Tips Before You Buy A Vacation Home
Many of us dream about buying a vacation home and some of us may be lucky enough to make this dream a reality.
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Many of us dream about buying a vacation home whether it is a summer cottage, winter retreat or tropical hideaway and some of us may be lucky enough to make this dream a reality. If you are considering taking the plunge, here are five tips to help you make an informed decision:
How Will You Finance Your Second Home
Financing a vacation home can be tricky. Thats especially true if you still pay a mortgage on your primary residence.
Having an existing mortgage may make it tougher to qualify for a loan on a second home, but not always. Fortunately, new lending rules make it easier to purchase a vacation property.
Most banks will treat this as an extension of your primary residence and offer financing along those terms, says DiBugnara.
The three most common ways to buy a vacation property are:
- A cash-out refinance on your primary home
- A HELOC on your current home
- A conventional loan on the second home itself.
Be aware that vacation home loans are often regarded as higher risk. The reason why is that youre not using the home as your primary residence, and you may rent it out.
As a result, the interest rates can be slightly higher on these loans.
Pros Of Owning Vacation Rental Property
Pro #1: Rental Income
The big advantage to buying a vacation rental property is the potential rental income you could make by renting out your investment property. Rental property websites like, Airbnb, VRBO, and HomeAway have changed how people vacation.
Travelers are staying at hotels much less than they have in the past, and instead opting for vacation homes listed on these websites. The main reason for this is, its usually more bang for your buck. Rather than paying $100+ per night to stay at a hotel for a week, vacation rental properties listed on Airbnb, are typically a better deal. Not only that, access to an entire home is appealing, especially with children.
Pro #2: Property Appreciation
As with owning any real estate property, you will most likely see an increase in equity or appreciation. To put it simply, real estate values rise with inflation. Due to continuing inflation in the U.S., vacation rental property owners should expect to see the value of their property rise over time. In short, holding onto your rental property long-term is a great investment strategy.
Pro #3: Tax Benefits
A vacation rental property is considered a business. Which means, there are substantial tax benefits and you are allowed to write off most of the expenses. Just as I mentioned above, rental property owners can deduct mortgage interest, maintenance and repair costs, property management fees, money spent marketing, etc.
Pro #4: Enjoyment
Pro #5: Family and Friends
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Available Funds For Customizing Your Home
Your vacation home may be in your dream destination, but it might not be your dream home. Determine if you have the financial resources to renovate your future vacation home to align with your specific needs and preferences.
This will be especially important if the property will be a vacation rental home. The more accessible and fixed up the home is, the more appealing it will be to potential renters. For example, if your vacation home will be in a popular retirement area, you may need to make your property accessible.
Should You Buy A Vacation Property As An Investment
When on vacation, you ponder how great it would be to own property rather than waste money renting each year.
But dont let the crashing of the waves on the beach, the chance to ski up to your door, or being able to grab a drink from your fridge during a golf game cloud your thinking about vacation properties.
If youve never invested in a home outside of your primary residence, its essential for you to learn more about real estate investing unless you can easily afford a vacation property.
Your excitement about owning your own vacation home may fade when you realize the risk involved and the expenses related to owning some properties.
If you plan to rent out a vacation property and cant manage it yourself, finding a great property manager can also be difficult and expensive.
Running the numbers for a vacation home or a vacation rental property can be eye-opening. Seeing all the figures you didnt initially consider when you began dreaming about owning a great home away from home, can be mind-changing.
Take time to run your numbers through a calculator like this one from Bric Vacation Rentals. Its an investment property analyzer allowing you to evaluate potential vacation investment property options and determine your return on investment.
When you do your homework, you may decide a vacation home or vacation rental investment isnt a practical option at all. Instead, you could look at other real estate options to build wealth:
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Con: Keeping Up With The Competition
The stability of a vacation home cannot be beat, but that also means youre in charge of making your home stand out against the many others listed for rent in the area. This applies to both nearby attractions and home features. Owners will often make improvements to their vacation homes, like adding pools, hot tubs, and other amenities to attract more vacationers. Unfortunately, not everyone has the means to do so, which can deter renters from booking their space.
Enjoy Generous Tax Benefits
Since your vacation home will be generating income, youll also be able to write off any expenses paid in connection with earning that revenue.
Lets say you rent out the home 25% of the year. The IRS will allow you to deduct about 25% of the carrying costs of the property against the income it generates.
Expenses you can write off include mortgage interest, real estate taxes, property insurance, homeowners association dues, property maintenance, utility expenses, cleaning costs, supplies , and management fees if you hire an outside service to manage the process.
Still another expense is depreciation. The IRS will allow you to depreciate the value of the home over roughly 30 years. Since depreciation is whats known as a paper expense, it will reduce your tax liability without costing you any money.
Of course, you can only apply depreciation to the business use of the home. If thats 25%, youll only be able to depreciate 25% of the value of the house.
Speaking of income taxes, when you decide to sell the home youll get the benefit of long-term capital gains tax rates.
If your taxable income is $100,000, youll be in the 22% tax bracket for federal income tax purposes. But since the sale of the vacation home will be a long-term capital gain, youll pay only 15% on that gain.
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The Dream Of Owning A Vacation Home
I can picture it now. At the end of a weeklong summer vacation, I look out across the water in front of my vacation home and see the sun setting over the mountains. Friends and family are busily preparing dinner, rounding out an amazing day of relaxing and enjoying the water and sun.
Can you see yourself there?
Think About How Another Home Will Impact Your Lifestyle
Its easy to focus on numbers, like the monthly mortgage and down payment, while also getting caught up in the dream of a weekend getaway. However, its important to consider the more nuanced implications, specifically around travel.
Will you feel obligated to skip your European holiday in lieu of going to your weekend home? Will you feel okay shelling out for a beachfront hotel when you own a mountain cabin? Are you comfortable with your answers to those scenarios?
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Opt For An Updated Home
While buying a vacation property thats newly renovated or has updated appliances might cost you a little extra upfront, it will save you money in the long run. You wont have to worry about washer and dryers breaking as easily or walls needing a fresh coat of paint. An upgraded home is also a great thing to keep in mind if you plan to rent out your vacation home when youre not using it!
With certain types of vacation homes come more responsibilities. Second homes on an acreage, a beach, or even in the mountains will have property that will need upkeep, such as pulling weeds, mowing the lawn, cleaning out the gutters, or fixing roof shingles. So if youre someone who doesnt want to do the extra labor, consider a place where maintenance is minimal or included in your HOA fees.
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Will Buying This Vacation Property Make My Life Better
If you dont think a vacation property will improve the quality of your lifestyle, then forget about it. I went the expensive route by buying a condo in a great location with a high HOA so I wouldnt have to do anything to maintain my property.
Buying a house would have probably been a better investment, but a house doesnt have three pools, three outdoor hot tubs, a spa, a golf course, ski-in/ski-out access, and restaurants. I paid up for convenience and amenities because I was focused on lifestyle first.
Con: Affording The Purchase Of The Home
Like with all traditional real estate, a vacation home can be costly. Not only is there the initial down payment and other closing fees to worry about, but buyers who want to finance the new home will have to qualify for the mortgage. This can be an obstacle for anyone with an existing home mortgage because of their debt-to-income ratio and might require additional work to prove they can handle the payments.
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Can Vacation Home Rentals Help You Pay Off Your Second Mortgage
Harvey owns his own vacation home in southwest Florida. He says owning one can be a great way to diversify your investment portfolio, if you plan to rent it out.
Savvy homeowners will rent the property partially during busy seasons and cover the majority of their mortgage payments for the year, says DiBugnara.
Savvy homeowners will rent the property partially during busy seasons and cover the majority of their mortgage payments for the year Ralph DiBugnara, President of Home Qualified
Services like HomeAway, Airbnb and Rented.com make it easier than ever to attract and cater to short-term rental clients.
But managing, maintaining and marketing a vacation home to renters is hard work. If the home is far from where you live, you may have to hire property management experts to handle these tasks. And theres no guarantee that your rental will be in demand.
Lastly, if youre looking to profit from this venture, treat it like a business. Have a business plan, have a budget, and do your market research, suggests Harvey.
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Airbnb Is Not A Magic Answer To The Cost Problem
Whenever I hear someone talking about purchasing a second home, they immediately justify it by saying they can rent it out on AirBnb to offset some of the cost of ownership. Of course this is very possible, and something that people do all of the time, but it is also an enormous burden on the property owner. Short term rentals require constant marketing, correspondence, cleaning, and they are often accompanied by neighbor complaints and damages to the home.
Of course, property management companies can handle a lot of those problems, but they take a 30% fee, likely erasing the benefit of renting out the house in the first place.
For me, the bottom line on AirBnB is time. It’s the most valuable thing I have, and I don’t want to be spending it dealing with over entitled short term renters who are doing their best to destroy my property.
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Question : Should I Rent Instead Of Buy
Dont rush into the decision to buy a vacation home. If youre serious about owning a second house, try renting in the same area you want to buy. Rent for several months to determine if youre really on board with maintaining two residences. You could discover a second home is a perfect dream, or an unwelcome nightmare. But you wont know until you have a trial run. If youre on the fence about renting or buying, consider these pros to renting:
- Renting a house for a week or two in the summer is cheaper than buying a house you might only use a few times each year.
- Renting is a short-term commitment. Buying a second home requires an ongoing investment of time and money.
- Renting gives you the freedom to choose different vacation destinations every year. Buying might lock you into the same area for years to come.
What About Buying A Timeshare
If you accepted or considered accepting the perks by sitting through a timeshare presentation and tour, you may wonder whether buying a timeshare would make a great vacation property.
Keep in mind you arent buying your own vacation property when you buy a timeshare. Youre only buying a small part of a property with limited access to it.
You also have a minimal voice in what happens with the property. But you might have to make significant payments to keep that access.
Even though buying a timeshare usually costs much less than buying your own vacation property, it may be challenging to sell if you no longer want it. You are under lawful agreement to pay for whatever expenses you signed on for in your timeshare agreement.
Dont be sold on a timeshare just through the presentation and the promises they make at it. Be sure to take time and research the specific timeshare you are considering. Online searches will provide you with plenty of information about why buying a timeshare can be a terrible idea.
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Work With A Local Realtor
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.
Questions To Ask Before You Buy A Vacation Home
1. Where’s a good place to buy?
Buying a vacation home is a bit like getting married: After enjoying the destination as a casual visitor, it’s time to make a long-term commitment and settle down.
Choosing where to buy depends largely on where you live, what you can afford, and whether or not you will rent out the property when you’re not using it. So before saying “I do,” give some serious thought to these core issues:
How will you get there?
According to the National Association of Realtors , more than 80 percent of vacation-home buyers choose locations within driving distance of where they live, with about half of all owners opting for properties within 50 miles of their primary residence. Proximity to your home is especially important if you plan to visit the property frequently. Much as you loved your trip to Fiji, you’re not likely to fly to the South Pacific for a three-day weekend.
Will you need rental income?
NAR statistics show that most owners of vacation homes do not rent out their properties, but if you can’t quite make the mortgage payments without some rental income, it’s best to choose a popular destination where demand for short-term lodging is high. Experts say the most desirable spots are near oceans, lakes or rivers, or at mountain recreation areas.
Will the location suit your future lifestyle?
2. Can you afford to buy a second home?
Key factors include:
3. Is it a smart investment?
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Dont Forget About Maintenance Fees
All homes require maintenance. And average annual maintenance feesfor any sort of home, first or secondare about 2 percent of the property’s value each year. Buyers often underestimate the cost of maintaining a home, particularly when it comes to roof jobs, exterior paint, and other similar pesky long-term projects, but its important to consider that in your savings plan, too. If youre on the beach, for example, itll be costlier to maintain, says Malani.
Tip: Plan for annual maintenance costs equal to 2% of the home’s overall value.
Pros Of Buying A Vacation Property For Short
Without a doubt, there are real advantages to buying a vacation property for short-term rental. But before we get into those, I first want to be clear that were talking about these benefits as they relate to vacation property.
Put another way, a vacation property isnt an investment property, so the benefits will be different.
While an investment property is strictly a money-venture, a vacation property is something of a hybrid. Much like the house you live in, a vacation property provides personal benefits, but has the potential to produce financial gains at the same time.
With that said, lets move on to the pros of owning a vacation property.