In Minnesota, people love their cabins.
The experiences and memories our cabins give us are irreplaceable. Wellies and rain suits, hanging by the shore looking for frogs, watching fireworks over the lake on the Fourth of July, driving slowly at night, hoping to spot deer, fires in the fire pit and games on the porch.
And then our kids get older, with sports and activities occupying their weekends. Maybe we eventually decide to sell the cabin. There are wonderful family reasons to own a vacation home, but how do you evaluate it as an investment?
Most of us don’t consider all the costs of owning vacation homes, both in time and money. Here is how to plan for ownership of a second home:
There are obvious costs, such as insurance, property taxes and utilities. Property taxes and insurance conservatively each cost around 1% of the home’s appraised value. We have seen insurance costs increase significantly through the past few years. Depending on where your vacation home is, it might even be unobtainable. But more importantly, insurance costs are rising because the likelihood of claims are rising. Your deductible might be a hidden cost of owning your vacation home.
Next, you have to put money down on your property. The money you put down could be earning returns elsewhere. If you were in a money market fund, you would be earning around 4%. If you paid all cash for the property, it would cost you a minimum of 6% a year (opportunity cost, taxes and insurance) of your home’s value, plus utilities. If you put 20% down and had a 6% mortgage, your annual costs would be more than 7.5%.
But what about upkeep? Depending on the age and complexity of the home, generally, upkeep would annually be around 1% to 2% of a home’s value. And this is if you do all the chores yourself. Any big expense would be on top of this.
Then there are all the toys you “need” when you buy the vacation property, as well as your furnishing costs. These expenses will vary based on your personality.
