Unlike buying a primary residence, where I believe you should buy one as soon as you can afford to, purchasing a vacation property is a different matter.
Nobody needs to buy a vacation property; it's a luxury expense that everyone can do without. Chances are, you won't use your vacation property enough times a year to justify the expense, making it likely to be a suboptimal investment.
My own experience has left me somewhat jaded. I bought a vacation property in Palisades Lake Tahoe in 2007, just a year after the property market peaked. Despite getting about a 15% discount from its 2006 price, the property continued to decline in value by 50% during the depths of the global financial crisis!
Certainly, my perspective might have been more positive if I had purchased the vacation property at the market's bottom. However, I still maintain that owning a vacation property is a suboptimal investment.
A Vacation Property Becomes More Worth It After Having Children
As a single individual or couple, you're unlikely to use your vacation property enough times a year to justify owning it. After all, most Americans take vacations totaling less than 30 days a year, and it's doubtful you'll spend all 30 days in your vacation property.
During the 330+ days you don't use your property, it's essential to rent it out as much as possible. Otherwise, you'll find yourself in the red with property taxes, potential HOA fees, and maintenance expenses. It would be wiser to forgo owning a vacation property and instead use your cash to vacation wherever you desire in the world.
Even with all the freedom I had after 2012, I didn't spend more than 30 days a year using my vacation property after retirement. With just my wife and me visiting, we preferred to diversify our travels to Hawaii and explore Europe.
However, once you have children, the value of a vacation property skyrockets. Let me share the five main reasons why.
1) More people get to enjoy the vacation property
The more individuals who can enjoy the vacation property, the more valuable your vacation property becomes. My wife and I enjoy our vacation property, but a two-bedroom, two-bathroom condo for just the two of us was too much for the first 12 years we owned it. We could have saved a bunch of money just renting a hotel room instead.
Below is the exact layout of our vacation property. It can comfortably accommodate four people and up to eight if necessary. With two kids now, we can now utilize the entire property, with my wife and I on the king-size bed and our two children in each queen-size bed. Alternatively, we can each have our own beds given we have a sofa bed.
Fortunately, we can rent out our vacation property in three separate configurations: 1) two bedrooms, 2) one-bedroom suite, 3) studio with two queens. Therefore, it wasn't the biggest waste since could often still rent out one side if we were vacationing up there.
2) The cost of the vacation property gets amortized across more people
The more children you have, the more the cost of the vacation property is spread out.
Our vacation property rents out for between $500 and $1,500 a night, depending on the time of year. If it were just my wife and me, the cost would be $250 to $750 per person per night. However, with four of us now, the cost per night comes down to $125 to $375.
All expenses, from the HOA fee to the maintenance expenses to the annual property taxes, are divided among four people. Consequently, the vacation property feels like much better value.
Our vacation property can sleep three kids and two adults comfortably. So if we wanted to spread the costs out even more, then we should have another kid. Alas, we are too old.
3) More comfortable living arrangements for a family
Airbnb has a clever commercial that underscores the challenges of renting only a room for a family vacation. It's less than ideal when your bedroom doubles as your living room, kitchen, and dining area. If you have a little one who doesn't sleep through the night, it can disrupt everyone's sleep.
Due to budget constraints, most families can't afford a vacation rental as spacious as their primary residence. Consequently, going on vacation often means downgrading in accommodations.
However, if you own a vacation property that suits your family's needs, you'll enjoy a better layout and a more comfortable vacation. This is one reason why owning a vacation property becomes more appealing after having kids. Once you're finished or nearly finished having children, you can invest in a vacation property of an appropriate size.
As a single man, I took a risk in 2007 by purchasing a two-bedroom, two-bathroom condo spanning a little over 1,000 square feet. For ten years following my purchase, it seemed like a wasted investment—an unnecessary and overly spacious vacation property for my household. It felt like I was driving a large SUV with only me or me and my wife inside.
However, in July 2019, I finally brought our two-year-old son to our vacation property. That marked the beginning of feeling like our property was worth it. When we vacationed with our 10-month-old daughter during the pandemic in October 2020, I finally felt that the vacation property had fulfilled its potential.
4) A stable second home for kids to build lifelong memories
One of the wonderful aspects of owning a vacation property is the familiarity it offers. Children become accustomed to the property and its surroundings, fostering a greater sense of comfort. You can keep pictures, clothes, toys, and stuffed animals at your vacation property, making it feel like a second home.
We have two owner's lockers: one in the unit where we store our personal belongings and another in an owner's lounge on a different floor, where we keep all our ski and snowboard gear. It's a luxury not to have to haul all our gear and personal items every time we visit Lake Tahoe.
Moreover, it's enjoyable to become acquainted with the town surrounding your vacation property. You'll get to know restaurant and bar owners, discover secret hiking and skiing trails, and participate in local events. Over time, you may even develop friendships that create a stronger sense of community.
While kids love going on adventures, younger children especially appreciate the familiarity of a second home. Routine is essential for their sleep, mood, appetite, and bathroom regularity, making a second home an ideal retreat for family vacations.
5) You give yourself more time to build more wealth
Kids are undoubtedly expensive and demand a significant amount of time and energy. Therefore, it's wise to accumulate as much wealth as possible before they arrive.
Once your kids are here, you'll naturally want to spend time with them, which often translates to less time at work. While not always the case, less time spent working sometimes means less income growth.
Prior to starting a family, devote as much time and energy as you deem reasonable to building wealth. You might even consider setting a net worth target before having kids. This way, when they do arrive, you'll experience far less financial stress and can better prioritize your spending.
The only drawback to waiting until after having kids to buy a vacation property is that its value may appreciate faster than your income can keep up. However, if that's the case, wonderful! Just rent a hotel room or home. It's much less hassle and efficient.
Finally Excited To Go To Our Vacation Property More Often
After experiencing an incredible family ski vacation in April 2024, I'm thrilled about visiting our vacation property in Lake Tahoe more frequently. There was a three-year period when my enthusiasm for going wasn't high, although we still made the trips.
Previously, our focus was primarily on summer visits for hiking and water sports. Now, with the added dimension of skiing, we plan to visit three times a year, every year until our kids graduate high school. This translates to 12-14 years of new family experiences and bonding.
Wait Until Your Youngest Turns At Least Three Before Buying
Buying a vacation property should be primarily a lifestyle decision, with investment considerations coming second. If you buy one, think about a vacation property as an expense.
Ideally, hold off on buying until your last child turns three. Before reaching that age, children typically aren't too concerned about where they vacation. As long as there's a pool close by, good weather, a playground, fun activities, and loving parents, that's all that matters to them.
However, if you're eager to buy a vacation property and uncertain about the number of children you'll eventually have, here's a compromise: wait until your first child turns five. Even if your other children won't fully appreciate the vacation property until they're older, you'll still be able to create enjoyable new experiences for your eldest and yourself.
Reflecting on my own experience, if I had waited to buy a vacation property until my first child turned five in 2022, rather than in 2007, I would likely be $500,000 richer today. With Treasury bond yields at 5% or higher, I could earn an additional risk-free passive income of $25,000 a year.
Unfortunately, it's too late for me to change that decision. However, I can share my experience with you so that you can make a more informed decision when it comes to purchasing a vacation property. At least we had some good times up at the property.
Best of luck with buying something you don't need!
Reader Questions
Anybody buy a vacation property before having children and regret it? What do you think of my recommendation of buying a vacation property after having children? What did you do with your vacation property after your kids left the house?
Invest In Real Estate More Strategically
Instead of purchasing a vacation property, consider investing in passive real estate investments across the country for potentially better returns.
Consider Fundrise, a leading private real estate investment firm with over $3.3 billion in assets under management. Fundrise primarily focuses on residential and industrial real estate in the Sunbelt region, where valuations tend to be lower and yields tend to be higher.
By investing in real estate through platforms like Fundrise, you can generate passive income that can be used to finance vacations anywhere in the world. After all, simplicity often leads to happiness.
Personally, I've allocated $954,000 to private real estate funds, primarily targeting properties in the heartland. With remote work becoming more common, it's reasonable to expect that Americans will increasingly gravitate toward lower-cost areas of the country.
Fundrise is a sponsor of Financial Samurai and Financial Samurai is an investor in Fundrise.
Mazatlan was supposed to be our escape, a sunny vacation condo for a few weeks a year. But as life takes unexpected turns, this little slice of paradise became our full-time retirement haven (and a handy income producer when we’re off exploring!).
Downsizing and moving here permanently was a leap, but it’s been the best decision ever! Now, when we’re out adventuring the world, our condo welcomes wonderful guests, providing them with a taste of the Mazatlan magic we adore.
I think you are looking at it all wrong! If a Short Term Rental (STR) Owner approaches it as a business, develops a five year pro-forma on return, gets creative with problems that can be solved with strategy, and gets a wee bit of a dopamine hit every time that VRBO/AirBnB booking request comes in, there is a return to be made!
I bought a 1500 sq ft 1913 bungalow in Oregon Wine Country in 2000. Purchase price was $412,000, downpayment was $100,000, 30 year mortgage locked in at 3%. We have not put any additional cash into the house while making $10k improvements each year (painting the house, upgrading furniture, etc). If I sold at year five, the projected Internal Rate of Return (IRR) is projected at 43%. 5 year IRR’s north north of 20% is my target for any risk/reward tradeoff on a business.
Don’t delegate management responsibilities. When I purchased the home, I created systems for the operation of the house that could be dummy proof.
-We hired a local caretaker, the next door neighbor, who receives stipends based on cleaning fee expenses passed on to renters (very reasonable rates and NO chores delegated to folks enjoying their vacation).
-We conduct quarterly supply/demand/pricing analysis
-My wife and I have delegated responsibilities and systems on Financial Management, Renter Engagement, Vendor/Facility Maintenance.
Its not an autopilot investment but one that allows you to grow some creative expression, execute a strategy with pretty immediate measurable results, AND enjoy for you and your family. I still get a dopamine hit every time I see that booking request…
The priceless personal milestones for my vacation rental include:
-Getting married at a winery a few blocks away
-Our first child came early while vacationing there and born at the local community hospital. We stayed at the house for a few weeks after baby was born before traveling home.
-We’ve been invited to weddings, events from the community we’ve developed
I was lucky enough to purchase my ski condo in December 2017. If I hadn’t purchased then, I probably would have never been able to afford it. Currently getting in around 25 days on the snow and try to do a week in the summer.
I’m in the rental pool so my HOA is covered, and I still make a little money, so my time there pretty much doesn’t cost me anything. The condo takes care of most everything for us and we use their contractors for any maintenance or upgrades so there is the cost of upkeep. I get to benefit from any upgrades myself and the guests do as well. I keep it in the Premier rental category. Plan on retiring soon, so I’m planning on spending more time there and will probably pick up a part time job which actually pays pretty good since housing is so expensive it’s difficult to get employees. Very happy that I pulled the trigger when I did. As always, thanks for sharing all of your wisdom.
When we travel as a family we normally rent an apartment via AirBnB etc or a cabin at a camp site etc. with two bedrooms. In your case, I suppose maintenance etc. can be provided by the resort? Otherwise, having a second home seems like a lot of hassle. I wonder how much you make from renting it out and whether it ends up being a good investment return?
The property management, which earns 25%, handles all the bookings and maintenance issues.
I just did my taxes, and the net rental income provided about a 6.2% yield. Not bad actually, especially if rates start going down and we get to use it.
But during 2020, it was shut down for 3-4 months, which meant lost revenue.
Ours is 50% management fee, but all of the utilities including cable and internet are included. 30 minutes per month maintenance in the unit included as well. It usually ends up being less than 50% because they return money to us if they collected more than it cost. We also have a ski valet and shuttle from the lodge anywhere in the village and to and from the airport. They pretty much handle everything so there is no hassle owning there whatsoever.
We have three kids (9, 7, and 7). We were very gung ho about getting a vacation ski place until we saw that all of our weekends now revolve around youth sports and youth arts. Summertime is much of the same. Something to consider if your kids are 6 and under. Things change.
Thumbs up . Was going to say basically the same thing. My guess is that kids schedule will kill many desired outings at a vacation home. I never considered buying a vacation home while my kids were growing up due to this.
Did you have a lot of kids activities during the holidays too?
So far, we don’t. Our activity will be going up to Lake Tahoe to skater in the winter and I can do water sports during the summer.
Grandparents like seeing the kids. So off to grandma and pa we go(siblings too). I guess since all they do is spoil the kids then send them back to us, holidays are prime time for them since schools out.
This, 100%.
It seems in large swaths of middle/upper middle class New England (area I am most familiar with, though I’m sure it’s no different in the rest of the Acela Corridor and the affluent west coast) it is the grandparents, retirees, DINKS and/or empty-nesters who actually utilize vacation homes – young families go for maybe one week per summer and the random weekend. For active families with 2-3 kids sports and other activities (including for ages 5-10 it seems endless birthday parties) and camp(s) during the summer so dominate who would ever have an opportunity to get any time at a vacation house for any total days per year that made it remotely worthwhile to purchase?
And I’m not even talking about the hardcore hockey, lacrosse, baseball, gymnastics or other travel/competition families, even just two very busy kids can require a color-coded spreadsheet schedule. As well, people all want to visit Europe, Florida, Caribbean, National Parks, DC, NYC, innumerable interesting weekend trips (there’s 25+ at least here in New England) and it is common to have at least one parent with out of state (or country) family to visit (and everyone these days have other family and undergraduate, graduate, etc. friends to visit out of state)
I kind of envy the days when families did not have endless camps/sports/activities/travel, rarely left their home state, had all the grandparents/cousins right nearby, and just spend most weekends “at the Cape” or in Maine or NH, etc. but time waits for no man. I’ve been reminded by many that if the kids aren’t so involved it’s a holy terror to keep them away today’s crack cocaine – phones/screens. It’s a bigger, more connected, more available (and more competitive) world these days – driving 2-3 hours to sit at the vacation home with any regularity will just have to wait when all the rest subsides and everything else has been seen and done…
The only exposure I had to a vacation property growing up was through a friend. Her dad was a successful lawyer and had purchased a beach house about 3 hours from our home. When I was 10 years old her family invited me to go with them for a week at that beach house. I was ecstatic. Vacation to a new place with my best friend free from my own parents?! That house was huge too. It was way nicer than my own house haha. So clearly her dad was doing something right. I believe he rented it out when they weren’t using it as well. Funny how much harder it was to do that back then before the internet!
I don’t have any plans to buy a vacation property of my own any time soon but I’ll definitely bookmark this post if I ever do. Thanks for sharing so many helpful insights!
Our youngest was four before we purchased our vacation home in Hawaii. We didn’t necessarily plan that; it just worked out naturally. Traveling with children before that age can be challenging, especially if you’re taking a long flight (we live in Austin, Texas).
Buying a vacation house for personal use is rarely a good investment from a cash flow perspective. There are just too many expenses, especially if you have a property manager. A good vacation home property manager can command up to 25% of revenue. And, if you have a vacation home far from where you live, you will most likely need one. There is the possibility of appreciation, but I don’t consider counting on appreciation investing.
We purchased the home in 2020. Despite renting it out, we have had negative cash flow each year we have owned the property. Operationally, we lost 1.91% of the down payment in 2020, 0.42% in 2021, 2.06% in 2022, and 0.24% in 2023. This does not include the principal payments on the mortgage and does not include the value of our personal use, which has averaged about 60 days a year.
Fortunately, home prices in that area have risen, compensating for the operational loss. We bought at a good time during the pandemic before home prices started to take off, and we have a 3.25% mortgage.
I calculated how much my down payment would have been worth had I invested in an 80/20 blend of VTSAX/VBTLX instead of purchasing the home. I then calculated my returns from the vacation home, including appreciation (minus potential selling costs). In a straight-up comparison, the investments won 15% to 13.7%. These are total returns through the end of 2023, not annualized. If I had included our use of the house at fair market value, the results would have changed in favor of the vacation house, 17.4% to 15%.
I would not consider these results to be typical. We got lucky with the timing of our purchase. We also lightly renovated the house, which is included in the negative operational returns. I think the bottom line is to think of your vacation home as a treasured place for your family to enjoy, not as an investment. The memories we have created are worth more to us than any opportunity cost of the money.
Note: The percentages in my comment regarding operational loss were relative to the purchase price, not the down payment. The total returns were relative to the down payment. Sorry for the error and any confusion.
Your knowledge of the numbers is very good to see. I’d bet a lot of vacation and 2nd home owners have no clue about their opportunity costs and/or profit/loss from these homes.
I often compare what a safe return would be on our vacation property versus what it brings in as a rental each year. It’s safe to say, the principal we have it the second home would generate more than it brings in for net income after expenses each year if invested in t-bills or VOO (at least in the past few years of high inflation), and would do so with little to no effort on my part dealing with airbnb, vrbo, and property managers. However, it’s an irreplaceable asset for our family and we have over a decade of memories there. Fortunately we spend a month or two there every summer. Many of the reasons Sam cites in the main article.