About five years ago my wife and I bought a vacation home. It is a nice little house on a beautiful lake in Central Wisconsin. When we decided to start shopping for a home on this lake, I ran some numbers to figure out if buying a property of this type would be worth it in the long run. After all, you get to use it all the time and it should only increase in value over the years. I mean, they’re not making any more lakes right?
Well, five years later I can tell you that I made the wrong decision. While I love the house, here are the reasons why buying a vacation home is not always a good investment.
The price doesn’t always appreciate. When we bought our vacation home, we assumed the price would continue to appreciate over the years. While it’s true that the house is worth more today, that’s because we sunk in a lot of money to fix it up. And during a weak housing market, vacation properties are the worst to sell. When you really need to sell them there are no buyers. Of the 700 plus homes on the lake, over 150 are for sale. During the first half of this year, less than five have sold. Instead of rising in value, our vacation property declined and continues to decline in value.This is the inside of our lakehouse
We assumed DIY would add value. Another assumption that we made was to treat the house as a fixer upper. Almost like a flip this house type of fixxer upper. We figured that by doing a lot of the fixing up, demolition, and remodeling work ourselves, that we would save a lot of money and that we would be rewarded for our work with more equity in the house. While we did save money versus having our contractor do all the work, our theory didn’t hold up. Contractor bills were still very high and the cost we put into the house, because of weak housing prices, has been mostly lost already.
The taxes keep rising. I don’t know if this is happening everywhere in the country or just Wisconsin, but our property taxes have more than doubled since we purchased the vacation home. When we bought it for $30,000 less than the assessed value thinking the taxes would go down. They actually raised the assessed value even higher the year after we bought it. Then, for each building permit we applied for, they raised the value of the home by at least twice the amount of the work we had done. According to the assessors, which are a husband and wife team that are completely incompetent, your home value has nothing to do with “how much you paid for it” or for “what you put into it”. Even the last year, when housing prices fell another 25%, the assessed value and the mill rate continued to climb. In just over four years, our property taxes have doubled. The monly property tax is now about 70% of our mortgage! I don’t know of too many investments that can be profitable when you have costs that rise this fast. Wisconsin property taxes are a joke!
The monthly expenses keep rising. Not only did property taxes keep rising, but the cost of energy also shot up. So did the cost of insurance. And the price it costs to pump the holding tank has climbed by a whopping 60%. And when one of the marinas went out of business, the other marina suddenly raised their prices too! These are all expenses we accounted for in our initial decision to buy but they have all climbed by so much that we were just plain wrong.
The small costs can really add up. It’s not just the big utility and insurance bills that cost a lot. It’s all the little things too. Like buying salt for the filtration system. At $6 a bag and a bag a week it can really add up. Other maintenace costs and things like weed killer and cleaning supplies also add up fast. The small costs make up much more of the overall costs than you’d think. Especially when you first buy a vacation home and you need to furnish it.
They are nearly impossible to rent out. If you live in a development that is very popular and has its own rental company then it may be possible to rent your vacation home to pay for some of your costs. If you buy a vacation home like ours, you’re pretty much out of luck. Our county laws state that weekly or weekend rentals are illegal, and the neighbors in the area make sure and enforce this law. I’ve listed our house on sites like postlets, trulia and craigslist and never had a legitmate lead to rent it. I would gladly lease it out for a year or more but there is no easy way to do that either. Vacation rental websites charge hundreds of dollars to list and don’t deliver, at least in my opinion, and for my vacation home.
In summary, you are paying a lot more each month than the house is appreciating. This is really the definition of a bad investment right? You are spending more money than you earn. Well, we expected our vacation propert to rise in value by a few percent a year. If it did, it would rise faster than the cost to own it. What we found out was that our vacation property fell in value by a lot, and that the cost of ownership was over double what we had expected. Unfortunately, we’ll be stuck with it for a while longer, until the housing market recovers and then the vacation housing market starts to cover. In our case, investing in a vacation property was a bad idea!
UPDATE: A Lot Has Changed Since I Originally Wrote This
Since I wrote this article, I have taken a few steps to help my family recover from the vacation property expenses. First off, I contacted the assessor and pleaded my case to him. Although he couldn’t change my tax assessment for the current year, he was able to re-assess the property earlier this year and reduced the assessed value by about 20%. This should save me close to 20% on the ridiculously high Wisconsin property taxes.
Also, the housing market has come back and houses in my neighborhood near Madison have been selling quickly and starting to go back up in value. Although this hasn’t caught on yet for second homes and vacation homes, it is a good sign that they will start rising in the future. Although this doesn’t help my monthly cash flow problems, the thought of getting some capital appreciation back makes paying all the monthly expenses a little more worth it.
And finally, I rented out the home this summer and made enough to pay my property taxes. I used VRBO.com to list our vacation rental. It was very scary to let total strangers use the house, and many of them lied about the number of tenants. I also spent dozens of hours writing the rental agreement, preparing rules and other rental information, and even more hours corresponding with potential renters. In addition, my wife and I had to travel 3 hours round trip almost every week to spend 5-7 hours cleaning, laundering, removing garbage and mowing the yard. The time commitment was larger than you’d think and during that whole time we didn’t get a chance to stay there until we stopped renting it out and saved three weekends for ourselves. Overall, it was a lot of work and I’m not sure what I’ll do next year, but will probably have to rent it out at least a few times to help cover the property taxes again.
If anyone has any questions about renting out vacation homes drop me a comment and I can probably help answer them.
And if you’ve had a similar experience or have any other constructive comments about buying, renting or investing in a vacation property, please leave us a comment below.