Are you considering buying a vacation home? Weighing the pros and cons? Wondering if it makes financial sense? There are several benefits you can reap besides just being at your favorite vacation spot in your own place. Here are some of the bonuses you can realize from owning a second home:
When you buy a home in a popular vacation destination, you may be able to rent it on a short-term basis to other vacationers. That rental income can help you cover the costs of your vacation home. Depending upon your situation, keep in mind that you may have to pay a rental or management company to coordinate renters or maintenance. VRBO and Air BnB are a couple of websites that allow you to easily schedule rentals and collect payment.
You may be able to deduct the mortgage interest, property taxes and repairs you pay for your vacation home. If you use it as a rental property you may be able to use your expenses to offset your rental income. Consult a tax adviser to see which tax rules and laws apply in your particular situation.
Just as with your primary residence, the value of your vacation home may increase over time, giving you equity in your vacation home. As you pay off any mortgage on the property, you’ll also build equity. You can opt to cash out some of the equity to fund other investments, projects, college tuition or whatever you need or want to do with the money.
Having a "free" place to stay at the beach or the mountains can be a stress reliever, both in providing a vacation in a place you love, and in not having to worry about finding a rental for the dates you want and price you can justify. A vacation home also makes for a comfortable, familiar place for family to come and hang out and make lifelong memories. It can be a nice place to invite friends to come visit, too.
The answers to these five questions can help you figure out if vacation homeownership is for you:
1. Do you have a down payment?
Vacation home lenders typically require a 20 percent to 30 percent down payment. Talk to a mortgage professional to see what options you have for financing. Condos generally require a larger down payment than single family properties. And closing costs are also generally higher, as you need to escrow extra funds for prepaid condo fees.
2. Can you afford the additional expenses of vacation homeownership?
A vacation home generates many of the same annual and monthly bills as your primary home. Can you afford community association dues, homeowners insurance, insurance for natural disasters like floods and hurricanes, utilities, telecommunications and property taxes for a vacation home? If you plan to rent the property you will also need to be sure it is fully furnished and equipped. With tenants coming and going, items are more likely to break or "disappear" so you'll need to factor in replacement and repair costs. You'll also need to calculate how much you can rent the property for, and for how many weeks or months, to see if it can generate enough income to cover your costs - or at least cover a portion of your costs if you need help with the bills.
3. If you plan to rent, will you be bothered by other people using your home?
As outlined above, rental income can help pay for your vacation home, but renters will also spill things on your floors, steal small decorative items and increase the wear and tear on your property. If you can’t deal with minor damage and disappearing pots and pans, you won’t be a happy landlord. When furnishing a rental property you need to remember that it is a business and not your residence, so look for sturdy furnishings, don't buy top (ie, expensive) quality items, and don't decorate with personal things like photos of your family and your favorite candy dish from Aunt Mary. If you'll be bothered by others renting the property, you might want to consider buying a less expensive place so you won't need to rely on rental income to afford it.
4. Do you plan to vacation in this location for several years?
There’s no guarantee that home values will rise in the future. If you decide to sell in just a few years, is the property in a market where you'll be able to recoup your closing costs and expenses? One of the major reasons for investing in a vacation property is the potential for making a profit when you sell. The longer you plan to stay, the better your chance of building home equity before you sell.
5. Will You Use It?
To get the most possible enjoyment from a vacation home, you have to stay in it. And the shorter the drive, the more likely you are to use the home. Or if it's in a place you go to every year, such a Disney World or Lake Tahoe, you'll likely use it all the time even though you have to fly there. But if you just think you're going to like a spot you might want to "practice" the commute before you commit to a purchase. That condo in Myrtle Beach might seem like a sweet deal when you spend a week there playing golf, but does it make sense to buy? How often will you make the 12 hour drive? Can you get a direct flight? How expensive is it to rent a car if you fly there? The sweet deal may end up being a costly mistake.
With all that said, if you’re buying a vacation home solely as an investment, being close by may not be as important to you. The more important factors may be the rental income and year over year return on investment.
Are you still leaning toward buying a vacation property? Then give me a call and we'll come up with a plan to make your investment goal a reality!