Vacation homes as financial investments

August 15, 2018

The financial questions to ask before deciding whether to buy a vacation home.

Vacation homes as investments can sound appealing, especially in the summer, when doctors may be taking time off from work. Buying a house or condominium where you enjoy vacationing may seem like a good investment, but it is not always easy to predict  the financial and practical outcomes. Vacation property can become either a money pit, a means of earning rental income, a way to have a permanent residence at a favorite destination, or a profitable investment. Here, several doctors who have made vacation home investments share their advice and personal stories.

Look for a bargain

Leif Dahleen MD, an anesthesiologist in Brainerd, Minn., researches a range of investment types and advises other doctors about investing on his blog, PhysicianOnFire.com. He cautions doctors not to be too enthusiastic about investment property and to run the numbers before buying. “Once you add up the costs and factor in the time you spend managing the property and tenants, it can be tough to make the numbers work well in your favor,” Dahleen explains. Still, by using a methodical approach, Dahleen believes that investment property can make sense financially for doctors.

He says that the investment he and his wife made is practical in many respects. He explains that he bought his second home-a cabin on Mullett Lake near Cheboygan, Mich.-at an auction for $15,400 and put another $50,000 into it, making it very affordable. Their cabin is located near his wife’s family, which makes it practical as well. And he has plans to expand his property ownership in the upcoming years. “We are preparing to build on a different lake in northern Michigan. The home will be a duplex, and we will rent out the smaller portion to guests,” Dahleen says.

He advises doctors to think carefully about the location of investment property, consider how much time they will actually be able to spend there, and if they want to spend much of their vacation time or weekends in the same place. “My advice is to consider buying a place that could serve as your retirement home when you are no longer working. If you plan to move to your favorite destination eventually, it might make sense to buy that lake cabin, dude ranch, mountain home, or beach house sooner than later to make use of it as a rental property before the price goes up with inflation, ” he says.

Use online tools 

David Draghinas MD, an anesthesiologist in Dallas, Texas has developed a side business of helping physicians understand finances, as founder and host of the Doctors Unbound podcast. Like Dahleen, he advises physicians to carefully examine the financial aspects of second home ownership with a long-term view. “Everyone should approach this type of investment by running their numbers, understanding their cash flows, buying the property under market value, and having multiple exit strategies in mind,” Draghinas suggests.

He and his wife selected their property in Dallas, he says, because a nearby property is easier to manage, and they already understood the local market. They use their second home as a vacation home and they also rent it out. To screen renters, he uses platforms such as Airbnb. He says that built-in screening tools, such as requiring forms of ID to be verified, linking social media profiles, and allowing guests to be reviewed by previous hosts is advantageous for owners as well as renters.

He suggests searching listings on websites such as VRBO.com, and suggests that doctors purchase software like AirDNA to examine market data. As with any investment, a physician has to consider whether owning a vacation home and renting it out would be enjoyable or a burden.

“Physicians have to decide if returns are worth the management demand on the physician,” Draghinas explains. The ownership and rental process itself has been pleasant for him and his wife. “We enjoy opening up our home to travelers from all over the US and internationally. We take pride when they tell us how much they enjoyed staying in our home,” he says.

Do the research first 

Eric Tait MD, MBA, and his wife, Claudine Johnson MD, both internists in Houston, Tex., purchased 12 units of equity in a Hilton Hotel in Belize, a destination they love. Unlike Draghinas, who bought a property close to home, they had to travel to Belize four times to develop a thorough grasp of the market. Tait explains that the due diligence required to gain a strong understanding of the economics of a vacation home takes time, especially when the property is in a foreign country.

“You need to talk to the chamber of commerce, governmental agencies involved in regulating and promoting tourism, know the bigger developers in the market, do site surveys of competing projects, and find potential partners that you will work with,” he explains.

Tait regularly attends investment seminars, and observes that physicians fall in love with the concept of living in a resort area, but may not focus as much on the investment aspect of doing so. He explains that it is important for doctors to consider whether they are purchasing a vacation home for personal enjoyment or are making a financial investment, and that it is possible to achieve both. “They often have to rein their enthusiasm,” he says.

Minimize maintenance 

Nancy Rolnik MD, a sports medicine physician who practices in Walnut Creek, Calif., opted for the timeshare model. With timeshare ownership, a buyer can purchase the right to stay a specific resort for the same week each year. This type of ownership allows the buyer to exchange weeks or locations with other resorts that participate in the same timeshare program, often for an exchange fee.

She says that she didn't want to invest in a vacation home due to the added work and worry that it would bring. So instead, she and her husband own several vacation weeks in Nanea and Ka'anapali, both in Maui, Hawaii. These purchases allow them the option to exchange properties and visit different locations.

The biggest advantage, she says, is that she has friends and extended family who own property in the same timeshare program. That allows the large group to travel together, and know what to expect of their accommodations, because the properties in different locations are similar in layout and size. The low maintenance required is one of the features that Rolnik is pleased with. “An annual maintenance fee provides me the freedom not to do anything myself,” she explains.

For a vacation home purchase to be a worthwhile investment, a good deal of time devoted to researching the market and maintaining the property is required. But for doctors who do not want the obligations and time commitment of owning a vacation home, there are less time-consuming options. “I enjoy having many destination options instead of maintaining a single home and going there over and over,” Rolnik says.