Your Dream Vacation: To Rent or Buy
June 5, 2023 Author: Tess Downing, MBA, CFP®, Complete View Financial
With summer vacation beginning this month, the thing on everyone’s mind is where to travel for the summer. Your kids are out of school, the weather is getting nicer, and you want to get out and explore new places during this season. The summer season brings changes to everyone’s lifestyle. No matter what your desires are for summer, it is important to make smart financial decisions and investments that don’t impact your long-term goals. One of these big decisions many people make is whether to buy or rent a vacation home for the summer. Let’s take a look at the differences and why a lot of homeowners perceive purchasing as the better option.
Many reasons why people are more inclined to purchase a vacation home instead of renting is because they believe they will be able to make up the money they put into the property. They think that they’ll be able to use the house for the summer and the rest of the months, and be able to rent the house out to others for profit. While this is good in theory, the rental business is volatile, and you can’t count on this flow of income to guarantee a return on your initial capital. Here are some considerations to digest in terms of rental income:
Reason #1 for Purchasing: You Believe You'll Gain the Capital Back
Many vacation homes are unlikely to be rented out all year long: Renters often want to travel to these vacation spots during the summer months, typically when homeowners would also want to use the space. This overlap creates a decline in the amount of rental income you can bring in. Also, renters typically do not want to travel to locations such as the beach in the winter months. Travel to these destinations relies strictly on the weather and the time of the season.
- Property management: Unless you live on the property year-round, you must hire a company to monitor your property. These companies are not free, so remember to take this factor into consideration when deciding to purchase.
- Insurance: Vacation homes are typically located near large bodies of water, which can lead to higher insurance costs for flood and storm protection.
- Rent Income is Taxable: If you rent out your property for more than 14 days out of the year, any income made is able to be taxed. This also means you will need to differentiate between personal and rental use.
Reason #2 for Purchasing: You Believe Buying is Better than Renting
A lot of times, those who have their own home have a negative attitude towards renting out other properties. They believe that buying is a superior option and will be a smarter investment down the long road. When differentiating between the two, contemplate the following:
- Rent is a predictable expense: With purchasing a vacation home, you are not able to predict the unexpected costs that come with managing a property. With renting, you have access to the rates and fees that come along with the property upfront and do not have the responsibility of managing the property.
- Location: By purchasing a vacation home, you are bound to that vacation spot for years to come. If your family already travels to the same location year after year, this could be a good option for you. However, if you like to explore new areas and locations, having a property that you own may inhibit your ability to travel.
- Retirement: Many times, homeowners are looking to purchase vacation homes as a means to retire when they get older. Purchasing gives you the security of having a property in a location you want to move to as you get to that next stage in life.
Whichever direction you choose regarding purchasing vs. renting a vacation home, it is important to consult a financial advisor to help you decide. Both buying and renting have their pros and cons, and it is important that you make the decision that best fits the lifestyle you are trying to occupy in the future.