Why Vacation Properties Are a Great Source of Wealth and Freedom

What would you do if you had $20,000 to spend any way you’d like?

Many people say they would put it in the stock market hoping for big returns – but most, I think you’ll agree, would upgrade their car, or buy expensive jewelry or electronics. But, those things don’t last. I have a forever option that smart people – just like you, are already doing.

I’d like to suggest a savvy alternative. A better choice. One that’s both fun and financially rewarding.

Invest in a vacation rental.

Starfish Blue, FijiYou go on vacations, right? And, you probably spend $2000 on accommodations in any given year. Actually, the number is $2150 on lodging in 2015. In 10 years, that’s $21,500. And that’s assuming the cost stay flat.

Now, I’m not telling you to stop going on vacation. I’m suggesting that you let other people pay you for their vacation.

Vacation rentals are growing in popularity.

The average vacation rental owner rents 18 weeks a year. I can teach you how to do better than average.Couple

Of course, your vacations will be free. Over the course of a 30-year mortgage, you will have your dream home paid for by other people, and you’ll have saved $64,500 in vacation costs.

Let’s say you invested that money in the stock market. If we assume a generous 8% rate of return annually, it will be worth just over a tidy $200,000.

Here’s what that looks like on a graph.

20k graph

But, first, we need to subtract the cost of 30 years of vacations. Assuming they go up a rate of only 3.4%- that’s the 30 year rate of return for housing, you will have spent $120,000.

That takes your stock value down from $200,000 to $80,000.

$80,000.

Still, an okay amount that you could stretch over a few years to supplement your retirement.

Now, let’s look at the numbers if you invest in a modest $200,000 home. You put 10% down – that’s the same $20,000. In 30 years, assuming home values go up 3.4% annually, you will control an asset valued at $545,000, plus you will have saved $120,000 in vacation costs.

Here’s what that looks like.

200k graph

Why the difference? $200,000 in the stock market compared with and over half a million, $545,000 with owning a vacation rental?

Easy. Even though the stock market is assumed to go up at a higher rate – 8%, and the investment property is only given a very conservative 3.4% increase in value, year over year, it’s the value of the asset that you are holding.

It’s called leverage.

With an investment of $20,000 in the stock market – year over year gains in the beginning are quite small.

Year 1 Stock Market 

$20,000 x 8% = $1600

That’s great- but you just wiped it out with spending $2000 on accommodation for your vacation. In fact, you’re in the hole. A negative balance.

Year 1 is -$400.

Let’s look at Year 1 Vacation Rental

$200,000 x 3.4% = $6,800

PLUS- you saved $2,150 in vacation costs, so the total for

Year 1 is $8,950.

Cha-ching!! 

Yes, this is oversimplified. The fact is, unless you purchase an existing vacation rental, you’ll have furnishing costs the first year, as well as marketing costs. So your year 1 costs are likely much higher than any other year.

Even if we take out $50,000 for furnishing and updates throughout the 30-year ownership- you’re still far, far ahead of what your money would be doing with an even higher rate of return, because you are leveraging your money- putting down $20,000 to control an asset worth $200,000.

The appreciation is on the $200,000 base, not on $20,000.

Here’s a graph that compares the two investments- (not including the cost of vacations.)

Both 20 and 200k graph

Now, let’s address the issue of the cost of vacations going up. That’s a fantastic thing! Why? Because people, those vacationers who are paying you good money to stay in your house, will be paying you more money, on average, year over year.

But, with a fixed rate mortgage, which is generally your biggest monthly bill, your costs are staying fairly even.

Let’s say vacations going up a modest 3.4% a year. And, you are booked 20 weeks a year for 30 years. But the end, people will be paying $5860/week, when they started out paying $2000/week.

Year 1- $43,000 income

Year 30- $117,200 a year

And, this in INCOME- not net worth.

Now that your mortgage is paid off, you can move into your dream home – which other people paid for, free and clear of any mortgage or debt. Now that’s living the good life!

If you don’t see yourself retiring in your dream home, you can do what many people do, live off of the income and travel the world and staying in your home as often as you like.

You can collect 6 figures a year, renting it out to only 20 guests a year.

If, in retirement, you continue to rent it out, using it for your own vacations as well, in 10 years, you will have made $1.4 million dollars. assuming the same 3.4% inflation.

Are you excited?

What are you waiting for?

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