A Vacation Property Buying Rule To Follow: Lifestyle First, Income Second

A Vacation Property Buying Rule To Follow

So you're thinking about buying a vacation property. Mortgage rates are going up and the pandemic might be causing cabin fever. Let me introduce a vacation property buying rule to follow so you don't get in trouble like me.

Back in February 2017, during a hot tub party at my vacation property at The Resort At Squaw Creek, I got to know a fellow owner who retired five years ago as a partner from a major law firm. We got to talking about the roller coaster ride we've had since purchasing our vacation properties 10 and 9 years ago, respectively.

He told me something surprising after I asked him somewhat jokingly what he plans to do with his property now that global warming was over. After all, Lake Tahoe got a record ~23 feet of snow in #Janburied 2017 and is shaping up to have a great 2020-2021 season.

He said, “Just continue to enjoy it. If you look at the latest listing prices, we're back to even after an almost 50% fall. But I'd never sell because the property is worth an insignificant amount as a percentage of my net worth today. I'll just leave the property to my kids to enjoy.

Given this was a hot tub party, and not a personal finance 1X1 consulting session, I didn't dig deeper into his finances. But given the retired lawyer was 20 years my senior with adult children, I realized I had just “seen the future.”

Vacation Property As A Percentage Of Net Worth

My vacation property buying rule centers around limiting the purchase price based on a percentage of your net worth.

When I bought my vacation property in 2007, the purchase price was equal to roughly 25% of my net worth. In 2017, using the same purchase price, my vacation property was worth about 8% of my net worth. And in 2020, my vacation property is worth around 5% of my net worth. With each decline as a percentage of my net worth, I've felt better.

By the time I'm 63 years old in 20 years like the law partner I met at the hot tub, the property should be worth just less than 2% of my net worth and completely paid off.

Any asset that's worth less than 10% of your total net worth starts feeling like a relatively insignificant amount of money. Think about it.

Your 10% asset could lose 100% of its value, and you'd still have 90% of your net worth intact. This is one of the reasons why my 1/10th rule for car buying has been a popular guideline because it helps protect consumers from their spendy selves.

Bright Side Of Spending So Much

I so happened to spend a significant 25% of my net worth on my Lake Tahoe vacation property right before financial armageddon hit in 2008-2009. Despite saving 15% off the original asking price, this was still one of the most ill-timed purchases ever.

But if I had spent just 10% of my net worth on the property, I probably wouldn't have lost more than an hour's worth of sleep over my purchase. I certainly would have been bummed to see my property's value go down so much. However, it wouldn't have been so bad because I knew I could make up for the loss after saving 50% of my income for one full year.

There's a positive side to spending too much of my net worth on a vacation property at a bad time. Because I did, I started Financial Samurai in 2009 due to all the pain of losing so much. Ah, thank goodness for always having a positive mindset!

Lake Tahoe Record Snowfall January 2017 - vacation property buying guide
This is actually a road buried in 23 feet of snow. January 2017 Lake Tahoe.

Hopes And Dreams Of Owning A Vacation property

What the ex-law partner said about passing his property down to his children really spoke to me since when I first wrote this post in February 2017, I was expecting to have a son in April 2017.

Given his daughters are now 26 and 28, and he bought his condo 10 years ago, he lamented that he never got to spend as much quality time up in Tahoe with his family as he hoped. As teenagers, his daughters wanted to hang out with their friends somewhere else instead.

Related: A Massive Generational Wealth Transfer Is Why Everything Will Be OK

Since first coming up to Squaw in 2001, I've always imagined it to be a place where I could take my kids during their school holidays.

During summer vacation, we can go hiking, mountain biking, boating, river rafting, kayaking, and water skiing.

During winter break, we can go sledding after seeing who made the best snow angels. Lake Tahoe is magical.

Of course, not everything goes according to plan, but I'm someone who has the patience to think in 10-year increments. After all, I spent 11 years at my last firm and I've consistently written on Financial Samurai since 2009.

Further, I'm now a varsity boys tennis coach because I want to see what it's like working with teenagers at least 14 years before having one of my own! Perhaps through this new job, I can figure out a better way to relate to my future teenager so he will want to spend time with his old man.

A Vacation Property For Family

The value of my vacation property will personally skyrocket if I'm able to fulfill my vision of hanging out with my little one(s) up at The Resort. Neither he nor I would have a care in the world.

When he grows up to be an adult, he and his old man can carve down the leisurely blue run and talk our own stories as we soak our aching muscles in the outdoor hot tub.

Hopes and dreams are what make owning a vacation property worth it. Luckily, I was able to take my two young children and wife to our vacation property in Lake Tahoe recently.

The kids had a magical time swimming in the pools, going down the water slide, soaking in the hot tub, and running around on the grounds. Then we went hiking in the mountains as well. The only downside was that our car got damaged while being valet parked! Oh well. I'm glad we own a used car that isn't too expensive.

Just imagine skiing/boarding through this fluffy powder on Monday, January 23, 2017.

A Vacation Property Buying Rule To Follow

If you can view your vacation property as an investment in lifestyle instead of as a financial investment, you'll find your asset much more rewarding.

In order to never have your vacation property feel like a burden, heres my vacation property buying rule: spend no more than 10% of your net worth on a vacation property purchase price (not downpayment). For example, if you net worth is $3 million, spend no more than $300,000 on a vacation property.

I feel so much better now that my vacation property is worth less than 10% of my net worth versus when it was 25% of my net worth.

If you foresee a rapid increase in your income and net worth, then you can probably stretch your vacation home budget to 25% of your net worth. But I don't recommend doing so based on all the worry and stress I had to go through. Buying a vacation property for enjoyment and then constantly worrying about whether it will financially ruin you is counterproductive.

Finally, before buying a vacation property, make sure you calculate how much you'll actually be able to use the vacation property a year. Run a cost of ownership comparison to the cost of simply renting a nice place anywhere you want.

Overestimating the usage time is quite common. The reality is that most people can only take off at most 4 – 6 weeks a year. Only if you're unemployed, financially independent, or have a location independent business can you truly maximize your vacation property.

Wait Until You Are A Millionaire Before Buying A Vacation Property

If I followed this vacation property buying guide, I wouldn't have foolishly bought a $715,000 vacation property in 2007. At the time, my net worth was about $2,200,000, which meant I was spending 35% of my net worth on a vacation property. After my net worth declined to $1,500,000 a couple years later, the vacation property I had bought accounted for almost 50% of my net worth!

If you're super-bullish on your career and income, then you can certain spend a greater percentage of your net worth on a vacation property. However, I would try to maintain disciplined. A vacation property is generally a terrible investment. It is better to just rent and go on unique adventures instead.

My vacation property buying guideline essentially says you shouldn't even consider buying a vacation property until your net worth is at least $3,000,000, where real millionaire status begins.

It's been an amazing financial run since 2009. I'm sure some of you are far richer at this point in life than you could have ever imagined. Just make sure you follow my vacation property buying rule and stay disciplined.

Investment Suggestion

Invest In Real Estate Across The Country. Owning a vacation property is more a lifestyle choice and less of a good investment choice. If you want to make money in real estate, take a look at Fundrise, one of the largest real estate crowdfunding platforms that has investment opportunities all around the country.

I foresee crowdfunding to attract a lot of capital to lower valuation, higher yielding projects around the country. Minimums are as low as $10 to invest in their private eREITs.

Fundrise Due Diligence Funnel
Less than 5% of the real estate deals shown gets through the Fundrise funnel

If you are an accredited investors and want to invest in individual real estate opportunities mostly in 18-hour cities, check out CrowdStreet. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.

I personally have $810,000 in real estate crowdfunding in markets outside of expensive San Francisco, Honolulu, and New York City. It feels great to earn income passively and diversify my real estate holdings.

Update 2022. I finally took my boy and wife up to our vacation property for the first time in July 2019 and it was magical! Then I took my son and my 10-month-old daughter again in late October 2020 and it was also pretty nice. Here's what it was like taking a vacation during a pandemic. I'm glad we went, but now we need a vacation from a vacation! I plan to take them to see snow for the first time in 2022.

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71 thoughts on “A Vacation Property Buying Rule To Follow: Lifestyle First, Income Second”

  1. Great site and great posts as always. I know this is an older post but wondering if you had any updated thoughts on your 25% rule. Specifically, I’m not quite sure if your using the full value of the property, as opposed to the net value of the property, makes complete sense.

    I understand your thinking, concentrating too much of your assets into one asset, especially one where you established already is more of a life style investment than income producing or financially sound in general given the associated costs.

    However, using the full purchase price for the property seems to contradict your main point of being able to withstand a complete loss on the property. In a typical purchase situation, the net worth of the property will be roughly 20% of the purchase price assuming a typical mortgage. Even with a 50% mortgage to equity ratio, it wouldn’t be the full purchase price. In my mind, its the equity you have invested in the property that is at risk and should be used for such a calculation.

    I understand that is as much a rationalization as anything, as I’d like to purchase a vacation home in the 2-3M range with a net worth of $10M. Your rule would make this purchase a poor decision. It is a bad decision on many many levels (how often will we use it…ongoing costs, etc.). However assuming we put $1m down and a mtg for the rest, not quite sure that your broad 25% rule applies.

    I know its a 5 year old post, but would appreciate any thoughts in case you still go back and check old comments.

    Great site – best of luck on your journey.

  2. You made a great point when you said that any assets that are worth less than 10% of your total net worth are not worth it. My husband and I are looking for advice to purchase a vacation home, and we are looking for advice about how to buy the right property. We’ll definitely take it into account so we know what is more worth the money.

  3. I know this column is old so this comment might get lost. The real difference to me is whether the vacation property is just a get-away or a rental property. I felt comfortable investing more in my resort property in a rental program than in my get-away property that only I use. It’s not just about the investment or the mortgage, it’s about the entire return on investment (objective and subjective). Rental resort property has rental cash flow plus high personal value plus tax deductible trips to the resort area so I invested more. Sole-use get-away property has no rental inflow with some (but not as high as resort) personal value and now travel tax deductions so I invested less.

  4. Alicia Byrne

    I think your advice on not having my vacation property feel like a burden is such an important thing to remember when choosing out a vacation home. My family visits Hawaii every summer and we love it there. Now that my husband and I are going into retirement, we’re thinking of buying a vacation house there so that we can have a nice place to stay whenever we visit the place. I’ll be sure to look for a good real estate agent when I start searching for my ideal beach house.

  5. Victoria Addington

    I am thinking if buying a real estate property in San Juan del Sur, perhaps a vacation house. My family used to celebrate holidays in my aunt’s home in Nicaragua. Now we want to have our own place to stay during holidays. Thanks for your tip to not spend more than 10%–20% of my net worth on buying a vacation property so I wouldn’t see it as a burden.

  6. It’s great to consider this rule that you mentioned. Maybe it would be better to get a timeshare. I’ll look for a waterfront house to get so I can enjoy more time on the beach.

  7. You made a great point about how you can have a place to take kids during summer vacation. My family and I are looking for an oceanfront place in Fernandina Beach, FL to own as a vacation home. We will keep these tips in mind in our search for a professional.

  8. What is everyone’s thoughts on a vacation house if you are not having children? We are considering a cabin about an hour away near a lake, we would put probably 40% down on the property. All our other friends are having kids, which will probably cost them more than the cost of this cabin. It’s either get a vacation house, or trade up to a bigger, more expensive house… Tough decision!

    1. We don’t have kids, aren’t planning to have any, and just got approved for a mortgage on a vacation home yesterday (40% down as well).
      Our current home is 1500 sq ft and I sometimes wish it were bigger but I don’t think an extra couple of rooms would add much to our life – other than provide storage space for more stuff we don’t really need. Whereas getting out of the city and looking over fields and trees will certainly reduce stress in addition to bringing in a modest income if we rent it out a few weeks a year.

  9. newparentinvest

    Hey Sam,
    Great post as always. I particularly love:
    “If you can view your vacation property as an investment in lifestyle instead of as a financial investment, you’ll find your asset much more rewarding”

    I’m a new parent and for my next investment looking at a home I can rent out today but looking at homes I can see myself personally living in for a few months each year in retirement or a vacation home today to spend with my family. I haven’t made any hard decisions on which direction I’ll choose just yet but the reason is exactly what you said above in that quote I love so much :)

  10. I have kids aged 8, 6, and 1. The two older kids are on a ski team and we go almost every weekend. Over the years we have made friends with many regulars. After training for the day, the “neighborhood kids” would play outside while the dads and moms pop a beer. The memories being created are priceless.

    However I disagree with buying vacation properties. They rarely work out as investments. I almost bought 3 years ago but the internal IRR was in mid single digits assuming modest capital appreciation, and it would have been cash flow negative. That property would have only been <3% of our NW but the cash flow aspect made it a non starter for me.

    I have done ski leases for the past 4 seasons. Last season the heat broke down for two weekends in a row. Eventually the property manager overnighted a part to Reno, had her maintenance man drove to Reno and back in a snow storm, to install the part. I had no idea how much it cost the owner, but I sure was glad that it wasn't my problem. This season we decided to split a nice big house with 3 other families, 10 kids total. It's an absolute mad house in the morning and evenings, but every single family agreed that this was a good idea, again for the memories being created. If I had bought and got locked down, we would not be able to do this.

    I do own a ton of time shares, specifically Disney. There is an active secondary market both for buy/sell and rentals. I can get cash on cash yield of mid teens if I don't use them myself. This is a good market for sophisticated investors – you have got uninformed sellers (often bought because of high pressure tactics), and a supply / demand imbalance (buyer usually dictate price). If you have kids it's great to have a timeshare.

  11. I was in Tahoe this past January as well. It was crazy. That picture brought back some not so pleasant memories

  12. Hi – we’re in the market for a holiday home in Italy so the guidelines in this post are timely and a great reference for thinking about the purchase.

    We’re looking at places for about 20% NW and are probably 7yrs away from FI. Reason for doing it now is wanting to lock in a 20y fixed mortgage while rates are still low and also make a down payment while the Euro is weak. We’re under no illusions about how little use we’ll make of it in the next 5yrs but renting it out should cover a good portion of costs. Doing it while still working is reassuring, if things don’t go to plan we just work an extra year.

  13. Could you please do the same chart as above (with what your income or net worth should be before buying your first property)? And how much property you’d recommend buying?

    I know you’re a huge advocate of saving, but you’re also very pro-housing, so I’d be curious to see what you’d recommend. I’m starting to build my 401k to reasonable levels and my income is finally over triple digits, but I can’t bring myself to buy.

  14. So the crown jewel of our budding little empire is the family cottage ‘up north’, as we say around these parts. The cottage was originally bought by my wife’s grandparents in the 1950’s for $6,500.

    The cottage sits on 50 feet of Crystal Lake waterfront. This lake is 3 miles by 10 miles, spring fed, sand bottom and all around awesome.

    Four generations of our friends and family have been visiting the cottage as a home away from home, but like most lake houses, the cycles of death and inheritance had taken their toll.

    Certain families members, aka the Dura sisters, caused the house to be put up for sale several years before I was really in a position to make a play for it.

    But, as fate would have it, this was also 2008 and the economy collapsed. Seems nobody was in the mood for a second home. This downturn lasted until 2012 when my wife and I decided to make a plan and try to will ourselves into sole ownership.

    We took out a mortgage and paid the aunts off. After consolidating the cottage, we put $58,000 into it to really bring it up to date and started making it available on VRBO.

    The cottage nowadays almost pays for itself ($24k out/$21k in per year). We plan on retiring here and hoping that our kids will continue the tradition long after we are gone.

  15. Sam – What about, instead of a different rule for each purchase, having one overall rule for ALL non-financial assets? That would allow more flexibility for people to hold whatever non-financial asset appeals to them the most. I might want a nicer house, but my friends may prefer nicer cars, fancier watches, art, a vacation home, or something else. It’s something I’ve thought about off & on for over 10 years. Personally I decided not to go over 20% total (currently at 13%).

  16. Theofficialjohnandre

    My parents bought a summer home in Cape may, NJ in 1998. They refused to rent it out although even a week in peak summer can get them $8-10k. As part of my future inheritance, I might keep that tradition alive. Not everything is about money!

    1. Cape may is great! Too bad it is too far from north jersey / nyc to get there super easy every weekend.

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