Should You Buy a Vacation Home? Financial Considerations

Should you Buy a Vacation Home?

First off – CONGRATULATIONS!  Considering buying a vacation home means you feel comfortable financially and that is a wonderful feeling.

Now, before you start browsing listings and envisioning lazy days by the beach, it’s important to carefully consider whether purchasing a vacation home aligns with your financial goals.

  • Do you have your financial foundation in place?
  • What will the vacation home bring to your life?  What will it take away?
  • Is this an investment or a pure cost?
  • What can I afford?

We like to think of finances in a hierarchy.  

First, you need a strong financial foundation to know you are secure and can meet your basic needs of shelter, food, etc.

Then, you can focus on financial flexibility.  Financial flexibility is taking a big breath, centering your mind, and focusing on what your most fulfilling life is.  Then, you focus on aligning your values with your money.

This may mean focusing on your kids – private school, college funding, getting your time back to spend making memories with them.

And/or it may mean more time flexibility – leaning into travel, sabbaticals, or a different career path.

For many of our clients, this is where thinking about a vacation property comes into play. 

What do you feel you will enjoy most from owning a vacation home?

Often I hear: 

…a place to gather family,

…to make memories with my kids, 

…a place to ‘just’ be and not be subject to the city hustle, etc.  

These beautiful visions bring my clients peace.  And we want to keep it that way by exploring some of the key factors to make an informed decision.

Evaluating your Finances for a Vacation Home

First and foremost, evaluate your finances. Can you afford to purchase a vacation home without compromising your other financial goals?

  • Do you have a good emergency reserve in place?
  • Are you on track for college funding?
  • Have you already maxed out your company benefits and retirement accounts?
  • What additional cash flow can you put towards this investment on an ongoing basis?
  • Are there any other large expenses coming down the road in the near future?

Next, consider the total cost of owning a vacation home. This includes not only the purchase price but also ongoing expenses in maintaining it.  Property taxes, homeowners insurance, maintenance, utilities, and possibly association fees.  

Will you get a mortgage on the property?  What is your total debt to income ratio now?  Would you qualify for it based on your current finances?  Vacation home properties aren’t the same as primary homes.  They generally experience higher interest rates and require larger down payments as second homes.

If you are looking at a beach home or ranch property, the rate of increasing costs may also be in question.  How much has the homeowners insurance and association fees gone up annually?  Many beach home communities are finding their insurance rates skyrocket at 40% a year the last few years.  This is something you want to know for future planning.

Another consideration beyond the home is how are you getting there?  Will you be able to drive or do you need to fly to get there?  Fuel and wear-and-tear on your car while driving to and from the vacation home and a larger dining out budget may factor into your decision.

What kind of activities do you plan on pursuing there?  Does this lead to a membership at a ski lodge or a boat purchase?

What may feel like buying a vacation home can lead to buying a vacation lifestyle.  Know the all in cost.

Evaluating the Investment Opportunity of a Vacation Home

To lessen the overall cost, could it be an investment property?   If you are considering renting out the property, you will need to add a rental income estimate to your calculation.  What is thee rental demand in the area?  Are there seasonal fluctuation? 

Renting out the home can often lessen the total price tag of a vacation home but can lead to more hassle if you aren’t ready for that step.

  • Will you offer the property as a short term rental?  What will be your minimum stay requirement?  
  • How will you manage the property?  Will you hire a property manager or will you personally manage it?  
  • Will you give up holidays for higher rental income periods? When will you use it?

Once you estimate the vacation home revenue and costs, it’s time to dive deeper.  Now, it’s time to dive into what your return on investment (ROI) and cash-on-cash return would be for the investment property.  There are many real estate investment calculators available.  The hardest part is deciding what numbers to put into the calculator 🙂

To learn more about the investment property side of real estate, we recommend checking out Bigger Pockets, the Real Estate Rookie Podcast, and Wharton school’s certificate program (if you are looking to make this your encore career).

What Can YOU Afford?

Now that you’ve evaluated your personal finances and the investment opportunity, it’s time to ask yourself what you are willing to do in trade-offs…

…Knowing this, what is possible now?

Depending on the area, I’ve calculated the annual cost for clients (even with rental income) to be $50,000+ for the pleasure of owning the home.   

What would it cost to rent an AirBnB in the same area?  Could you come up with an even nicer travel tradition for your family for less than $50,000?  

Additionally, think about your long-term plans and lifestyle preferences. Are you committed to returning to the same vacation spot year after year?  Or do you prefer the flexibility of exploring different destinations?  

If you have small kids, what are your hopes for them growing up?  Many kids activities can take over weekends with competitions and practice.

For our clients, my favorite YES BUY IT! moments are when we create a P&L and look at the return on investment of renting the property out less than half the year, and using it for the remainder of time. 

If the ROI and cash-on-cash return are still positive at that level, I know the property can function as an investment property in a worse case scenario.

Buying a vacation home can be a rewarding investment and lifestyle choice, but it’s essential to carefully weigh the financial considerations and ensure it aligns with your overall financial plan.

The above discussion is for informational purposes only.  Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.

Year End Planning and Setting Intentions for 2024

Year end planning

Each year we reflect on what went well for the year, what could be better, and how we will improve in the following year.  Some of the reflections are financial, some are based on improving quality of life, and others are around giving back to the community.

In my reflection this year, my heart is full of gratitude for the lives we touched at SeedSafe Financial.  We partnered with our clients to stay the course towards better finances in 2023, and that’s a big deal to me!

Although 2023 did not include the start of a pandemic, or fumbling through what that means in a ‘new world’, the year had its own challenges.  Rising interest rates, layoffs, and a stumbling stock market felt heavy at times and caused many to pause and ask the questions:  

How long will this last?  

Does this change big financial decisions I want to make?  

Where do we go from here?

Each year I hear these questions asked in year end meetings and it reminds me that life is full of unpredictable changes that will test our resolve.  The best way to stay the course is through a long term vision, reviewing plans, and creating priorities on an ongoing basis.

Build a long term vision of life

What is your most fulfilling life?   What are you doing in your most fulfilled life?  How are you feeling?  Where do you lean towards in this life?

We often skip right over our life vision and the purpose of money.  We may go straight to financial tactics: reading up on investment and tax strategies or the ‘top 5 things to do’.  We forget – money is a tool to facilitate a meaningful life.   

Money may mean different things to different people – comfort, security, freedom, anxiety.  It’s how we use money towards our life vision that makes an outsized impact.

Changes happen every year and our vision can lead us through it.  Your vision of your life should be your anchor and color all decisions (financial or not) that come your way.

With a vision of your life and the values you want to lean into, the next step is building financial flexibility towards that vision.

Knowing my long term vision of life, how do I feel about last year?

Work and life ebb and flow – some years you will have more time and energy to focus and some years less energy.

Review your time and energy over the last year.  What gave you more energy?  What took away energy?  How can you bring more energy to your life?

An enlightening exercise, The Wheel of Life, reviews major areas of a fulfilled life and asks you to assess how you are doing in those areas.  This can help you think more about what needs attention and time in the coming year and longer term.

As humans, we can (too) easily find ways we want to improve our lives.  Sometimes this is for ourselves, but sometimes it is what we ‘think’ we need to be happy.  Too often we can end up on the hamster-wheel of life.  Few on their deathbed wish they had more money.

One caregiver wrote about the experience of working with those towards the end of life and the regrets they had.  In The Top Five Regrets of the Dying, Bronnie Ware writes about the regrets:

1) “I wish I’d had the courage to live a life true to myself, not the life others expected of me.” 

2) “I wish I hadn’t worked so hard.” 

3) “I wish I’d had the courage to express my feelings.” 

4) “I wish I had stayed in touch with my friends.” 

5) “I wish I had let myself be happier”

It takes time and energy to live a life true to yourself, surrounded by those you love, and free from the ‘keeping up with the Jones’ attitude. 

Where can I lean into this year?

Now that you have your long term vision, reviewed last year and identified where you want to grow towards…what could possibly get in the way?  🙂

What can you make a priority this year?  How will you make it a priority?  Creating SMART goals rears its head again!  If you only have so much time and energy, then how you use it will make the biggest difference.

What can you remove from life that keeps you from a fulfilling life?

What can you lean into towards your most fulfilled life?

Considering your time

Each year I review my calendar and rate the activities and events I was part of.  What got me closer to my most fulfilled life?  What took away from it?

Knowing this, what can I do now to make next year even better?  It may include blocking out more days for creative work or scheduling out friend gatherings.  I love to host board game nights so I am penciling in those nights now.

Considering your energy

I am by nature an over-doer.  I want to do ‘all the things’ and find energy from a jam packed life, but even I have my limits.  What helps build your energy?  What takes away from it?

Are there activities that ‘must be done’?  Who else can do them?

Often I find our clients come to us because they know finances are important, but finances just are not on their priority list in life…and that’s okay!

If money is stressful, anxiety inducing or just ‘not fun’, why would you put more energy into it?  This may be an ideal place to begin to outsource and have a thinking partner that helps with money decisions.

The same may go for cleaning your home or cooking.  If you don’t enjoy it and you could use that time towards a more fulfilling life, then what can be done to reduce these activities?  For some, this may be buying a smaller home, reducing material things, or hiring a cleaning service.

For those who don’t have time to cook or have no desire to, it may mean hiring a meal prep service or buying ‘ready made’ frozen meals.

Each of us are individuals that deserve to be happier, healthier, and living our most fulfilled life.

If you go through the exercise of envisioning your most fulfilled life and find finances are something you want to change, please schedule a chat with us.

We wish you a beautiful holiday season!

The above discussion is for informational purposes only.  Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.

 

Teachings from my trek through Nepal

Jim goes to Nepal

by Jim Garvin, SeedSafe Financial LLC Lead Planner

Stepping away from work and the normal American life for an entire month to travel isn’t the norm.  It gave me a lot of headspace to think, reflect and experience life with new people and new cultures. If I could summarize the theme of my reflections, it would be “Gratitude”.

Gratitude

A few days ago I got back from Nepal, where I hiked the Everest Base Camp Trek, explored Kathmandu (Nepal’s capital), and Chitwan National Park.I love hiking and going on extended backpacking trips in Colorado, New Mexico, etc. but none of my U.S. adventures compare to Nepal.  Experiencing the Himalayas is the most challenging and fulfilling adventure I’ve been on yet!

This was my first time traveling to a third world country, and my experience was incredibly positive and very reflective. 

Being born and raised in the United States, a first world country, can make it easy to forget the true blessings that are around us every day.  Infrastructure, drinkable water & access to fresh food anytime anywhere. The low level of widespread poverty, the opportunities we have, etc. are very easy to take for granted. 

The biggest difference was opportunity.  Long ago, Nepal & India followed a very strict caste system. You would be born into a caste level, live and get married at your level, and die at that level. It was near impossible to change your caste level.  Recently, there are efforts to change this system, but culture takes decades to change a system that has been in places for centuries. 

In contrast, in America and other first world nations, you have the ability to change your economic status. This doesn’t mean it’s easy to change, but it is still possible. In third world countries, if you are born poor or into a bad situation, you most likely will die in the same or worse situation. 

This resonates strongly with me, as my personal background is from humble beginnings. Without the support of the Pell grant, the right mentors in my life, and other positive life-changing factors, my life would be very different. 

Regulations

Other big differences include regulations.  Environmental laws and auto emission laws were either nonexistent or not enforced.   Smog and certain areas of Nepal’s poor areas were trashed. We either bought bottled water or purified our own with iodine.  Electricity was spotty at times and their roads were rocky dirt paths with no pavement (talk about super bad motion sickness during every bus ride). These are observations of Nepal only – I had a wonderful time and I plan to travel back to the country in the future.  I mention these items to reflect on my gratitude for every day living in the United States. I am thankful we have fresh water, clean air, and environmental laws to help preserve our environment.

Based on my experience in Nepal, I’ve added to my bucket list to volunteer with the Peace Corps in their Economic Development program. 

Other Notes

The trip gave me the headspace to reflect on myself, life, philosophy, and more. If I were to write about each individual reflection, this would be a super long blog post! I choose to speak about gratitude because it is one of the most relevant reflections (especially around the Holidays! 🙂 but also because it resonated with me. 

Another strong reflection item was how much people from around the world are all alike. We trekked with people from South America, Western and Eastern Europe, and of course a few Nepalis. We laughed together, overcame challenges together, and related to each other on the most personal level.  Even though we all came from all different backgrounds. It was magical 🙂 

For the technicalities of the trip, we trekked about 70 miles and our highest elevation was 18,500 feet at the summit of Kala Pathar. At this altitude, you have about 50% of the oxygen compared to sea level. I carried a backpack of 35 pounds and we stayed in lodges and tea houses along the way (so we never had to use or carry a tent). We ate noodles and rice at every meal but we felt satisfied the entire trip. I also visited Tibetan Buddhist monasteries and joined in several different ‘services’ where the monks chanted and played music. 

Nepal is a beautiful, wonderful country that I encourage anyone with a hunger for adventure to explore. You will not be disappointed. 🙂

XYPN Live 2019: A Week of Financial Learning

XYPN Live St Louis

What a whirlwind week!  Last week we had the chance to go to the XY Planning Network Conference (XYPN Live 2019) for fee-only financial advisors and it was a blassssstttt.  Not only was the conference great, but Jim and I were able to take a 2 hour brainstorming walk session around St. Louis. #MyFav

XYPN Live St Louis
Windblown & Energized!

We presented Stock Options 101 to a packed room of financial advisors looking to one-up their stock compensation understanding and how to think about it with clients.  [Shout out to my co-presenter and friend, Shane Mason at Brooklyn FI!]

With our powers combined, we tackled:

  • how each type of stock compensation works, 
  • what that means in regards to taxes and AMT, and 
  • “Pro Tips” on how advisors can best support their clients/push their clients to better use this to grow their wealth

We may even start a stock comp education series to help all of us.  <<if you like this idea, please send us feedback and your stock comp questions>>

We also learned how financial advice is changing.  Technology won’t replace the advisor, but it will augment and change our focus.  We love technology and we are always looking at how to incorporate more into our business (so if you have ideas for us, please let us know!).  In the future, the value of advice will be in empathetic learning and financial engagement.   

Aka, creating space for you to pause the treadmill of life, consider your true desires, and then automate ways to get closer to that future.  

The advisor of the future is coming fast and it will be such a welcome change from what was ‘advice’ by only providing investment services or products.

To this end, I learned what this change may mean for SeedSafe Financial by engaging in a two-day pre-con with George Kinder.  George Kinder is the founder of financial life planning.  Taking financial plans from how do your assets and resources get you to your goals to are these even the right goals for you?  I already use his ‘three big questions’ often.  They help me understand whether the financial plan we put together would be meaningful for our clients, but this took it to another level.  [more information on The Three Big Questions can be found in this WSJ article – try them on yourself!]  

This pre-con was the emotional hard work it takes to make financial life changes for each of us…starting with myself.  I cannot ask someone to do what I cannot do for myself, so to be a life financial planner means I have to be living my best life plan too 🙂

Other big takeaways:

  • Fee only financial advisors are pretty awesome – I was able to get to know so many planners and learn the story of why they came to the fee-only world.  Most started their own businesses, so it was great to learn how others see and do things
  • XY Planning Network pushes advisors and consumers to be better – knowledge is power, and XYPN LIVE provides it in spades!  Even better, they connect all of us and energize us toward change. The conference did not disappoint in this arena
  • Technology changes…but stays the same.  We all want connection in the digital age, so use technology to that end.   Automate what you can from a quantitative and logical standpoint. Augment your connection through more videos and meaningful communication

This year is a record for my family and firm in the world of changes and new experiences.  I’d like to think those changes will finally settle a bit and allow me the space to talk with you more in the future.  To that end, we will be restarting our newsletters and incorporating ‘mini learning series’ on a bi-monthly basis. We will cover our “pro tips” on:

If you want to learn more about the power of life habits, cleaning your financial house, and creating your own financial plan, sign up for our newsletter HERE.