabin was just high enough that it didn’t make for a good cash purchase opportunity. And there weren’t a whole lot of banks that were willing to lend on it because it wasn’t close to anything metropolitan.
Living in Spain
As I contemplate my move to Spain, I am faced with the same housing dilemma. In a way, I’m making Spain my second home, meaning that a home purchase there would be a vacation home.
Buying a Flat
My immediate thought is to buy. It’s simple. I won’t have a landlord. I know I can get approved for a mortgage or buy cash. I’ll own the flat or house and won’t have to answer to anyone.
Flats are cheap in Spain, at least in Seville. For less than $100k I can buy something small and cozy, in a good part of town.
Renting a Flat
If I rent, I have to get approved for the rent. I won’t be able to make any changes to the place. I’ll have to buy furniture since rental units don’t come with washer/dryer/refrigerators.
And eventually I’ll have to move. Either my rent won’t get renewed or I’ll get tired of the place or it’ll become too expensive.
The advantage is that I’ll have a lot more options. The illiquidity of real estate has to do not only with the complexity of the transaction but also the physical location of it.
Quite a few landlords banked on AirBnb being the latest and greatest passive income strategy. They bought up multiple units in a city in order to rent it out for profit.
Eventually the caustic AirBnb culture came to a head and cities and HOA’s cracked down. And if it wasn’t the cities then neighbors retaliated.
Therefore, buying a place and thinking that you’ll just rent it out is really not all that great of an idea. Simple in theory but not that easy in practice.
Rent Before Buying
What makes the most sense is to rent in a place where one hopes to buy a vacation home. Ideally for a few repeat seasons.
This is probably good advice even when considering a primary residence purchase. A vacation home in the wrong neighborhood, for the wrong price, or with unforeseen factors such as nearby construction developments can dent its value.
Worrying about wasting money on rent is a normal feeling. Much like when we worry what others think about us, it’s a societal construct to want to own but it’s not a legitimate one.
Renting allows us to get an idea about prices. We get to know the neighborhood. We also figure out how often we realistically will stay at this vacation home.
I suspect, more often than not, after renting for a few seasons, one realizes that purchasing the vacation home really isn’t necessary. Renting will suffice and might even be a more liquid decision.
Unless you are a professional investor, you’ll look for facts, stories, and opinions which will confirm whatever decision you made.
So we can’t rely on our minds to help us make a good vacation home purchase decision. “See, that other home across from this one sold for $100k more than they bought it. What a great investment!”
Poor Money Decisions
Those who aren’t savvy with their money might be drawn to a vacation home purchase even more so than their peers.
The issue here is that they subconsciously know that they aren’t doing anything worthwhile with their money. They are either invested in high expense ratio mutual funds, are holding way too much in cash, are trying to beat the market through daytrading, or bouncing in and out of debt.
For these folks, buying a vacation home might serve the same purpose as buying a primary residence – a forced savings strategy.
By dumping a lot of their disposable income into a mortgage and building equity, at least they are building a nest-egg for themselves.
Retirement & Free Time
From someone who retired as a physician in 2016, I can tell you that the more free time you have and the earlier you retire, the less you will be motivated to have a vacation home. In fact, the less you’ll want to take a vacation.
I am perpetually on vacation. The majority of the things I do are elective. When I crave to do a particular thing then I just need my own permission to pursue it.
Aside from logical limitations, I can do something new every single day. I can learn about computer networking at the library one day and stay with a friend in SF the next week.
Those 2 hours I got to myself during a work week have now expanded to 10 hours per day. Stress and responsibilities contract which opens up so much more room to enjoy free time.
I’m throwing this little tidbit in because a vacation home’s price tag will likely delay financial independence. Even if you decide to not retire once you are financially independent, the freedom to do as you please with your day is something worth considering before trading that chance away for a vacation home.
Downsides of a Vacation Home
Here is some confirmation bias for ya; I am looking for facts that will validate my hypothesis that a vacation home is a poor, illiquid choice.
The downsides of a vacation home are that it’s yet another liability which you’ll have to babysit. It requires maintenance, repairs, upgrades, and it needs to be insured.
Unless you are incredibly wealthy, you will be faced with paying for Timmy’s braces or upgrading the rotting deck.
With Timmy’s straight teeth, that deck will rot even more into next season, making the subsequent repairs that much more expensive.
Whatever you own can become a liability at some point in your life. Your car, your gun locked up in the closet, your business, your medical license, and your vacation home can all become risk liabilities in the blink of an eye.
If you let your friends stay at your vacation home and their 5-year-old decides to somersault off of the deck onto some tree stumps then that might be something you’ll have to deal with.
If you weren’t at your property when the fire department handed out notices that brush had to be cleared due to a fire hazard then that ensuing fire could cost you hefty fines.
Handcuffed to a Single Destination
A wealthy acquaintance decided to buy a $1.5M vacation home in Hawaii because he loved going there. He would fly to the island from Canada a few times a year.
He loved the views, the weather, the people. 2 years into owning it, he realized that he had neglected his other favorite travel destinations such as Mexico and Portugal.
He felt so guilty flying to Europe when he had this $1.5M house sitting empty in Hawaii that those other trips started becoming a burden.
Another 2 years went by and he finally decided to sell. It was the best decision he made. Now he’s back to exploring new destinations without the guilt trip.