Question: We bought a vacation home for retirement, which we rarely use. Should we sell? Or should we rent it out and wait for mortgage rates to come down?
Answer: This is an enviable problem to have! Many people dream of owning a vacation home in retirement. And there are benefits to owning your own private getaway, like being able to pick up and skip town on a whim, knowing you have a place to stay.
On the other hand, owning a second home is an expensive prospect. Even if the property in question is mortgage-free, there’s still the matter of taxes, insurance, maintenance, and inevitable repairs. And while it’s easy to argue that a vacation home is worth keeping in retirement if it’s being used, things get a bit cloudier when you realize that the second home you bought to serve as a vacation hideaway is mostly sitting unoccupied.
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If you own a vacation home that you’re not getting good use out of, you may be wondering what to do. Selling is, of course, an option. But with mortgage rates still being pretty high despite a recent drop, it may not be the optimal time to find a buyer. Waiting until rates come down could attract more generous offers, but that leaves you bearing the expense of that second home for longer.
There’s also the option to rent out your vacation home and enjoy the extra income. But that could create some headaches, not to mention a tax obligation. If you’re not sure what to do, here are some options to consider.
Renting the home out has some advantages
It’s not a given that you won’t get a good offer on your vacation home if you sell now. Higher mortgage rates may be a deterrent, but if it’s a popular destination, you may have your share of cash buyers who don’t care where rates stand.
Whether it’s a good idea to sell now versus rent the home out for a while to ride things out hinges largely on your local market, says Robert Jeter, CFP and Founder at Back Bay Financial Planning & Investments.
“It depends on the market and the home,” Jeter says. “It is a major buyer's market right now. Lots of properties are sitting. So, it may be better to wait and rent, all else being equal.”
As Jeter explains, there are always people looking to rent out homes on a short-term basis for travel. If your home is in a desirable location, renting the home out lets you wait for mortgage rates to come down further, which could flood the market with buyers, giving you more negotiating power.
Jeter also says that if the home still has a mortgage, there can be benefits to keeping it.
“With the OBBB passing, depending on the tax situation, more people will be itemizing with the higher SALT deduction. So if you have a mortgage, you may be able to realize more tax benefits now.”
Another benefit of renting out the home? It allows you to keep it in the family and eventually pass it on to your children or other heirs through your estate plan.
While you may not be able to get great use out of your vacation home, if it brings your loved ones joy, it could be worth renting out for now and keeping. To that end, Jeter suggests putting the home into a trust so you can dictate how the home is to be used and managed.
Selling offers a clean break
If you’re someone who has the stomach to deal with renting out a vacation home, from keeping tabs on bookings to dealing with tenants, then that may be a viable option. But if you’d rather have near-term peace of mind and certainty, then selling may be the better bet, says Jen Yacoube, CFP and Wealth Advisor at Adero Partners.
If you sell the home, you not only wash your hands of the expenses related to ownership, but you can also potentially walk away with a nice lump sum of money. That could make it easier to meet other retirement goals, or simply give you some breathing room.
However, if you’re going to sell, you don’t necessarily want to sit around and wait for mortgage rates to fall, she insists.
“Waiting for mortgage rates to decline might seem smart, especially since a 1% reduction can boost buyer purchasing power by about 10%. That’s real leverage. But it’s not a guaranteed win,” says Yacoube.
As she explains, lower mortgage rates don’t always mean higher sale prices, especially if it’s a market that tends to attract cash buyers. Also, Yacoube says, the timing of mortgage rates falling further is really “anyone’s guess.”
Yacoube warns that the longer a home sits unused, the more money is wasted on upkeep. And, “if the property loses appeal or the local market shifts, that wait could backfire,” she says.
Yacoube thinks that in this situation, renting out the home is a perfectly viable option. But it’s important to know what you want, and to recognize that waiting to make a room either way may not be your best option.
“If the home no longer fits into their life or legacy, selling now offers clarity,” she says. “If they’re unsure, renting creates income and keeps their options open.”
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