Buying a Vacation Home: 4 Tips For a Successful Second Home Purchase
Many people dream of owning a vacation property to escape to whenever the mood strikes. As enticing as the thought may be, there are some things you'll want to consider before making a purchase. Whether you want a vacation home to enjoy time away from your "normal" routine, or you want a duplex as a way to earn income while building real estate equity, there are financial challenges and maintenance to think about.
Weigh the Pros & Cons of Owning a Vacation Home
As you consider the relative advantages and disadvantages of vacation home ownership, you'll also want to consider travel arrangements, the cost of travel to and from your second home, and the need for ongoing maintenance and periodic repairs. Check the availability of needed services and security beforehand to determine if your vacation home will be appropriately maintained when you're not there. Confirm that such services are part of the contract if you plan on renting it and listing with a management company.
Pros of Vacation Homes
By choosing wisely and investing in a second home in a popular area, you might expect vacation property to appreciate relatively quickly in value. If you decide to rent it out, you can typically still enjoy using your vacation property when you wish but also earn additional income that will help pay the mortgage and maintenance bills. The return on investment, especially if you own property in sought-after locations, can be impressive, and the equity build-up is a bonus.
In addition to the financial advantages of owning vacation property, most buyers consider a vacation home an investment in their quality of life.
Cons of Vacation Homes
Many of the costs associated with vacation home ownership are the same as those associated with your primary residence. Added concerns like the property's location, and your ability to monitor and control costs from afar, might be potential challenges. Even if your vacation property is within a day's drive, it is likely impossible to keep a close watch on its condition and know exactly what needs to be done on a routine basis, whether the home is empty or rented out.
If you choose to place your vacation home with a full-service rental property management company, you should receive regular statements and updates, but you will be required to pay a fee for management services. Ensure the rent you receive will cover the management costs, any debt service, and the cost of utilities, taxes, and maintenance. No property will be rented 100% of the time. Figure out the required occupancy rate based on all associated costs.
If you choose not to rent a vacation property, it is even more imperative that you consider the total annual cost of ownership and your ability to carry the financial load.
Consider the Finances
Owning a second home is a bit more complicated than doubling the payments you are obligated to make on your primary property. Because there are various ways to treat a vacation home—either as a personal asset or strictly as an investment, based on the way it's used or rented out—you should obtain the advice of both a legal representative and a tax accountant before entering into a contract to buy a second home.
It's also typically more difficult to secure a mortgage for a vacation home and might require a much higher down payment, sometimes as much as 50% of the value. Consider how each scenario might impact your current financial reserves and income. Budget for the costs of utilities, routine maintenance and upkeep, periodic repairs, taxes, and, if pertinent, any association fees or community dues. Ask all the relevant questions, and satisfy yourself with answers before you decide to buy.
If you sell your vacation property for a higher price, you will be liable for capital gains tax on your investment and the associated selling costs. Know beforehand what that might entail.
There are numerous good reasons to invest in real estate, mainly second homes and vacation properties.
Decide If You Want to Rent or Not
Deciding to rent a vacation home may seem easy on the surface. However, there is a lot more involved than most people think.
Many people dream of owning a vacation home for reasons that have little to do with economic gain or financial reward. If you have the capital to purchase a second home and the income to pay the added ownership expenses over time, you may not need to rent your property.
If you rent your vacation home, you shift from second home owner to business manager. Renting allows you to recoup some of those dollars and treat the expenses as business deductions. Running your vacation rental like a business will decrease your annual income tax burden and save you money. Strict rules must be followed to report your yearly expenditures. Be clear about what expenses can be counted as losses and the allowable percentage you can claim annually.
Spend the time and money upfront to get the answers you need, like understanding the governing rules and regulations. Budget realistically for repair and replacement costs, and don't leave anything of high value in the home when you're not there.
Choose the Best Location
No matter your dream, the big question is, "Where do you want to live that dream?" Because, by its very nature, a vacation home caters to your preferences. Select a location that you love. Whatever your preferences are—mountain ski chalet, secluded pastoral land, a hunting and fishing retreat, lakefront cabin, or beach cottage—look for a vacation home in your price range that satisfies your wants and needs.
Other valid considerations include a vacation home's proximity to your primary residence and its earning potential if you rent it for short-term stays or a part of the year. Evaluate the property's potential for appreciation, and consider whether your vacation home could become your full-time residence.
Are You Ready to Buy a Vacation Home?
Once you have all the facts, you're ready to search for the right vacation home.
No doubt purchasing vacation real estate has surged over the past several years, and second-home ownership will continue to be a popular option for investors. Whether you choose a duplex, a single-family home, or a condo in a resort community, you are part of a growing trend. Buy for the "right reasons," and you should have a stable investment and a second home to enjoy.