Rent Luxury Vacation Homes, Buy Modest Ones – Pt. 1

I used to think that buying a vacation home was a financially silly thing to do. But after spending more than twenty hours researching the subject, I’ve changed my mind. Read on to learn why it might very well be a great financial decision to buy that cabin you’ve had your own eye on.

Why Buying a Vacation Home Appeals to Me

Back in the mid-1980s, my grandfather bought a small cabin by a lake in the Poconos. When I was growing up, my Dad would drive us 12 hours one-way from Ohio to the house. We would typically go once during the summer. We would then spend a week boating, swimming, and picking blueberries.

I learned to swim, sail, canoe, and kayak on the tiny beach on the smaller of the two lakes. This is what the Little Lake looks like. The experience of returning to the same place to vacation year in and year out was incredibly meaningful to me. It felt stable, safe, and important. 

Now that I have kids of my own, I’ve thought a lot about what it would take to offer them the same experience. I used to think that owning a vacation home was a catastrophically bad financial decision. But it turns out that I was wrong about that. If most of the following 3 things are true for you, then it probably makes sense to buy, rather than rent, a vacation home:

1. You want to vacation in the same place year in and year out.
2. You are okay vacationing in a modest property, not a luxury villa.
3. You are open to renting the property while you aren’t there.

This was incredibly counter intuitive to me, but I think the data make a strong case here. I apparently didn’t know what I was talking about: buying a vacation home can make lots of financial sense.

If You Want to Vacation in the Same Home, You Have to Own

Before we even get into the research and analyses, is it viable to rent rather than buy? For this to work, you would need a rental property to remain on the market and generally available every year for a long time. 

You might say “well, you could just rent a home that is nearby, you don’t need the exact same house!” And in practical terms, that’s correct, but this isn’t a practical subject. I’m talking here about forming an emotional bond with a space. To do that, you need exactly the same home year in and year out. It can’t be a neighbor’s property or on the other side of the lake. It has to be the same home. 

Unfortunately the data about how long properties remain listed with VRBO and Airbnb is scant. Despite my best Google/ChatGPT-fu, I wasn’t able to find any industry averages. 

Luckily, though, I have a small dataset of my own. I’ve been an AirBnb renter since 2012. Airbnb saves all of your previous trips (along with the listings) in your account. I dug around and here’s what I found:

Most AirBnb Properties Only Last a Couple of Years

This curve looks about like what I expected: most people who rent their home do so for a while, but eventually many properties churn. 

But this is problematic for you if you want to rent the same place year in and year out. AirBnb was founded in 2008. It hasn’t even graduated from high school yet! From my small anecdotal sample (n=60), it appears that only ~25% of homes remain actively listed on the platform for 11 years.

So, before I dive into the detailed analysis of whether or not you should rent or buy, if you accept my stringent definition of a vacation home, your only realistic option is to buy. Properties come and go too often for a rental to be your family’s regular retreat.

How Much Will You Use Your Vacation Home?

Before we can dive in to figure out what it actually costs to own vs rent a vacation home, we have to establish how much you’ll use it. 

Paid Time Off

The average American worker gets 11 paid vacation days per year. [source] That number rises to 15 for workers in the private sector with at least 5 years of tenure with their current employer.  

The US Federal government recognizes an additional 11 Federal holidays. [source] 

For our example, let’s assume that you are a tenured private sector employee. You use all of your paid time off (PTO) every year. Counting national holidays, that means you have 22 days off per year. You probably don’t want to spend every single day at your vacation home. You’ll want to visit friends, family, or just chill out at your main residence some of the time. 

Let’s assume that you use 10 of your combined 22 days off per year at your vacation home. You’re a smart planner, though, and you maximize your weekends. You leave on a Friday and get back on a Sunday. So in addition to the 10 days of PTO, you get 6 weekend days for a total of 16 days at the property.

Weekends

Since there are 52 weeks in a year, there are approximately 104 weekend days every 12 months. Because you love your vacation home so much, we’ll assume that in addition to your 2 weeks of PTO, you spend an additional 1 weekend per month at the home.

Total Time Spent Lounging

You could expect to spend 16 + 24 = 30 days a year lounging in your sweet vacation home. Nice.

What Kind of Vacation Home Do You Want?

The answer here depends entirely on that old real estate adage about what makes real estate valuable: location, location, location.

If you want to buy a vacation home in Aspen, Colorado, that will set you back quite a bit: 

A home in rural Ohio, by contrast, can be yours for a lot less:

If you are adventurous, you could pick up some really nice land for a song:

Clearly, the only way to do an analysis about the cost of owning vs renting is to focus on a single location and then compare homes for sale and rent that are nearly identical.

Since I live in Austin, TX and I love to vacation near lakes, I’ll use the Horseshoe Bay area for this post. It’s about an hour west of Austin in what’s called the Texas Hill Country. It’s an expensive place and it should provide a good example of what it costs to own vs rent.

Buying a Vacation Home in Horseshoe Bay, TX

Horseshoe Bay is sought-after because the lake is constant-level. Texas has long-term water sustainability problems. Water levels in most Texas lakes will fall in the coming decades. When that happens, the receding water line will expose unsightly “bathtub rings.” It will also force owners to constantly lower boat ramps and docks. 

But not Horseshoe Bay! At least not at first. The lake has the water rights to keep the water level stable even during years where water is in short supply. Hence the prices and the demand. 

Here are the requirements for our imaginary vacation home:

• Must be waterfront. No hiking to a local beach, this is vacation after all.
• Must have at least 2 bedrooms and 1,500 square feet of space. This is a family vacation home, not a bachelor pad.
• Move-in ready. No undeveloped land or properties that need to be knocked down.

The Home

This one seems to fit the requirements quite nicely:

Here’s what it’ll cost per month to hold onto the property with 20% down and a 30-year fixed-rate mortgage:

Yikes. That’s nearly $132,000 per year just to cover the principal, interest, tax, and insurance. And we’re only getting started.

Maintenance

A good rule of thumb for home ownership is that upkeep costs 1-4% of the home’s value per year. [source] But this property is ~4x the median national home price of $425,000 [source], and home maintenance costs have a ceiling. A new dishwasher doesn’t cost 4x as much just because your home is nicer than average. With that said, this is a waterfront home with a boathouse. You can imagine maintenance being higher than average. It’s also in an expensive community where labor and materials are likely to be in high demand.

1% of the home’s value would be $16,850 which feels too high to me. So I’ll just round it down and assume maintenance averages out to be ~$10,000 per year.

Closing Costs

Typical closing costs in Texas are 5-6% of the home purchase price. For this seemingly modest lake house, that works out to a whopping $84,250 at 5%. 

Ownership Duration

Let’s assume that you want to own the property for 30 years. Owning it for a long time means that you’ll be able to weather market cycles and own it outright at the end. A 30 year ownership period means that your $84,250 closing costs get divided out to $2,808 per year.

Yearly Cash Flow

Here’s what it will cost you per year to hold onto the home.

Total Yearly Cost to Own a $1.7M Vacation Home

The surprisingly high cost to own a modest 1,900 square foot waterfront property in Horseshoe Bay, Texas. 

Principle, Interest, Taxes, and Insurance	$10,819 * 12 = $129,828
Maintenance	$10,000
Closing Costs	$2,808
Total 1 Year Cost to Own	$142,636
Source: OverthinkingMoney.com

Multiply that by 30 years of ownership and you’ll be out of pocket $4,279,080 for your vacation property.

Resale Value and Refinancing

Some readers will point out that you could refinance the property when rates fall. But as I’ve argued at length, I don’t think rates are going to come down anytime soon. Perhaps in 10-20 years mortgage lending rates will fall enough to warrant refinancing, but that’s a long way off. Anyways, by that time, you will have paid most of the mortgage interest. There’s not much point in refinancing if your payments are 80% principal. 

We definitely do need to calculate a resale value, however. A safe rule of thumb for yearly real estate appreciation is 4%. [source] I think it makes sense to be more conservative because there’s compelling evidence that home prices will fall in the immediate future. So I’ll assume a lower rate of 3% per year.

Over the course of 30 years, your $1.7M home should appreciate to be worth $3,970,813.

The Opportunity Cost of Cash

We’re almost done. We’re so close, but we still have one big topic to account for: the opportunity cost of money. 

To buy the home, you have to put down 20% of the purchase price. For this expensive home, that’s a hefty $337,000. What if you chose not to buy the home but instead to just invest the money? 

Here’s how much that money would be worth if you invested it in the market and received 5% per year (courtesy of MoneyChimp’s calculator):

So you end the 30 year period with an additional $1.46M. We need to include this as a cost because it is what you are giving up by choosing to buy the home. This is the “opportunity cost” of money.

The Total Cost Per Night To Own a Luxury Vacation Home

Putting all of our inputs together, here’s how much it costs per night to own a $1.7M vacation home. It’s a lot higher than most people would think.

Cost Per Night to Own A $1.7M Vacation Home

Here’s what it costs per night to own a vacation home long term.

Yearly Cost to Own	$142,636
30-year Cost to Own	$142,636 * 30 = $4,279,080
Opportunity Cost of Money	$1,456,495
Resale Value	$3,970,813
Total Cost to Own	$4,279,080 + $1,456,495 – $3,970,813 =  $1,764,762
Nights You Stay Per Year	30
Total Nights Over 30 Years	900
Total Cost per Night	$1,764,762 / 900 = $1,961
Source: OverthinkingMoney.com

To make the rest of the arithmetic in this post easy, I’ll round it down to $1,900 per night. But even at “only” $1,900 a night, that’s quite an expensive property.

It should be easy to rent something as good for less. Let’s test that hypothesis. 

What’s Next?

In part 2, I’ll dive into the murky waters of rentals. That will be a more length post because we will need to consider not just how much it costs to rent a place, but also the financial upside of renting out a home that you own as well.

Happy overthinking!