WATCH: Why buying a second home might be a bad idea

For many, a second home is a dream come true. The allure of having a permanent vacation place, a home away from home, is undeniable. But financially, is it a better fantasy than reality? 

The Real Deal’s Amir Korangy broke down the numbers to see whether it really makes sense. 

Here’s his take. 

Imagine you live in the New York tri-state area and you’re considering buying a second home. A few obvious locales might be the Hamptons, the Jersey Shore, Upstate or Miami. The combined average cost of homes in these areas hovers around $1.25 million. And that’s not necessarily your dream house — it’s just the average.

There are a few non-financial factors to think about too. You have to be committed to the location you’re buying in, and having a vacation place could mean less flexibility in where you spend your leisure time. 

And of course your investment is tied to local market conditions, which can be unpredictable. Economic downturns or shifts in popularity can impact the home’s value.

So back to the numbers. 

Let’s say you buy that $1.25 million second home. You’ll probably need to put down 20 percent, so $250,000. On top of that you’ll face closing costs, which can be roughly 5 percent of the loan, so $50,000. That means you’re $300,000 out of pocket before you step foot in your new home away from home. 

Mortgage rates have been up, but let’s be optimistic and assume you can get a 6-percent loan on the remaining $1 million balance. Annually, that puts your out-of-pocket expenses around $114,000. That’s for all your holding costs, including those mortgage payments, insurance, taxes and other money homeowners inevitably end up having to spend. Multiply this by the term of the mortgage — let’s say 30 years — and you’ll have paid a whopping $3.7 million for your $1.25 million home. 

Pricey. So, is it worth it? 

The average worker gets around three weeks of vacation time, not including weekends. But you own a second home. Maybe you’re higher up the food chain (or European!), so let’s say you have six weeks. That’s 42 days annually to enjoy your second home. 

If you didn’t buy that second home, you’d still have your $300,000, plus the annual $114,000 you would have spent on carrying costs. Over the term of your mortgage, that’s $124,000 you could spend each year on other vacations instead. 

That’s almost $3,000 per night on every night of your vacation. Imagine what $3,000 a night can get you in Tuscany, Napa, Aspen or Tulum. Or if you’d rather stay local, that would still get you a nicer spot in Miami, the Hamptons, Westchester, or New Jersey than the home you’d be able to buy. 

Now, you might buy a second home and end up being able to sell for more than you bought it for, turning a tidy profit. Some vacation markets have seen huge gains in the last decade. But others haven’t fared as well — and the market can be hard to time. You also have to keep in mind how much money you end up putting in, and whether or not you can refinance. 

So the financial realities paint a complicated picture. The cost of the initial investment, the interest paid over the years, and the lack of flexibility in terms of vacation destinations make it a costly proposition with tradeoffs that need to be considered. 

Of course, for many, having a second home might be a symbol of success, and a source of happiness. But before you decide to take the vacation home plunge yourself, make sure to check the numbers.