The Pros and Cons of Buying a Home in a Tourist Destination

The idea of owning property in a place so desirable that people flock there for vacations can be incredibly appealing, both from a personal and financial perspective.

However, before getting swept up in thoughts of beautiful settings and promising rental income, it’s important to consider the potential downsides, including higher prices, seasonal shifts, and strict regulations.

Pros of Buying in a Tourist Destination

Buying property in a tourist destination offers several advantages, including:

• Income potential: In tourist communities, there’s usually plenty of demand for short-term rentals, at least during certain periods of the year. Unless the market is saturated, this means the property should easily be rentable at an attractive price.
• Property value growth: Popular destinations tend to attract more external and internal investment, boosting desirability and, in turn, housing prices.
• Lifestyle perks: The property offers close access to amenities that people pay a premium for. That could be beaches, mountains, nature, nightlife, entertainment, or something else. Think of it as a free or low-cost vacation.
• Potentially lower property taxes: A few tourist areas charge among the lowest property taxes in the country. Examples include Hawaii, Nevada, Colorado, and Arizona.

Cons of Buying in a Tourist Destination

Unfortunately, there are also some harsh realities to keep your emotions in check. Some of the biggest include:

• Expensive: In many tourist areas, property prices are higher, and everyday goods and services, such as groceries and repairs, tend to be more expensive.
• Seasonal Fluctuations: Not all tourist destinations are popular year-round. Some are only busy for a few weeks or months. Outside of those periods, the place may empty out, making renting the property hard and living there potentially lonely and boring.
• Crowds: It’s one thing to spend a week there, another to live through a busy season with heavy traffic, lots of noise, and little parking.
• Local regulations: If you plan to offer short-term rentals, be aware that tourist hot spots sometimes have strict regulations that can eat into your earnings.
• Market volatility: Tourism-dependent areas are more vulnerable to economic downturns, as vacations are often among the first things people cut when money is tight.

Primary, Secondary, or Investment Property?

Buying a home as a primary residence, second home, or investment property has different implications, and it’s important to understand them.

If the home is going to be your primary residence, meaning where you live all or most of the year, banks will generally charge lower interest rates and demand lower down payments to buy it. You may also qualify for tax benefits, including capital gains exclusions when you sell, although the option to rent is often limited and might even be prohibited by lenders.

It’s a different story if the property you own in a tourist destination isn’t your main home. In this case, you’ll need to decide whether to declare it as a second home or investment property.

Generally, you’d declare your property as a second home if you plan to use it for personal enjoyment. You’d treat it as an investment property if it’s mainly used to generate income, either through long-term tenants, short-term rentals, or resale for profit.

Second homes qualify for better mortgage rates and require a lower down payment than investment properties, but the latter allow for more tax deductions.

Best Practices Before Buying

Before buying a home in a tourist destination, consider the points above and do the following:

• Research local laws on rentals and property ownership.
• Visit in the offseason to understand year-round conditions.
• Understand the dynamics of peak and offseason periods, rental patterns, and how tourism fluctuates.
• Work with local agents familiar with both residential and vacation markets.
• Analyze realistic rental income potential and run cash flow estimates based on conservative projections.
• Weigh this against operating costs.
• Check insurance requirements and availability.
• Review past sales data to determine the volatility of the local housing market.
• Analyze the long-term potential for local developments and tourism growth as well as environmental risks.
• If you plan to live there, consider staying in the property or neighborhood as a guest first to get a feel for the area.