Why I'm Thinking of Paying Cash for a Vacation Home

It's a move that makes me nervous, but it could make sense.

My husband and I have several large financial goals we've been working toward for years, and one of them is purchasing a vacation home. The idea there would be to use the home ourselves part of the time and rent it out part of the time to help offset its cost.

At this point, we've saved enough for a decent down payment on a nice-sized vacation home in the area we're targeting. But can technically afford to buy a smaller home in that area outright -- if the price is right. And recently, we began toying with the idea of going that route -- aiming for a smaller property that we can cover fully in cash.

The upside of paying in cash

Although my husband and I would like a decent amount of space in a vacation home, we've seen almost nothing available along those lines over the past two years in the area we're looking at. And the few larger homes that have hit the market were way overpriced.

As such, we're now rethinking our strategy. If we buy a small vacation home that's less than half the cost of a larger one, we can potentially cover it in cash. And that could benefit us in two ways.

First, there's limited inventory of homes across the board, and especially in our target vacation home area. And so if a smaller home does hit the market, an all-cash offer is likely to give us a leg up over the competition.

My husband and I don't have the desire to enter into a bidding war on a second home -- those can be very stressful and can result in having to pay more to get an offer accepted. And so if we offer up cash, we might avoid that.

Secondly, mortgage rates have risen sharply since the start of the year, so right now, borrowing isn't nearly as affordable as it was at this time last year. Because we have the money to pay for a smaller vacation home outright, we don't think it makes sense to sign up to pay many thousands of dollars in interest.

And to be clear, we do recognize that tying up a lot of money in a home is a risky move, since homes are fairly illiquid -- meaning, it's hard to sell a home quickly and turn it into cash. But at the same time, the money we have earmarked for a vacation home purchase is completely separate from our emergency fund, which happens to have enough cash to cover a year's worth of bills. So even though we'd be taking a risk by putting a lot of money into a home, it's a risk we feel we're equipped to take on.

It will all depend on the market

Ultimately, whether we pay cash for a vacation home this year -- or buy one at all -- will depend on what the real estate market looks like in our target area. If we see a cute, affordable home hit the market that meets our requirements, we'll consider making that cash offer. But we're not going to push ourselves financially to cover the cost of a home in cash. If we don't see homes we can comfortably swing with a cash offer, we'll look at taking out a mortgage or delaying our second home purchase.

The latter scenario is actually the most likely. The housing market on the whole is still very tight, and since we're not desperate to purchase a vacation home, we refuse to settle for a property that won't fully meet our needs or pay a ridiculous price for one. But if the right property happens to pop up, a cash offer could be our ticket to snagging it.