Vacation home. How much is too much? Lordosis style poll.

[Tangler]

I know it is controversial regarding the "utility" of a vacation home.

Investment vs luxury consumption item?

I know some of you smart critters have bought vacation homes and use / used them as rental properties and actually break even or make money.

I worry that I probably don't have the skill / ability and absent that would require copious doses of luck.

Since luck and hope are poor strategies, I am just going to consider it what it is (or would be) for me: A consumption item.

Background:
Age 48, Household income (variable but last year was around 450k), debt = 0, (zero mortgage) current home value 1.5M. Investments (>4M).

No kids. Expenses around a max of 120/year and a lot of that is taxes.

Working part time. Part of work is small business, part is per diem Anesthesia. Latest per diem gig is on Cape cod, so there is this "idea" that I could work at cape and then stay at my little vacation house and shuttle back and forth (1-1.5 hour drive) to my primary residence.

Here is my question: If you looked at a second home ( a small house near kayak fishing waters on Cape Cod for example) what is the MAX % of net worth would you put into a vacation home?

[Tangler]

For those of you who use a vacation home as a rental property here is a follow up question.

How do you determine the value of the property?

If you look at the capitalization rate (R) what R do you consider "reasonable"?

R = NOI / Value, Where NOI = net operating income and R = cap rate

Or, do you use the "1% rule" or something else? Instinct?

[Larry Ragman]

Hard issue to put into a poll. That is, the poll asks a straight up financial question but the issue has complexities. For example, if a second home you could deduct mortgage interest and taxes but SALT deduction limited to $10k. Maintenance at the Cape is high. Need to factor in the budget. If you would be doing this year round need a weatherized place. No biggie, just more money. Since you would be coming down regularly to my mind it would be too much trouble from a scheduling standpoint to rent it out. So, I’d rent one for a year to see if the idea worked. If yes, I’d buy for cash and make sure the hit to the bottom line would no affect my ability to live on the cash flow from the remainder. By the way, if you buy, buy a good rental. You can use it for cash flow when you retire.

[Tangler]

Hard issue to put into a poll. That is, the poll asks a straight up financial question but the issue has complexities. For example, if a second home you could deduct mortgage interest and taxes but SALT deduction limited to $10k. Maintenance at the Cape is high. Need to factor in the budget. If you would be doing this year round need a weatherized place. No biggie, just more money. Since you would be coming down regularly to my mind it would be too much trouble from a scheduling standpoint to rent it out. So, I’d rent one for a year to see if the idea worked. If yes, I’d buy for cash and make sure the hit to the bottom line would no affect my ability to live on the cash flow from the remainder. By the way, if you buy, buy a good rental. You can use it for cash flow when you retire.

Thanks! You are correct. Lots of variables. Will wait (no rush) and see how i feel in 3-6months (minimum).

Agree this complex with lots of moving parts.

Agree, maintenance will be significant and will cut into net operating income and drop the cap rate if used as a rental.

Agree, cash purchase. Not a fan of debt.

Agree, scouting the area for a while is intelligent (renting a place for a while and looking around) no rush.

[Larry Ragman]

Regarding cap rate, etc. I find those metrics more valuable for commercial and multi-family. For single family rentals I just look at cash flow and cash on cash return. Not sophisticated, I know.

[Lordosis]

Do you travel with your wife or other friends? Or are these solo trips? Seems like it is too much of a hassle to buy a home if it is just a place to crash while out on a fishing trip.

[Fullhouse11]

We just bought a second home 7 months ago. It represents about 12.5% of our net worth. 50/51, NW $7.8M, income $800k, retirement 10 years away. We may rent it out in the future after we figure out how much we use it and if we want to inventory our stuff or lock it away for renting. We love the new house, on a lake about 2 hours from primary home, we go there way more than we thought and it is adding a lot of happiness for us so far. We rented in this location for many years before finally deciding that we could afford to buy a second home here. I think that your income and your savings make it a good investment in lifestyle, but the fact that you don’t have kids is where you really have an edge financially. Us breeders underestimate that cost by $100s of thousands of dollars. Good luck! Some decisions aren’t completely financial after you hit your FI number.

[Anne]

Would you choose Cape Cod as your number one vacation home location if you weren’t currently doing part time per diem work there?

[dennis]

We've had a lake home for 33yrs. the first 16yrs a condo and a house for the last 17yrs. Never have and still don't want to rent it out. Is it a luxury, sure but I love it. At the time we bought it was probably about 10% of our NW. It's value has grown as has our NW so it is still about 10%. It will be mortgage free in about 7 yrs but the loan is only 2.5% interest so won't pay it off early as it is far below inflation rate.

[Tangler]

Would you choose Cape Cod as your number one vacation home location if you weren’t currently doing part time per diem work there?

Yes.

[VentAlarm]

I don’t think there’s a number. If you have a 2% withdrawal rate and want to spend 30%, that’s probably fine. If you need 6%, any amount is too much.

Depends on use, other obligations, cashflow, etc.

[Marko-ER]

Ok, I will bite & here's my take. We purchased a bit of a "diamond in the rough" vacation home that's on three separate parcel lots on a lake that's adjacent but not immediately within a very popular vacation area. The prices within the popular vacation area have exploded during COVID and have risen in the adjacent areas including where we bought, but not as much. We were able to buy with cash to minimize transaction costs and we got a HELOC to slowly do improvements. The value of the property is just about 10-15% net worth and less than 60% of gross annual income. With ongoing COVID risk and 2 kiddos under 2yo, we are otherwise not going to travel much in the next 4-5 years. Plus we really like the area and we wanted to share this vacation property with friends who make substantially less in elementary/special ed teaching & would otherwise not be able to afford a vacation at all.

In terms of renting, we are only going to do 2 weeks / year to keep under the tax reporting threshold. As mentioned above the property is on 3 lots, so my other thought is if it can be done within a reasonable budget (~70K) is to add a second floor 3-season unit above the garage that could also be rented under a different address for another 2 weeks, but otherwise so we can spend time with friends & family together and not be crowded and have our privacy. If/when we sell our main home, we could also transport our auxillary office/guest suite if not useful to future buyer to the vacation lot & potentially add more value to it (on parcel #3). Last but not least ("mostly" kidding) it serves as an escape valve in case of a major social unrest -- i.e. prepping light.