This post is adapted from a recent episode of the Scholar Financial Advising podcast. Listen here to get the full conversation.
A listener asked: “My spouse wants to buy a luxury vacation home as an investment, but I’m worried about tying up cash. How do we decide if this is wise?”
There’s a lot to unpack here, starting with how we define “luxury” and what it means to view a vacation home as an investment.
Are Vacation Homes Good Investments?
Looking at a vacation home as an investment is usually not the best idea. At best, it may generate neutral cash flow—especially if you plan to rent it out. But the time you’d want to use the home, like summer weekends or holidays, is often when rental demand is highest. You’re stuck either renting it during those high-demand periods or using it yourself and losing the potential income. We’ve analyzed this kind of purchase many times, and in most cases, it ends up being a net worth neutral decision. You’re moving money from your investment portfolio into a physical asset. That cash isn’t gone, but it’s no longer in income-generating investments. The home might appreciate, but generally it will just track inflation. It shouldn’t be viewed as a way to fund retirement. That said, it’s not necessarily a bad purchase. You still own the asset. If needed in the future, you could sell it or borrow against the equity.
The Real Costs Go Beyond the Mortgage
There’s more to consider than the home’s price and basic expenses like maintenance, taxes, and insurance. One of the biggest hidden costs is lifestyle inflation—what economists refer to as the Diderot Effect. When you buy something that upgrades your lifestyle, it often leads to a cascade of additional spending. Let’s say you buy a lake house. You run the numbers, include projected rental income, and it looks like you’ll break even. But what’s missing from that spreadsheet? Lake houses aren’t much fun without a boat. And if you have a boat, you’ll probably want a jet ski. And then another jet ski. You’ll need a truck to tow the boat. Then you’ll want to host friends, which means more entertaining, more supplies, and more upgrades. Eventually, you’ll want a nicer dock. Maybe better decor. These expenses creep in slowly but can dramatically increase your total cost of ownership. If you were buying a property purely as an investment, you likely wouldn’t spend money on any of these things. But when it’s a vacation home for personal use, the expectations change.
Try Before You Buy
If, after considering all that, the purchase still looks viable, the next step is to really assess whether you want a home in that location. Vacationing somewhere is very different from owning there. Take trips during different seasons. Visit during the week, not just holidays. Go to the grocery store. See how far the nearest restaurants are. Some places that are great for a short trip can be frustrating to live in or visit regularly.
Final Thoughts
There’s nothing wrong with buying a vacation home. Just be honest about what it is. If it’s for personal enjoyment, that’s fine—it doesn’t need to justify itself as an investment. But don’t confuse the two. And remember, not every dollar you spend needs to grow. There can be value in experiences and lifestyle that don’t show up on a balance sheet.
This post is adapted from a recent episode of the Scholar Financial Advising podcast. Listen here to get the full conversation