What's a Better Use of Money: Renting or Buying a Resort Home?

What's better: renting in your favorite vacation destination, or purchasing a house of your own?

If you often vacation at a favorite resort area, you might wonder whether it might make sense to stop paying rent for your accommodations, and instead purchase your own home in the area. To determine whether buying or renting a resort home is the wisest use of your money, you must consider a number of factors including expenses, common problems, and your personality.

Assess the Costs of Renting Versus Owning in a Resort

First, compare how much you’d pay for home rentals each year with the yearly expenses of owning a home. To help you determine which option involves the greatest annual expense, let’s look at the likely costs involved with each.

Costs of Renting a Home In a Resort

Calculating the costs of a rental home is fairly straightforward. The main cost is, of course, the nightly (or weekly) rental rate.

Rental rates typically vary depending on the accommodation’s quality, size, and location, which resort you are visiting, and the time of year at which you visit. For example, renting a luxury slope-side condominium at a ski resort during the holidays will cost a bundle. If you are renting an older home located out of town during the off-season, however, a more reasonable rate can be had.

If you anticipate spending a lot of time at the resort, the rental costs can really add up. You must assess how much time you will realistically visit each year. Additionally, you must account for the fact that rental rates are typically always on the rise due to inflation.

Other expenses associated with a rental home might include cleaning fees as well as repairs (if you happen to cause any damage while you’re there). Also, if you rent a hotel room at a resort, you must account for the expense of tipping the hotel staff, and (unless it’s a room with a kitchen), the expense of eating all your meals at restaurants.

The Cost of Resort Home Ownership

Calculating the annual costs of owning a resort home is more complicated. First, you must determine the amount of mortgage interest you will pay each year, as well as tax costs or savings and any additional expenses. You must also weigh the home’s appreciation potential against other investments.

Mortgage and Tax Issues With Owning a Resort Home

If you have the funds to buy the home outright (with no financing), mortgage issues won’t be a concern. However, prices for homes in resort areas are typically steep, and most people must obtain some type of mortgage to finance a second home in a resort.

Mortgage interest rates and mortgage interest deductions for a second home are not necessarily the same as for a primary residence. Sometimes lenders will classify a second home an “investment property” and charge higher mortgage rates (this commonly depends on how often you stay at the home).

Additionally, the interest on a mortgage for a second home is not always allowed as an income tax deduction. For example, your mortgage interest tax deduction might be limited if you rent out the home, or if you used equity in your primary home for the down payment of the second home. (For details on the rules relating to taxes on second homes, see IRS Publication 936, Home Mortgage Interest Deduction, and IRS Publication 527 Residential Rental Property.”

Tax issues also arise when you sell a second home. If you sell your primary residence, a certain amount of any gain from your home’s appreciation is not taxed (as of 2014, the first $250,000 of appreciation (or $500,000 for a married couple filing jointly) is excluded from capital gains taxes). However, if you sell your second home, you must pay capital gains taxes on all appreciation (unless you qualify for what’s known as a 1031, or “like kind” exchange -- the details of which are found in the Internal Revenue Code Section 1031, and explained in the IRS article, “Like-Kind Exchanges Under IRC Code Section 1031.”

Opportunity Costs of Tying Up Your Money in a Resort Home

Another consideration with owning a home in a resort is the potential for property appreciation or loss. Although real estate can produce nice gains, it’s a risky investment overall, and could easily result in a loss. Before you buy, talk to a real estate professional in the area, and do some research to get a general idea of whether the resort home you are hoping to buy is likely to appreciate, and if so, by how much.

Compare the home’s estimated appreciation (or loss) to the returns you might get by investing the money elsewhere (in the stock market or bonds, for example). If it seems there’s a greater probability that you would make more money by investing elsewhere (and then renting a resort home instead), you should include the difference in gain as one of the expenses of owning the home.

On the other hand, if the resort home is likely to give a greater return when sold than another investment, this could be counted as income you’d miss out on by sticking with a rental property.

Other, Secondary Resort-Home Costs

Owning a second home also means a second set of home-related expenses. Just as with your primary residence, you will need to pay annual real estate taxes, utilities, and ongoing maintenance expenses for the second home. If you do not visit your resort home regularly, you might need hire an on-site manager to keep an eye on the property, and to take care of required maintenance. For example, you might need someone local to take care of the landscaping, shovel out the sidewalks and drives, or repair damage from storms.

Additionally, if the resort home is located in a planned development (which are common in resort areas), ongoing dues and assessments might be another expense.

You might recoup some expenses by renting the home out when you’re not visiting. Renting can't be counted on to significantly defray costs, however. During peak seasons in a resort area, renting out a home is typically not a problem. However, unless you have the time to arrange rentals on your own, you’ll likely need to pay a portion of the rental rate to a real estate agent or rental agency to coordinate this. If the rental period is short term, you might also need to hire a housecleaner to clean up between renters. Additionally, finding renters during the off-seasons in a resort might prove difficult.

Non-Financial Considerations With Renting Versus Owning a Resort Home

In order to determine whether it’s wisest to rent or buy, you must also consider a number of other differences between renting and owning a resort home.

With a rental home, you might find that your favorite home or condominium unit isn’t always available when you want it. And you might be less than thrilled with your alternative rental accommodations once you arrive. Perhaps the rental is smaller, older, or uglier than anticipated, with lumpy beds, scratchy bedding, or smelly carpets. Or perhaps you will be unpleasantly surprised by the neighborhood, where a large group of loud, rude college kids keeps you up at night, and takes over the common swimming pool and hot tub area.

These issues can be avoided if you own your own home. You can furnish and stock the place to your tastes and will know just what to expect each time you visit. Also, if you are concerned about the neighborhood or frequently changing neighbors, you might purchase in an area that doesn’t allow short term rentals, or one that has more long-term residents and fewer rental homes.

Whether Your Personality Is Suited to Resort-Home Ownership

To make the wisest choice between renting or buying a resort home, honestly assess your likes and dislikes. Are you sure you want to visit the same place again and again? If you love variety, trying new things, and exploring new places, renting might be the wiser choice for you. Remember that, to make the costs of ownership worth it, you will want to spend most of your vacation time at the same place. Yet going to the same place repeatedly might start to feel like a drag.

Look at the Whole Picture Before Buying a Resort Home

Before deciding whether to rent or buy in a resort area, you must assess all of the considerations above. In the end, however, only you can determine which choice would give you the most satisfaction. If money isn’t your first concern, and you just want a place of your own as a retreat, buying that dream home in a resort might be the way to go. If not, however, take a close look at the direct and indirect costs as well as the investment value of your intended resort home.

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