When it comes to buying a vacation home, I can offer a little advice that can hopefully help you create a realistic budget. After all, I bought a vacation home about five years ago and did not do a very good job of estimating the expenses that went along with it.
Quite honestly, I was kind of naive in a way. My wife and I had pretty high income at the time and my way of justifying the purchase was probably still left over from when I was a San Francisco property owner. I figured that even if we had to spend some money from savings to own it, the value would only go up. After all, it’s a lakefront property and they aren’t making new lakes. How could the property go down? Plus, at the time, real estate prices hadn’t started falling yet, and I didn’t foresee what was about to happen.
Of course, I had my spreadsheets out, and did the traditional financial modeling that I always do when making a major financial decision. My biggest mistake was underestimating costs. I figure by pointing them out here, I can help someone else make better estimates than I did.
Specifically, these are the things to consider when budgeting for vacation home.
Consider These Expenses When Budgeting for a Vacation Home
Mortgage Costs Are At Least Predictable
When I first was purchasing the property, the main thing I was concerned with was, how much is it going to cost me each month. After all, I was accustomed to living in apartments and houses that I considered the rent or mortgage to be 80% of the monthly costs of ownership. I considered the mortgage expense for the vacation home to be the only major cost of ownership. We got a good rate on our mortgage, and then two years refinanced to an even better rate. Let’s just say that since we bought the house, the mortgage expense has been the only thing that has been as planned.
Property Taxes Can Change
Personally, the property tax rates in Wisconsin disgust me. And I mean that! As a property owner in California, I was paying about a third of the annual taxes that I pay here for twice the property value in California. With that said, I did my research and looked at the past property tax rates. We purchased the vacation home for $250,000 and it was assessed at $280,000. I assumed the property taxes would actually decrease, as they do in other states when the assessed value is replaced with the purchase value. I was wrong!
Over the next few years we did some improvements on the house that cost us about $50,000. Unfortunately, I got building permits for three years in a row, so the tax assessors came out each of the next three years. Instead of moving the assessed value down to the purchase price, which I informed them of, they took the old assessed value and then added another $50,000 in value the first year. The second year, they added another $15,000 and then the third year they actually increased it by another $15,000. That means that they increased the assessment by $80,000 and that it was $110,000 higher than the purchase price I paid. If you back out my $50,000 investment, the assessment was still $60,000 higher than my total cost of purchase. Now, you could argue that home prices were rising everywhere, but this was already well into the housing crisis, and according to my realtor, our house had already fallen in value since we bought it. And did I mention that the mill rate also increased during the period of ownership.
The takeway here is that, at least in our case, property taxes increased by over 100% during the first four years of ownership. It’s true that we fixed the place up a lot, but there is no justification for increases like that. And it’s not just me that’s unhappy, it’s the entire lake community. There are more homes for sale there now than there have been in the past 10 years combined. Also, the cost of monthly property taxes is now only $150 per month lower than our mortgage expense! And in case you are an investor, you know that paying money for property taxes is a zero return investment. At least the mortgage goes toward paying down the principal, but property taxes are just plain painful.
Don’t Underestimate Furnishings
When we bought the vacation home, we figured we had extra stuff from our house that we could bring to help furnish. We also figured that we’d slowly start buying things on sale or at garage sales. Wrong again. Turns out once you buy a vacation home, you want to use it right away. You also want to invite your family and friends right away. And nobody wants to sleep on the floor or eat on a card table. Turns out, you need to furnish it quickly.
We figured it would cost us maybe $5,000 to furnish the house. I’m guessing it cost us more like $20,000. Here is what we bought: 3 beds and mattresses, 3 nightstands, four $800 swivel chairs for the living room, $2,000 of deck furniture, large dining room table and 12 chairs (the chairs were cheap from IKEA), 2 carpets ($1,000), an entryway cubby system ($400), some art for the walls, shelves, a computer desk and some other random furnishings that I can’t think of off the top of my head.
Do Your Research on Utility Costs
Utility costs are something else that was much higher than I expected. When we bought the property there was only electric service. We had an LP tank added, and put in a forced air furnace. We assumed that the heating expense would be similar to our house that had natural gas. Turns out LP gas is much more expensive. The first year we started buying it for about $1.50 per unit. Now it is closer to $2.50 per unit. Furthermore, we hardly use the heater in the winter, but just keeping the heat at 50 degrees can cost as much as $300 per month.
Besides heating and AC, you should make sure you consider your water and sewer costs. We have a holding tank that costs $150 to get pumped each time it fills up. The water is from a well so it is free, except we need an iron filtration system that uses a $5 bag of water softener pellets every week. These expenses add up to much more than we thought when we budgeted for this vacation home.
Also, don’t forget about internet costs. We were paying $50 a month for dial up speed DSL until I was able to get the iPhone through Verizon and use it as a wireless access point.
Sweat the Little Things
Perhaps the biggest understimation I did when I created my vacation home budget was when I estimated the little expenses. Many of these I never even thought of. Here are some of the costs that you should account for.
Toiletries. Towels, hand towels, soap, shampoo, toothpaste, as well as wastebaskets and towel holders. In addition, you need a supply of things like childrens tylenol, antihistamines and band aids. You should also get a first aid kit if your home is on a lake. I’m guessing we spent at least $500 on this type of stuff. Towels alone can cost over $100 for a set of six.
Electronics. I spent an extra $200 buying a satellite dish so that I could bring my Dish box to the second home. I only used it once! Also, we have two DVD players, a $1,500 LCD TV, an iPod player, four alarm clocks, three wall clocks, a wireless thermometer, and a computer with wireless router. I’m guessing we spent at least $3,000 on electronics.
Kitchen Supplies. If you want the kitchen to be functional, you’re going to need things like silverware, plates, bowls, pots, pans, pizza cutters, grilling utensils and storage containers. Those are just a few of things you’ll need. You’ll likely be able to bring some stuff from your primary home, but in the end, you’re going to need things last minute and have to run to a store. If your place is in the middle of nowhere, or somewhere expensive, these items can be quite costly. Oh, and don’t forget that you’ll need a coffee maker too.
Pantry Items. You’ll need to keep a supply of food and snacks in the pantry and in the fridge. Things like flour, cooking spray, spices, popcorn, butter and so on. While you could argue that you’d use these items even if you were at home, that’s not really the case. Things left at a second home go bad pretty quickly. Partially because we don’t leave the air conditioning on when we’re not there, the pantry can get pretty humid and make any opened food stale. It’s amazing how much you can spend on food that goes bad.
Other Miscellaneous Items. Take a look around your house and you’ll see lots of things that haven’t made it on my list yet. For example, bedding for four beds can cost as much as you have to spend. Also, toys and toy storage for the kids, a grill , a firepit, lawnmower, chainsaw, rakes and shovels are all things we bought. Also, throw pillows, a pizza oven, coasters, cool party glasses, a cooler for the boat, extra beach towels, floaties, life preservers and lots of fishing poles and tackle. If you throw in the $1,000 worth of ice fishing equipment I bought and the hundreds of dollars in stain to redo the deck, these costs have probably totaled over $10,000 for us.
Other Things You Buy To Go With Your Vacation Home. And then there are the things that you buy to go with your home. In our case, we bought a pontoon. Guess what, we needed a new dock to go with it, as well as anchors, life preservers, ropes, covers, batteries, trolling motors and so on. We also needed to fix up a shed to store some of our stuff. There are various other purchases that we made that we wouldn’t have without a lake house, these should all be accounted for in your initial vacation home budget.
In the beginning, I expected that we would spend around $20,000 on furnishings, including our pontoon. In the end, I’m guessing it was closer to $60 or 70 thousand. When making your plans to buy your vacation home, or even when budgeting for your first home, you should take your most aggressive estimate for costs and then add another 25 to 50 percent just to make sure that you have your bases covered.