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Buying A Vacation Home Before A Primary Residence

Owning Offers More Consistency Than Hotels And More Flexibility Than Timeshares

Buying a Second Home is a Major Money Move

Hotels are consistently inconsistent. They shut down, get new owners, and book up. Furthermore, their prices are in constant flux, making them cheap buys for a weekend away in one season and extremely cost-prohibitive in another. Also, the rules around additional guests and pets can make it hard to feel completely at home. And we’ve all heard timeshare horror stories.

Lisa Ann Schreier, who calls herself the Time Share Crusader, reminds future buyers that there is a big difference between buying a vacation home and a timeshare. “First, a timeshare is never an investment, and purchasers can expect little or no resale value once it’s paid off,” says Schreier. “If there’s still an outstanding loan on the timeshare, there’s almost zero chance of being able to sell it.”

Timeshares are typically purchased for a week or two per year, and sometimes there’s the vague promise of exchanging it for access to another destination. In short, for people who want to constantly return to the same place, buying a vacation home is a smart bet.

Homeownership Is A Good Investment

There are many reasons to own real estate property, explains Christopher Liew, a CFA Charterholder and the founder of, where he shares tips on money, travel, career, and real estate. He says that a vacation home, in particular, offers tax incentives, potential property appreciation, higher rental income , ideal venues for gatherings, and the freedom to renovate or furnish anytime. While the latter two reasons reap benefits that might be hard to quantify, the former three are all about crunching the numbers.

The tax component can vary significantly based on where the home is located. For United States taxpayers buying U.S. properties, the IRS website can explain everything from property depreciation to tax breaks for military and clergy. There are a lot of breaks on the books, which can make mortgage payments and even visiting rental properties tax-deductible. For those buying abroad, it is important to keep in mind the tax regulations in both your home country and where the property is located. Expat tax advisors can help with the financial projections, especially keeping in mind property appreciation.

Set Up Your Vacation Home As A Vacation Rental

Once the home is yours, its time to think about whether you intend to use your new vacation home as a short-term rental.

If youre planning to rent your vacation home, youll want to secure trustworthy vacation rental property management. The right company can deliver significant income and allow you to enjoy your home more when you visit.

If youre weighing your vacation rental management options, here are some questions to keep in mind:

  • Do you want to manage the vacation rental yourself?
  • How much freedom do you want to have to use the home for your personal vacations?
  • Is it more important to you to have the vacation rental as a project or hobby, or would you rather visit and simply relax?
  • Are you interested in earning passive income and helping your home pay for itself?
  • Does your home need improvements or design upgrades to optimize your income and your guest experience?

Vacasa is the leading full-service vacation rental management company in North America, so we know firsthand the kind of income you can earn when your vacation home is truly working for you. Reach out to us for end-to-end helpfrom buying the right home to managing it effortlessly.

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Seek Out A Local Lender

Its best to look for a mortgage lender who specializes in second homes in the area where the property is located. The lender will have ready sources of financing and understand the required rules and specifics of the place youre buying in.

How you finance, for example, depends on where your vacation property is located. For lenders, a second home carries more risk than a primary residence in the case of a downturn, borrowers are most likely to continue making payments on their primary residence. To offset that risk, buying a second home typically requires more money upfront and the financial capacity to afford two homes, and comes with higher interest rates.

Matters become even more complicated if the property is to be rented. Once rent is in the picture, lenders wonder whether theyre financing a second home or investment property. The difference is important because its easier to qualify for second home financing.

Another complicating factor arises when the property has unrelated individuals buying together the lender wants to be sure that the property will not be devalued by squabbles among owners. The best approach is to have an agreement in writing, created by an attorney, that shows how the property is to be owned and operated.

The list of complications goes on, but the important point is this: An experienced lender with localized knowledge will be your best resource when looking to buy a vacation home.

Cash Large Down Payments The Norm

How to Buy a Vacation Home or Second Home

While you don’t have to have all cash or a large down payment to buy a second home, those were the norm last year and can make it a lot easier to qualify for a loan when you already have a mortgage on your primary home.

All-cash purchases were done by 38 percent of vacation home buyers and 46 percent of investment buyers in 2013, according to the NAR survey.

Of buyers who financed, large down payments were common. The median down payment for vacation home buyers was typically 30 percent, and 26 percent for investors, NAR found.

John O’Brien, a lawyer in Chicago, bought a vacation home 24 years ago about 150 yards from Lake Michigan near Michigan City, Ind., with all cash, in a roundabout way. O’Brien took out a mortgage on his primary home, which was paid off, to buy the vacation home so he wouldn’t have a mortgage on it.

Vacation home buyers don’t want to go into default on their mortgage, of course, and the best way to avoid that is to not have two mortgages, he says.

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Is A Second Home Even Worth It

First, consider how many vacation days you take annually. For those who spend an entire month or two at the beach every year, the annual mortgage payments on a beach house could actually be less than what you would spend to stay at a hotel or rent a house.

However, Americans are notorious for working too many hours each week and taking far too few vacation days each year. Even those who work for an employer with a use-it-or-lose-it vacation policy are guilty of letting those vacation days expire unused at the end of each year.

Also, consider how many of those vacation days are spent in the geographical area of where you are considering purchasing. It is a good idea to rent a home for a season in the location where you think you will want to purchase to get a feel for how much use you will actually get out of it. You may find that it is more economical to earmark a certain dollar amount every year for a seasonal rental and just build your budget around that figure.

Obtaining A Mortgage For A Second Home

Second home loans may have higher interest rates than primary residences because they represent a greater level of risk. Because youre not dependent on your second home for a place to live, lenders assume that you may be more likely to stop making payments on the loan if you fall on hard times.

To qualify for a second home mortgage, you may also have to meet higher credit score standards, have a down payment of at least 20%, and meet specific cash reserve requirements. Reserve requirements mean you must have enough money in liquid savings to cover the mortgage for a few months if need be.

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How The Idea To Buy A Vacation Home Fits Into Our Long

Speaking of comprehensive plan Im still not 100% sure we have one. Or at least, we dont have one thats set in stone.

Thats because financial planning is a process. We wanted this decision to buy a vacation home to fit into that process and at the same time, we wanted to ensure it wouldnt weight it down.

The idea is to keep the house we did end up buying for a long time. Like, the-entire-length-of-the-30-year-mortgage kind of long time.

Of course, no one knows what will happen between now and then, but I think our general plan is to maintain this house forever. To us, forever doesnt literally mean until we both keel over. I

t just means as long as we want to, because theres no already-plotted timeline for when we need to sell theres no pressure to sell at all if we dont want and theres also no pressure for the house to be an investment and make money. Were treating it as a purchase and an ongoing expense.

The idea is for this property to serve as our home base over the next few decades, and it will be the big constant that we can always come back to whenever we need or want.

Buying A Vacation Home Before A Primary Residence

What You Need to Know Before You Buy a Vacation Home | Real Estate
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Buying A Vacation Home Before A Primary Residence. How does a primary mortgage differ from a secondary mortgage? When you own a weekend home, you end up paying for services you might never use if it were your primary residence.

Lenders often want larger down payments and you can expect a. Even people who love their primary residence think of purchasing a second home. Or you could buy a primary residence and rent out part of it. Unlike a primary residence, a vacation home is a luxury. Mortgage rates are at their lowest levels in years.

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Considerations For Buying A Second Home

Buying a second home can be an alluring prospect. Before you decide to purchase one, there are several items to consider. These include the costs associated with owning a second home, the attributes of the home, its rental potential , and the income tax treatment. There is also the legacy and inheritance consideration, depending on how long you plan to own the property.

In this short video, JNBA President Kim Brown and Advisor Luke Traxler discuss important things to consider before buying a second home.

Does owning a second home fit into your financial life plan?

Before you buy a second home, first determine whether you can afford it. Even if you can rent it out or deduct part of the costs of ownership from your taxes, a second home is usually a luxury, not an investment. You should buy one to add value to your life instead of to your net worth.

Buying a second home may be right for you if:

  • Owning one has been your lifelong dream, and you can now afford it
  • Youre almost ready to retire, and you plan to use the home as your primary residence in retirement
  • Youll save enough money on family vacations to offset the cost of the second home
  • You can recover most or all of the costs of owning the home by renting it out when youre not using it
  • You enjoy entertaining frequent guests

Buying a second home may not be right for you if:

How much will it really cost to own a second home?

Mortgage payment, taxes, and insurance

Repairs, upkeep, and fees

Its A Sellers Market Nationwide

While a vacation home can be a good investment, Bill Gassett, a Realtor with Maximum Exposure RealEstate, based in Hopkinton, Massachusetts, recommended considering whether you need to purchase a property immediately or you can wait a year or two.

Real Estate markets across the country are heavily skewed toward sellers at the moment. An extreme shortage of housing has driven home prices up to unprecedented levels.With interest rates having jumped already by a couple of percentage points, there is a strong possibility the craziness that exists right now could start to change by year end to the beginning of next year, he said. The first signs will be inventory starting to rise and fewer buyers in the market, if interest rates continue to go up.

When the real estate market starts to change, he said the first segment impacted will be vacation homes i.e., second homes.Those who own second homes will look to sell them first before their primary residence, he said. More inventory and lower demand will eventually translate into an adjustment in prices.

Since so many factors go into the decision to buy a vacation home, its best to consider your unique situation. Whats best for you might not be the right choice for someone else so, when making a choice, consider factors like local home prices, your financial situation and what you plan to do with the home.

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How Lenders Define An Investment Property

If youre thinking of buying an additional property with the sole purpose of renting it out or earning income from it, then it would be considered an investment property. Investment properties tend to have the highest interest rates and down payment requirements of all property types. This is because lenders consider non-owner-occupied homes to have an added level of risk because tenants would not likely have the same attention to maintenance and upkeep as owners living in the property.

Your property will likely be considered an investment property if:

  • The home is within 50 miles of your primary residence.
  • You will not be living in the property, and you plan on collecting rent or lease payments from it.
  • You intend to earn a profit by flipping the property.

If youre looking to rent or lease the home, you may need to submit a lease agreement that confirms the property is occupied by a tenant.

Should You Buy A Second Home As Your First Home

Top Tips For Buying A Vacation Home

There is a new trend catching on among younger urban residents: renting in the city and buying a vacation home as their first house purchase. This unconventional approach to first-time homebuying is one way for these buyers to achieve homeownership and all its benefits when they are priced out of their own market.

Real estate prices in most major U.S. cities are rising so high that it is virtually impossible for young professionals to start their home-owning journey within city limits. The creative solution of buying a vacation home while renting a primary residence in the city allows buyers to start building equity, earn rental income and provide them with a permanent vacation spot. If this sounds like it might fit your situation, heres what you need to know:

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Vacation Home Loan Requirements

  • Debt-to-income ratio For a primary residence, borrowers can sometimes finance with a 50 percent debt-to-income ratio, or DTI. For a vacation property, think closer to 43 percent, or maybe a touch higher.
  • With an FHA loan, you can buy a primary residence if your credit score is 500 and you have a 10 percent down payment. For a vacation property, for which FHA loans arent available, figure that youll need a credit score of at least 640.
  • Down payment Generally, you can buy a primary residence with as little as 3 percent down. With a vacation home, youll need at least 10 percent.
  • Reserves In some cases, you can buy a primary residence with little or no reserves. For a vacation home, youll likely need reserves equal to two to six monthly mortgage payments.

Be sure to check vacation home mortgage requirements with different lenders the financial stress created by the pandemic has caused many lenders to tighten their approval requirements.

Things You Need When Buying A Vacation Home

Postedby Gary Ashton RE/MAXon Wednesday, August 21st, 2019 at 10:34am.

Buying a vacation home is quite different than buying a primary residence, since you do not plan to live in it all the time. However, you may want to look for these five aspects to ensure that you are satisfied with the property and can protect your investment.

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Choose The Right Loan

There are several loans you can and cant use to buy a second home. For example, you can take out a jumbo loan but usually cant take out an FHA loan or a VA loan.

Additionally, there are different financial factors that lenders take into consideration when evaluating someone for a loan on a second home. For example, theyre stricter on a persons debt-to-income ratio and credit score.

Work With A Local Realtor

‘Home prices are going up pretty much everywhere’, plus a look at buying vs. renting:

Buying real estate in a new area or even one youve vacationed in for many years requires expert guidance, so be sure to work with an experienced local real estate professional. They will know not only what properties are available, but why you might prefer one to another, and any local regulations or restrictions.

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Schedule A Home Inspection

While some sellers will conduct a pre-inspection, its still a good idea to get your own home inspection, too.

Depending on the inspection results, this may be the time where you renegotiate the propertys price, given any repair costs youd assume after the close. You can request that the seller make concessions to address those repairs and/or lower the price.

Keep in mind that inspection results, and resulting seller concessions, can make or break your real estate deal. You can put your deal at risk by asking for too many minor repairs, even if theyre warranted . Work with your agent to identify the items worth asking for. Then, based on the sellers response, you have the choice to move forward with your vacation home purchase or walk away from the deal, often without losing your earnest money.

Tip: If the seller agrees to complete repairs, you or your agent will want to walk through the property to make sure the work was completed to expectations. Be sure to work with your agent and the seller to set that condition.

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