A vacation home may be the answer to current, budget-savvy travel as well as future financial gains. Having a home away from home can be a money-saver that enriches the quality of your life. However, a second home also means a second mortgage and maintenance.
Within this post, we’ll review three fundamental considerations for this type of property purchase. We’ll share the positives and negatives associated with owning a vacation home. Consequently, this will prepare you to make a go or no-go decision that best fits you!
Moreover, take note that a vacation home and an investment property are both types of second homes. They are not the same thing. For the purpose of this article, unless otherwise specified, a second home is a vacation home, not an investment property. We explore the variations of a vacation home that is also an investment property and will describe it as a rental property.
Property Investment: Understanding the Vacation Home Market
Firstly, there are positives and negatives associated with any investment. We ask you to refrain from evaluating them right now and instead take a step back. Think about how you can make the most of your money in order to reach your long-term financial goals. Investing is not a get-rich-quick scheme, it takes time and effort to properly manage and grow your investments.
Before investing your money, it’s important to understand the basic concepts involved. Learn about asset classes like stocks, bonds, mutual funds
Why would I do that? You’re thinking. Isn’t it wise to think through the pros and cons? You ask yourself.
Sound investment decisions should start with an understanding of the considerations unique to you. The points that fall into the “pros” or “cons” columns depend on an individual’s current circumstances.
Envision a woman in her mid-50s with a career spanning three decades and a man in his mid-30s in the midst of a career change. Their situations are very different, and therefore, their considerations will vary widely.
Below are some considerations that will help you to assess your unique circumstances. Then, we will move on to the pros and cons.
Economic Factors to Buying a Holiday House
Assess your personal finances. What are your recurring costs, and how much debt do you have? Do you have a steady income, or does it vary? How much are you able to save from each paycheck?
If you are hesitant or worried about your answers to those questions, it may be wise to address those concerns before considering investing in a vacation home. Remember, you’re on your own path and moving on your own timeline.
If you are comfortable with the state of your personal finances, then you can ask yourself some of the questions below to continue assessing your circumstances.
- What will be the yearly and monthly economic impact of owning a second home? How does the impact change my personal financial situation?
- Will the vacation home be primarily for my/my family’s use, or will I use it as a rental property?
- What are the periods I plan to use the house, and what (e.g., hurricane season, the academic school year) could interfere with or shorten those periods?
- How much of the maintenance and management will I outsource to a third party (e.g., property manager), and what are the costs?
Personal and Lifestyle Factors in Owning a Vacation Property
Assess your personal situation, your commitments, and your lifestyle. If you have an annual plan or set of goals, do any of them conflict with investing in a vacation home? Are you caring for dependents (e.g., minor children or adults with health concerns)? How set is your day-to-day schedule (e.g., do you have work travel or weekly volunteer commitments)?
After reflecting on your answers, it’s important to determine how much time and attention you’ll need to cover those existing commitments. As with financial considerations, the non-financial considerations are uniquely yours. Postponing a real estate investment because you’re trying to expand your family or launch a business does not close the door to the idea. It’s all about timing.
If you’re reasonably secure with your current personal situation, you may think through additional questions to assess your (non-financial) circumstances.
- How will a second home benefit my family and me?
- Have I estimated the additional time and effort involved with this type of investment?
- Have I avoided being overwhelmed with the additional variables (e.g., building a relationship with a property manager or developing relationships with renters).
The Knowledge Journey in Investing in a Second Home
We want to emphasize the learning curve related to investing in a second home. Reading and contemplating the points raised in this post will give you a solid start.
However, you will want to broaden and deepen your understanding of topics like:
- the local housing market (many tools are available to assist)
- the differences between acquiring a primary residence versus a secondary residence in terms of loans, permits, and taxes
- the additional considerations of a secondary residence if you’re renting it to others versus having it for personal use
Advantages of Purchasing a Vacation Home
You’ve assessed your financial and non-financial circumstances. You realized the research and due diligence involved in purchasing a vacation home. Now, it’s time to talk about the upsides.
Lifestyle Benefits of Owning a Holiday House
The last few years have taught us a lot about the importance of self-care, family time, and rejuvenation. We know that we can be judicious and disciplined in our habits to improve our quality of life. (We have researched and published several savings strategies on our blog in order to help you to redirect earnings to purchase real estate.)
If scrimping and saving have led you to purchase a vacation home, it’s definitely a way to increase the quality of your life!
You have a place to go whenever your schedule allows. The freedom to have many guests (no rental property rules dictating how many people are too many for a party) or none. You become familiar with the community surrounding your vacation home.
This means you’ll be able to try all the Italian restaurants and will be in the know about which beaches offer up the best surfing. You won’t have to worry about limitations of having to stay for only one week to find fabulous fishing holes or to locate legit lattes. You’ll know when the homemade ice cream shop becomes crowded and where the sushi is second to none.
Earning Prospects from a Vacation Home Investment
Beyond improving the quality of your life, you can earn income from a second home if you rent it to others. If the property is located in a high-demand area (e.g., a place of natural beauty or a commercial hub), you could earn a significant amount when you’re staying in your primary residence.
With some additional research and studying market trends, you could choose to buy a vacation home in a growth market (i.e., an area that is becoming more attractive to visitors or tourists). If your budget allows, you can add some amenities to the property. By taking those actions, you may reap the benefits as your property appreciates in value.
Financial Savings from Owning a Vacation Property
There are significant costs when purchasing a home. However, strictly in terms of vacation-related costs, if you own the property, you will skip over some of the typical travel expenses.
There are no resort fees to pay and no financial penalty for leaving after check-out time. You won’t have to pay to park in your own driveway. You can forget about a security deposit. You’ll not fret about the fee if you fail to leave the property in a “broom-swept” condition.
Drawbacks of Investing in a Vacation Home
As with any investment, there will be downsides. How much of a detriment they will be will depend on your individual circumstances (which we thoroughly vetted at the beginning of this post).
Costs Associated with Owning a Second Home
Think of the expenses incurred by owning a primary residence. Most of them apply to owning a second residence. Simply Put, you’ll pay twice as much if you own one home.
- mortgage insurance
- homeowners’ association fees (if in a managed community)
- property maintenance (whether you hire a firm to provide the lawn mowing and snow removal services or pay for equipment and perform the tasks yourself)
If you rent the house to others, some of the aforementioned expenses can be written off. It’s vital to receive counsel from a legal or financial professional when you are preparing your taxes if you are unsure of how to account for a vacation home.
Unforeseen Costs in Vacation Home Ownership
As with any home, there may be unexpected repairs that need to be addressed. A gutter may come loose, or a light switch may need to be rewired. Neither of those examples will tax your bank account.
However, if your water heater or a component of your HVAC system breaks, you will be looking at repairs ranging from a couple hundred to thousands of dollars. Experts recommend having 1%–3% of the home’s purchase price on hand.
Remember that you probably have cash set aside for unexpected repairs for your primary home, as well as a general emergency fund for accidents or unplanned medical costs. The “just in case” fund for your vacation property will consume some of the funds available for other emergencies.
Upkeep Requirements for a Holiday House
Homes need to be maintained regardless of who is at home (or isn’t, as the case may be). If you aren’t living in your vacation home for periods of time, you’ll want to make adequate preparations for your absence.
You may want to hire a property management company to care for the residence. Another option to consider is to install a high-quality security system to be your eyes and ears. Technology has evolved regarding security systems; many can show views of your property in real-time. Also, depending on the region, running a heater or air conditioner may be mandatory, even when there’s nobody home.
Property managers may charge different rates depending on the time of year their services are needed. Ensure you’ve read the fine print in any service agreement to bar any surprise bills.
Security systems have a recurring fee for monitoring and access to local law enforcement/emergency services. Many that transmit real-time views of your property require internet connectivity, which means paying for internet service year-round.
Limitations of Investing in a Vacation Property
We mentioned the joy of having a place to return is familiarity with the surrounding community (i.e., knowing where to find the perfect pizza or which shops have sale racks buried in the back).
One of the drawbacks of having a place to return is… familiarity with the surrounding community. Being at home away from home is a double-edged sword.
You will be limited to one region. You aren’t as likely to visit Disney World if you have invested in a home on the Maine coast. Traveling abroad becomes less approachable as you weigh the hassles of logistics and customs, as well as the perceived waste of not using the vacation opportunity you already own.
You will be subject to the rise and fall of interest in your home’s location. A locale that is a thriving hot spot for years may go into decline. Declines can be due to a floundering local economy or a natural disaster.
As your family situation changes (e.g., you add a baby or your children become teenagers), your vacation home may not be as appealing.
That one-bedroom loft in New York City offers very little for a newborn; they don’t care about being within walking distance to the Met. As your children grow from tweens to teens, your rambling country house situated among family farms, fruit-filled orchards, and quaint amusements may pale in comparison to a bustling beach and boardwalk.
In short, when you buy a vacation home, you are putting down (metaphorical) roots. These roots are not always easy to dislodge and relocate. Real estate investments tend to be long-term. You must ask yourself if long term is a term with which you can live.
Reevaluating the Decision to Buy a Vacation Home
We want to reiterate a few points of caution to ensure you are well-prepared as you decide.
The first point is that second homes can be vacation homes or investment properties. Legal, tax, and insurance implications differ from those applicable to primary homes. Also, when a second home is used only as a vacation home or used only as an investment property, discrete sets of implications apply.
The second point is that consulting with a financial or legal professional is highly recommended. There are considerations at the state and local levels, and the IRS rules can be complex.
Unique Mortgage Challenges for Vacation Home Buyers
The mortgage rate for a second home is affected by the same factors as the mortgage rate for a first home. You must provide information about your income, credit scores, and debts. Aside from the impact of those factors, second-home mortgage rates are approximately 0.5% higher than first-home mortgage rates.
If your second home is also an investment property, the mortgage rates range from 0.5–0.75%.
Tax Considerations for Vacation Home Investments
Property taxes are collected on second homes just as they are on first homes. Some taxes may be written off, depending on how you use the second home.
The Tax Cuts and Job Act (TCAJ), introduced in 2017, changed how tax breaks apply to second homes used as rental properties. Second homes that are rental properties may benefit from tax deductions for structural improvements.
Initial Investment Requirements for Second Homes
The down payment on a second home is usually a higher amount than for a first home. Mortgage lenders are in a riskier position when financing a borrower’s second home simply because a borrower will prioritize paying the mortgage for the primary home before the second home.
A quick internet search for “down payments on second homes” will turn up several results promising $0 down payments for second homes. The catch is that you have to pay for the house in cash. There are some situations in which a second home can be offered with a $0 down payment with a mortgage, but these situations require that the second home be transitioned to function as a primary home.
There is a lot to research, assess, and analyze if you’re pursuing a vacation home. That said, with the previously mentioned tasks complete, it can be a respite from a busy world. It can be a place to create and sustain bonds with your family and friends. It can be a way to earn income (bearing in mind the due diligence required from a legal, tax, and insurance perspective).
Even if your personal finances and life circumstances aren’t aligned with a second home purchase now, with this post, you have an idea of what is involved. When and if you do pursue a vacation home, you will be informed and equipped to move forward.
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