I stayed in a really old hotel last night. They sent me a wake-up letter.
After they retired, my parents bought a cabin in the woods. Actually, given that our neighbors had done the same thing and sold their plot for a hefty profit, I think that my parents had a similar idea. Live in it for vacations for a few years, and then sell it for a profit.
I have no idea if they sold it for a profit, but they did sell it a few years later.
Their reasoning was that they could just rent cabins and pay a lot less than they were paying in their mortgage and upkeep for the house. Plus, if they wanted to go somewhere else, they were free to do so without feeling like they were tied to going back and forth to the cabin.
When I worked at Capital One, several coworkers bought beach houses in the Outer Banks of North Carolina. The idea was to rent out the homes for, say, 50 weeks out of the year and then vacation there for a couple of weeks. The same people were in a panic when Hurricane Isabel roared through the Outer Banks.
Given that my wife and I are ski enthusiasts (I would not dare label us avid skiiers given our struggles on the simplest of black diamond slopes), we’ve often considered whether or not we would want to have a vacation home in the Rockies somewhere. We dream of the ski-out/ski-in vacation lodge right on the slopes that would remove the need to trudge around with skis and boot bags. However, when we’ve thought about the practicality of it, we’ve wondered if it was the most practical way to satiate our skiing and hiking desires.
Should I Buy a Vacation Home or Rent Airbnbs Instead?
There are benefits to each choice.
Pros of Buying a Vacation Home
- (Mostly) one and done. If you buy a house with cash (after all, there’s no such thing as “good” debt), and, aside from insurance, property taxes, and other maintenance costs (which I cover in “How Much Should You Have Saved to Retire? It Depends on Where You Live“), you’re set. You don’t have to worry about some capricious owner or hotel chain raising prices on you indiscriminately.
- You can customize your house to your heart’s content. Have an allergy to IKEA furniture? Chances are good that if you rent an Airbnb, you’re going to spend your time in a house chock full of furniture that was lovingly assembled by hand by a couple who had to seek marital therapy afterwards because of the extreme stress that assembling furniture causes. Think that rustic chic Northwestern Barrow is the style that best defines you? Hang those canoe and seal paintings all over your place.
- You become a local. If you’re an owner, then you can meet all of your neighbors and be on the same ground as them when it comes to the local versus tourist discussion. Make friends with people who won’t depart when the weekend is up. Find out the true insiders’ gossip and information on best places to do whatever it is that you want to do.
- No worries about vacancies. I wince with the memory of wanting to go somewhere during a specific holiday week or weekend and not being able to find lodging within my price range within a 50 mile radius of where we wanted to go. If you own your own vacation home, that fear is just a memory, as you can go whenever you want.
- Rent it out the rest of the time. Who says that you have to keep your place empty unless you’re using it? Why not turn that vacation home into an asset? With a little work, you can become a host on Airbnb (#aff) and set up a property management company to take care of the housekeeping and maintenance. One estimate is that you should target around $13,000 of rental income for every $100,000 you spend on a vacation home, although that estimate is only if you’re planning on purchasing the property for its cash flow and as an investment. Since you plan to use this vacation home some, decrease the amount relative to how much you plan on using it. You’ll need to find out cleaning costs, but costs seem to range from $60/house on the low end to $350/house on the high end, depending on location and size. That’s why some hosts only allow minimum stays of 2 or 3 nights, as, since they’re absentee hosts, they need to hire someone to do the cleaning and prep work for the next guest.
Pros of Renting Airbnbs
Naturally, the arguments for Airbnbs (you can get $55 off of your first Airbnb rental by clicking here (#aff)) are the inverse of the arguments for owning a vacation home. Namely:
- You’re not tied to one place. The fewer the physical possessions you have, the more freedom you have. This holds true for houses, too. If you have a vacation home, you’re going to feel tied to going to it over and over again to get the use out of it. With Airbnbs (or hotels, or VRBOs, or couch surfing), the world is your oyster, and you can go wherever the Muses inspire you to go.
- No need to commit significant amounts of money up front. Even if you’re going to get a mortgage on a vacation home, you’re probably going to have to put down 20% as a down payment. That can be tens of thousands of dollars tied up right up front before you even get a dime’s worth of enjoyment out of it. However, with an Airbnb, you put down a deposit on your room, and that’s it.
- Lemon protection. If the house that you buy has unexpected issues with it or your neighbors are jerks, you’re stuck. If the Airbnb doesn’t match what was promised, Airbnb will take care of you. At worst, you’re stuck for however long you rented, and you can go somewhere else next time.
A Case Study: Breckenridge, Colorado
We really like Breckenridge and have been there a few times. Let’s look at the relative costs for both options.
First off, let’s evaluate purchasing a home in Breckenridge.
I looked for single family homes within shouting distance of the slopes, with at least 2 bedrooms and 1 bathroom, and the cheapest one that I could find that didn’t have some odd restriction like requiring a job in Summit County was this house which listed for $659,000. The description says that it is a fixer-upper, so I’m estimating $75,000 of repairs and renovation. Add 5% of that total for closing costs, and it can be yours to live in for $770,700. I didn’t even include the IKEA furniture you’d need to buy to furnish it!
Assuming you don’t have $770k in liquid assets that you don’t need for retirement to buy the house in cash, then you will need to put down a down payment to get a mortgage. If I assume you need a 20% down payment, that is $154,140 for the down payment, and a $616,650 loan. If you can get an 8% loan for 30 years (that may be high, as second home mortgages are currently much lower, but this would be a jumbo second home mortgage, so I’m going high to be conservative), then your monthly mortgage payment will be $4,524.10.
Additionally, you’ll need to insure and maintain your home. Based on the estimates I outlined previously, they are:
- Insurance: $269.75 per month
- Home maintenance: $642.25 per month
- Property taxes: $222.24 per month (source)
- Total cost of upkeep: $1,134.24 per month
- Total cost of home with mortgage: $5,658.34 per month
Let’s assume that you’re OK with strangers sleeping in your place and want to become a host on Airbnb (#aff). I expect that you would use a service like Vacasa to manage your property. They charge 35% of revenues as a fee, and I also expect that between vacancy during available rental times and your own use, you won’t be earning for 15% of the time. That would mean your take-home from renting out your property would be 50%.
Since your expected rental income on this vacation house should be $100,191, you would probably net about $50,095.50 per year. Your annual cost from above is $67,900.08, meaning that you’d be out of pocket $17,804.58 per year until you paid off your vacation house in 30 years.
Yes, inflation of rentals, tax breaks…I get it. Check the numbers with your accountant or find a financial planner near you.
Now, let’s look at renting an Airbnb (#aff) in Breckenridge.
I found a couple of rentals that looked quite appealing. Both seemed to be within walking distance of the slopes or things to do.
The first one I looked at, I looked at renting for a month. The monthly rental, all in, was $4,800 per month, or $154.84 per night. Sometimes you just can’t get enough of the slopes.
The second one I looked at, I looked at renting for a week. The weekly rental, all in, was $1,903 per week, or $271.86 per night.
Using the second house’s nightly rate as a guide, I then looked to see how many nights you’d need to stay at an Airbnb to break even versus owning a vacation rental. The answer was, with a 20% down payment and with the other assumptions I outlined above, 65 nights.
But, you may say, at the end of 30 years, I’ll own the vacation house free and clear!
Indeed, you may.
But, you could have taken the $154,140 down payment and invested it in the stock market. The average annual return for the S&P 500 over the past 90 years is 9.8%. Recent historical real estate appreciation in Colordao has been 3.9%.
That means investing your $154,140 down payment in the market would, on average, leave you with $2,546,746 after 30 years. Putting that money down on a vacation home would give you a paid off vacation home worth $2,428,576. For the purposes of this evaluation, I’ll call that $118,169 difference a wash.
So, if you’re committed to spending at least 65 nights in an Airbnb in the same place every year and you have enough for a down payment (at 0% down, that number becomes 115 nights), then, in the example above, it makes sense to buy a vacation home. Otherwise, rent and enjoy the flexibility!