So you're thinking about buying a vacation property. I've owned a vacation property since 2007 and don't recommend doing so. However, let me introduce a vacation property buying rule to follow so you don't get in financial trouble.
The vacation property buying rule to follow is to buy a vacation property for lifestyle first, income and returns second. In other words, don't buy a vacation property as an investment with potential positive. Buy a vacation property because you think it will bring joy in your life. If you think this way, then you will enjoy your vacation property more.
I also wouldn't buy a vacation property until after your first kid turns three either. Before kids, you should be free to vacation anywhere in the world untethered. Once your kid turns three, s/he will remember and appreciate your vacation property more.
A Hot Tub Encounter At My Vacation Property
Back in February 2017, during a hot tub party at my vacation property at Everline Resort at Palisades Tahoe (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!
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. 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.
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 etc.
In addition to keeping your vacation property to less than 10% of your net worth, don't buy one until you have kids. This way, you will be able to amplify its utility and joy across more people.
Vacation Property Buying Guide
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.
I feel so much better now that my vacation property is worth less than 10% of my net worth versus when it was ~30% of my net worth. A vacation property must feel affordable. I've made this point in my post about buying the perfect house.
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.
Invest In Real Estate More Strategically
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. It has over $3.5 billion in managed assets for over 500,000 investors.
With only an investment minimum of $10, you can dollar-cost average into residential and industrial real estate in the Sunbelt, where valuations are lower and yields are higher. Fundrise is a sponsor of Financial Samurai and Financial Samurai is a six-figure investor in Fundrise.
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 $954,000 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.
Both platforms are Financial Samurai sponsors and Financial Samurai is a six-figure investor in Fundrise funds.
Vacation Property Update 2024 And 2025.
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.
In April 2024, I took the family up to our place in Lake Tahoe on an epic family ski vacation. The value of our vacation property has increased tremendously now that we have kids. I can't wait to go up there for 12-14 years while the kids are still living at home.
Finally, we took our kids on their first flights ever to Oahu to see their grandparents. We stayed with my parents for several nights and then at a beachfront vacation property my aunt owns. So far, not bad! Although, I am reminded that owning a vacation property can be a lot of work, especially if it's a house near the ocean.
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.
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.
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.
Change “now travel tax deductions” in last sentence to “no travel tax deductions”
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.
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.
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.
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.
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!
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.
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 :)
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.
I was in Tahoe this past January as well. It was crazy. That picture brought back some not so pleasant memories
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.
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.
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.
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%).
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!
Cape may is great! Too bad it is too far from north jersey / nyc to get there super easy every weekend.
Sam, do you rent out your property to others or do you keep it strictly for your own personal use?
Sam, I can say with much certainty that most vacation properties rock. We’ve owned several vacation homes over the years. We’ve also owned many increasingly nicer primary homes over the years, and by comparison, the vacation property was much closer to what we envisioned it would be like.
For vacation property, it really boils down to spending quality time with family. Our kids are grown and out of the nest now. Some of our best memories as a family occurred at our vacation properties.
Your past comments on your dream home in Hawaii got me to thinking about three items to consider:
1. Dreaming and planning for your dream home rarely lives us up to actually owning it. Consider one Vulcan’s famous words of advice, “After a time, you may find that having is not so pleasing a thing after all as wanting. It is not logical, but is often true.”
2. Vacation property has a better chance of living up to dreams and expectations.
3. Thinking about how fulfilling (and occasionally how difficult) life will be with children rarely compares to how truly amazing it actually is. What beats the memory of skiing down that black diamond ski run under perfect snow conditions alongside your son or daughter?
Happy Trails
For 2 years ending recently, I had a job in South Florida. They relocated me there and therefore paid the closing costs I incurred to buy my house with pool), which was a short sale. I fixed it up, and considered myself fortunate that my regular house was also a vacation home, and I had a job. But my boss retired. They gave me a choice to move under a relocation package, or lose my job. I struggled a lot about whether to move or not, and if so, whether to rent or sell. I finally decided to sell since they were covering all the closing costs. Made about $30k with owning the house only two years. But I miss the house dearly. And company never provided the career advancement they hinted would happen if I moved.
My family thought my uncle was crazy when he paid $100,000 for a house on Rubicon Bay in 1976. Today the buoy for his boat is worth more than that. I loved spending 2 to 3 weeks there in the summer water skiing. So enjoy your Tahoe home and know your kids are sitting on a gold mine.
Very interesting article.
I own a lakefront cottage and it is now worth 15% of my net worth.
So based on your rules I’m okay :)
My parents got a vacation place when I was around 5. It is actually where my grandparents took my dad & his brothers when they were kids. My mom just got the foundation leveled, but it’s always been a little uneven. It’s not winterized so it’s only open May-Mid Oct. My mom stayed at home with us so we would spend the first 5 weeks out of school up there. Dad would come up on weekends and at least 1 week. Friends and relatives would rent out her cabins on the property around 4th of July so we have a lot of great memories! Then my parents would rent it out the other weeks of summer and make $ to cover maintenance and any bills. We’d use it some weekends spring and fall. Early on it only had a propane heater and the one time we woke up on an unexpectedly chilly day mom hand stitched some spare fabric into hats for us.
It’s now mom’s summer retirement place and my aunt and uncle got a cabin about 20 min away. I don’t think I’d get a different place unless my future significant other had somewhere in mind. Who knows what the future holds. I’m in my wealth building phase and have a place to visit that comes with spending time with my mom. :)
Good post. You hit the nail on the head when you said it is about lifestyle. And your point about percent of networth ensures that having the second home lifestyle doesn’t become an albatross.
You also touched on something I experience myself as the definitely 1% like problem of feeling I don’t see as much of the world as I would if I didn’t have a second home.
Can you do future post on Vacation Home insurance policies and other issues specific to vacation properties?
The standard homeowner policy states that if the house is unoccupied for extended periods, the policy can be nullified. I have done some research to show there is a difference between “unoccupied” and “vacant” properties. Typically, to maintain the standard homeowner policy the property must meet two criteria – 1) the house is in a condition such that a typical person could live there. This usually means the house is furnished and the utilities are turned on. 2) the house cannot be unoccupied for 30 or 60 days depending on the policy.
Are there special vacation home policies and how do they compare to regular home insurance in regards to cost & coverage?
Second, are there issues with having a vacation house in one state and your primary residence in another state? I’m thinking specifically of things like dealing with the post office or picking up packages addressed to a vacation home; things that require you to show an ID which doesn’t have the same address as your vacation home.
We are closing Friday on a vacation home in Sleeping Bear Dunes Michigan. It feels strange buying a second home that is more valuable than our primary. However, my in-laws are paying the down-payment in full with the agreement they get to use it occasionally in their retirement. It will be rented during peak summer season which will hopefully pretty much cover costs. Hopefully my wife and I can enjoy it in the years to come and it will grow our net worth!