Owning a vacation home is an aspiration that appeals to many people. In the region of the world where I reside, Lake Tahoe is a high profile vacation destination. People flock there year around, but primarily in the winters and summers. In 2012 USA Today named it “America’s Best Lake” and Rand McNally and Orbitz have dubbed it the number one ski destination in America. An area with so much to offer seems like a great place to own a vacation home.
Does owning a vacation property in the Tahoe area make financial sense?
For our example we’ll look to the north eastern shore of the lake. The town of Incline Village was recently ranked as the best place to live in Nevada by the Movoto Real Estate blog. It’s a pristine area with some, if not the best, beaches that Lake Tahoe has to offer. In the winter it has access to a number of skiing areas around the northern side of the lake and in summer it’s home to every warm weather activity you can associate with a lake.
To purchase a single family home that is around 2,000 square feet and has at least 3 bedrooms, 2 bathrooms and a garage, which is located a block or two away from the shoreline of Incline Village, will cost around $850,000 based on my market research. Given that price tag, the 20% down payment will come in around $170,000 and the financing would need to be based on the remaining $680,000. At 4.22% the monthly payment would be $3,331.67 (30 year fixed). If we assume taxes and insurance would cost around 1.3% of the sales price, an additional $920.83 should be budgeted per month. This would take the monthly cost to please the bank, government and insurance company to $4,252.50. Annually that equates to $51,030.04.
Using VRBO.com as a gauge, an average of $230 per night of rental income is a reasonable estimate for our conceptual house in the location of Incline Village described above. If we assume that summer and winter occupancy run 80% and spring and fall run 35%, we can extrapolate how our rental income will cover our annual expense of $51k.
As we see, the estimated income generated, less our assumed 15% expense to cover cleaning and regular maintenance, leaves us with roughly 40% of our annual loan, tax and insurance costs. This isn’t exactly ideal. Heck, it isn’t even half way to covering the baseline expense with buying the property.
Does another option exist? Yes, it does.
The other option that could make this investment ‘work’ would be to have a situation in which you live in the house for the general period when vacation occupancy is at its lower levels. In our model, we assumed that fall and spring would be the seasons where occupancy would be at its lowest. If your need or want puts you in Incline Village for two seasons of the year, then you could factor in your occupancy as a cost you would incur, if you didn’t have the house (A sunk cost). This method isn’t so much ‘investment minded’ as it is ‘living minded’, but still keeps your situation in a financial perspective. Consider the following…
Surprisingly, looking at our living cost as a sunk cost with the combination of the vacation rental during the high season, brings us to a total slightly above our estimated annual baseline cost of ownership.
So, does owning a vacation property in Tahoe make financial sense? If you’re looking at the property as a pure vacation home that must generate enough rental income to cover your fiscal costs, then the answer is no. If the property is used partially as a primary residence during the “off season” and a vacation property during “peak season”, then the answer moves to maybe.
What’s your situation? What are your goals? Where and how do you want to live? What can you afford? There are so many questions to answer when considering to buy a home, let alone a home that is fully or partially a vacation property.