Investing in a Vacation Property: A Strategic Approach
**Primary Residence vs. Vacation Property**
While I firmly believe in buying a primary residence as soon as financially feasible, the purchase of a vacation property requires a different strategy. Unlike primary residences, vacation properties are discretionary expenses rather than necessities. The infrequent use of a vacation property often makes it a less-than-ideal investment, rarely justifying the high costs involved.
My own experience with a vacation property in Palisades Lake Tahoe, bought in 2007, was far from favorable. Despite securing a 15% discount from its 2006 price, the value plummeted by 50% during the global financial crisis. Had I bought at the market bottom, my outlook might have been different. However, I still hold that vacation properties often represent suboptimal investments.
**The Value of a Vacation Property Increases with Children**
For singles or couples, the use of a vacation property may not justify its ownership. With most Americans vacationing for less than 30 days annually, maximizing usage is crucial. During the majority of the year when the property is not in use, renting it out is essential to offset costs such as property taxes, HOA fees, and maintenance expenses. Rather than owning a vacation property, consider using your cash to vacation anywhere in the world.
After retiring in 2012, even with the freedom to travel, my wife and I did not spend more than 30 days annually at our vacation property. We preferred to diversify our travel experiences, visiting places like Hawaii and Europe. However, with children, the value of a vacation property significantly increases. Here are five main reasons why:
**1. Increased Utilization**
More people can enjoy the property, enhancing its value. Initially, our two-bedroom, two-bathroom condo felt excessive for just the two of us. We could have saved money by renting hotel rooms. Now, with two kids, we fully utilize the space, making it a more valuable asset.
Our property, capable of accommodating up to eight people, can be rented out in three configurations: two bedrooms, a one-bedroom suite, or a studio with two queens. This flexibility mitigates waste by allowing partial rentals when we vacation elsewhere.
**2. Amortized Costs**
The more family members, the more the costs are spread out. Our property rents for $500 to $1,500 per night. For a couple, this translates to $250 to $750 per person. With four people, the cost per person drops to $125 to $375. All expenses, including HOA fees, maintenance, and property taxes, are divided among more people, making the property more cost-effective.
**3. Better Living Arrangements**
Family vacations often mean cramped living spaces. Owning a vacation property allows for more comfortable accommodations. For us, a two-bedroom condo now feels just right. During our first years of ownership, it seemed like an overinvestment. Now, it suits our family perfectly, especially after bringing our children.
**4. Creating Lifelong Memories**
A vacation property provides a stable, familiar environment for children. They become comfortable with the surroundings, and it feels like a second home. We store personal items in owner’s lockers, eliminating the hassle of transporting gear. Familiarity with the area enhances the sense of community, and children thrive on the routine and comfort of a second home.
**5. Financial Strategy**
Building wealth before having children is wise, as kids require significant resources. Owning a vacation property can become a strategic financial decision. Accumulating wealth before children allows you to spend more time with them without financial stress. Setting a net worth target before having kids ensures financial stability when you do purchase a vacation property.
### Timing the Purchase
Ideally, wait until your youngest child is at least three before buying a vacation property. Before this age, children are less concerned about vacation specifics. If eager to buy, wait until your first child is five, ensuring they and future siblings can enjoy the property.
Reflecting on my experience, if I had waited until my first child turned five to buy a vacation property, I might be $500,000 richer today. The potential additional risk-free income from Treasury bond yields could have been $25,000 annually.
Strategic Real Estate Investments
Instead of purchasing a vacation property, consider passive real estate investments for potentially better returns. Platforms like Fundrise, managing over $3.3 billion in assets, focus on residential and industrial properties in high-yield regions. Investing in such platforms can generate passive income, financing vacations anywhere without the hassle of property ownership.
Personally, I’ve invested $954,000 in private real estate funds, targeting properties in lower-cost areas. With the rise of remote work, more Americans may move to these regions, making such investments promising.
Final Thoughts
A vacation property can be a valuable investment if timed and used correctly, especially with children. However, strategic real estate investments often offer better financial returns. Consider your lifestyle, family needs, and financial goals when deciding on a vacation property.
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