Does It Make Sense to Own a Vacation Home?

Transcript of Podcast Episode 400

Hello, this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode: is it a good idea to own a vacation home?

So, you’ve been going to the same vacation spot for years, and you really love the place. You’ve dreamed about having your own home there. Does it make sense? Is it worth it financially?

It’s a complicated decision. You may end up creating a lifetime of unforgettable memories for you, your children and grandchildren. But the financial stress might also be worse than you anticipated. Is it worth the risk? Here are some of the factors that you may need to consider:

• Funding the downpayment. Coming up with a substantial downpayment is rarely easy. You don’t want to fund it by using up most of your liquid assets. You still have to maintain an emergency fund. And don’t forget about taxes. If you have to sell one of your investments to generate the cash you need for the downpayment, you may have to also factor in the capital gains taxes you’ll owe as a result.
• Interest rates: When you finance your primary residence, the interest rate is often lower because of guarantees by the FHA, VA or USDA.[1] Less so with a secondary home. The average second home mortgage rate is about 0.5 to 0.75 percent higher than a typical primary residence. In addition, in many cases, the required downpayment may be higher, and it may be more difficult to qualify.[2]
• HOA fees: You may or may not be part of a homeowners’ association where you live, but you are more likely to be part of an HOA when you own a vacation property. This is because vacation homes tend to be concentrated in planned communities, resort developments, and condo complexes.[3]
  HOA fees have been rising steadily for decades. According to The Wall Street Journal, the median monthly condo fee was $420 in 2025, which is 29 percent higher than it was back in 2019.[4] And you may be responsible for a big assessment if the association decides that they need a new roof, or a new elevator, or a new parking lot. These are very difficult to predict.
• Insurance. Insurance premiums in coastal areas have gone up significantly in the last few years.[5] Also, depending on where you’re buying, you might also need to buy a separate flood insurance policy.
• Limits to your vacation destinations. If you’re someone who enjoys seeing different parts of the world, a vacation home may not be right for you. You might feel obligated to revisit your own paradise, even though you’d rather take a trip to Paris.

So, assuming you’ve gone through all this, and you still want to proceed, perhaps another thought has occurred to you. What if I bought the place, used it when I wanted to, and rented it out when I’m not there? You would still get to choose when you go away; you would just try to generate some rental income during the rest of the year.

That could go a long way financially. In fact, it could be what makes it all feasible. But there are more things to consider in that situation. Here are a few of those:

• Vacation home vs. rental property. These are two separate things. A vacation home is still considered owner-occupied and thus subject to less stringent requirements when it comes to the mortgage, including required downpayments and reserves.[6] So by choosing the rental property route, your financing costs may be higher.
• Maintenance can be more than you expected. The more tenants you have, the more rental income you’ll probably get. But chances are the maintenance and related expenses are going to go up as well, simply because of all the wear and tear. The utilities will probably be higher as well.
• HOA covenants. Many homeowners’ associations will limit the minimum lease duration. You might be prohibited from leasing your new place for less than, let’s say, 90 days. This could make it difficult if you want to schedule your own vacation every summer.
• Rental variability. Rental income is hard to predict. If you’re counting on using that money to help you afford it, just recognize that it can fluctuate considerably. Things like the economy, supply and demand, and local regulations can all play a role. 
• Additional taxes. Some jurisdictions have what are called “short-term rental” fees or taxes, which could run into the thousands. These fees can have less of an impact on local residents, the majority of whom likely do not own rental properties, than on people who don’t live there year-round.
• Opportunity cost. Let’s say your proposed vacation home rents for $3,000 per week during peak season. If you normally go away for two weeks during the summer, you may be inclined to think that you’re going to save $6,000 per year on rental fees.
  Not so fast. You must also consider the opportunity cost. That is, the possibility that the place would have been rented to someone else during the time you’re using it. You might come to realize that because you gave up that additional income, you’re not saving as much as you had expected. Maybe you can minimize the opportunity cost by visiting during the off season, or by waiting until the last minute when you have an unexpected vacancy.
• Section 1031 Exchange. If the circumstances are right, you may be able to defer any gain on an investment property you already own. Let’s say you already have a smaller place somewhere else. You might be able to fund the downpayment on the new place by selling the old one and using the net proceeds for your payment. A properly structured 1031 Exchange may allow you to do this while deferring any capital gains taxes that might have been due. But it’s complicated. You’re going to need professional help.

When it comes to buying a vacation property, emotions can often play a significant role. You love the area, you love the house, and you already have some wonderful memories there. But you need to take a thorough look at all the financial realities before you jump in. Like a lot of other major purchases, it could be one of the best decisions you’ve ever made. But you might also end up regretting it.

[1] Ostrowski, Jeff and Martin, Erik. “How are mortgage rates determined?” Bankrate.com. https://www.bankrate.com/mortgages/how-interest-rates-are-set/#loan-type-impact (accessed August 12, 2026).

[2] Greenberg, Gregg. “Second-home buyers are making these costly financial mistakes, advisors warn.” Investmentnews.com. https://www.investmentnews.com/practice-management/second-home-mortgage/267282 (accessed August 12, 2026).

[3] Block, Eliana. “NAR Pushes Forward for Solution in HOA Master Insurance Delays.”Nar.realtor.com. https://www.nar.realtor/news/real-estate-news/nar-pushes-forward-for-solution-in-hoa-master-insurance-delays (accessed August 12, 2026).

[4] Friedman, Nicole. “Surging HOA Fees Are Pushing Homeowners to the Brink.” WSJ.com. https://www.wsj.com/economy/housing/housing-affordability-hoa-fees-d02902af (accessed August 12, 2026).

[5] Greenberg, Gregg. “Second-home buyers are making these costly financial mistakes, advisors warn.” Investmentnews.com. https://www.investmentnews.com/practice-management/second-home-mortgage/267282 (accessed August 12, 2026).

[6] Greenberg, Gregg. “Second-home buyers are making these costly financial mistakes, advisors warn.” Investmentnews.com. https://www.investmentnews.com/practice-management/second-home-mortgage/267282 (accessed August 12, 2026).

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