A vacation home can be a unique getaway and a solid investment, depending on what you do with it. There are so many options: You can rent out your home, enjoy it yourself, or transform it into a year-round platform for hosting business events.
But before you decide between a small cabin on the seashore or a small apartment in the heart of the city, ask yourself these questions:
1. Is it convenient?
A vacation home allows you to escape the stresses of ordinary life. But sometimes being away from modern conveniences can be stressful, too.
If you live off of organic food and the only grocery store in town sells packaged ramen, are you going to be upset? If you have a young family and you’re 50 miles away from the nearest emergency center, will you be putting your family at risk?
Make sure that your desired vacation spot is comfortable and convenient for you. If you’ve done your research and you plan on bringing in renters, you can let them know what’s convenient about the area as an added selling point.
Your loan officer can help you find the right loan type for your vacation home. You can also find a breakdown of the different loan types here.
2. What’s the off-season like?
Find out from your realtor about what people have to say about their experience in the area. During the off-season, walk around town, dine at some restaurants, and ask the locals how they like living there. If you can, live in the area for a couple of weeks during the off-season.
If you’re planning on using the home yourself when you don’t have renters, remember that you’ll most likely be using it during the off-season. If you’re planning on having renters year-round, you have to make sure your vacation home has year-round appeal.
3. Are you making your own decision to invest or is someone making it for you?
If a relative, friend, or business associate is suggesting that you buy their vacation home, ask lots of questions. This is the best way to approach a suggestion from someone you know. You’re not saying no — you’re surveying your options. The more questions you ask, the more you’ll be able to tell what their intentions are. If they’re good and the property sounds great, look into it! If they sound like they just want to make some money or sell a property, buyer beware.
We’re pretty close to everywhere you want to be. Locate a Cornerstone location near you.
4. How are you going to keep it safe?
One of the biggest advantages of renting out your vacation home is that you can deter break-ins. But if you’re only renting out your home for part of the year, you’ll have to find a way of checking in on your home when it’s empty. Consider hiring a house-sitter or a responsible college kid in the area to check in on your home while you are away. You could also install a security system that will allow you to check in on your home from wherever you are. Don’t forget to check out the crime rate in the area!
5. How easy is it to get there?
That island getaway sounds great until you realize you have to fly your whole family there once a year, and it’s going to cost you. Even a cute cabin in Vermont isn’t looking so cute when you realize that it’s 9 hours away and you’re exhausted by the time you get there.
If you have renters, are you going to be comfortable renting out a home in a remote location, where you can’t check in on how it’s doing? A good compromise is a vacation home that’s a few hours close to where you live.
6. How much work will you have to do?
One thing that no one likes to think about when they’re buying a vacation home is how much home maintenance they have to do. But it’s worth thinking about. If you’ve been away from your home for months, dust has settled and cobwebs have arrived. Besides the cleaning, you may have to fix pipes, heating and cooling, and more. Of course, you can avoid having to do unexpected home maintenance by getting a thorough appraisal before you buy your home. Don’t forget to do the research on natural disaster insurance for your area.
7. Can you really afford it?
When you’re looking for the perfect vacation home, it can be hard to hold back. Many people buy more home than they can afford because they’ve fallen in love with the look and feel of their new place. But it’s important to be reasonable when you buy a vacation home, because you’re going to be using it a lot less than your primary home. You won’t be able to use the space often or see your return on investment for a long time. As a reference, the average vacation home went for $192,000 in 2016.
And if you have renters, you may have to pay someone (or several people) to maintain your home while you’re away. When you’re buying a vacation home, spend less than what you have. You’ll need the extra cash for taking care of maintenance, security, and loan fees.
8. What’s the actual cost of a mortgage on a second home?
Mortgages on second homes have higher interest rates and can have a down payment of at least 20-25 percent, or even more. That’s because borrowers are more likely to default on a second home than on the home they live in. How do you know if you can afford a vacation home?
Get pre-qualified with a reliable lender. Find someone who is willing to dig deep into your financial picture. Your lender will take a look at your debt, and if your monthly debt is less than 36 percent of your pre-tax monthly income, that’s a good sign. As always, it helps if you have a great credit score. If you’re looking for extra funds, ask your lender. There are so many options out there (like pulling equity from your first home) that can be risky or smart depending on your finances.
We can help you take the next step. Find out how much mortgage you’ll prequalify for on a second home online.
9. What are the taxes on a second home?
Second homes get taxed differently than first homes. If you rent out your home for fewer than 15 days a year, your home could qualify as “personal-use property.” You’ll only have to pay for your mortgage interest and property taxes. But if you rent out your home, you will have to send receipts of your rental income to the IRS.
You can deduct repairs, utilities, insurance, and management costs on your rental property. But you will have to make sure that you only deduct the time periods when your renters are around, not when you were using it as a vacation home. Here’s what’s the most different — when you sell your second home, the sale will be considered a capital gain. But you can get avoid the capital-gains tax by using your vacation home as primary home for at least two years before you sell it.
Getting a vacation home can be a financially rewarding experience, if you do it right. Start by reaching out to someone you trust. We’re here to make buying a first, second, or third home easy. You can contact a loan officer and find out how much house you can afford using our free app.
For educational purposes only. Please contact your qualified professional for specific guidance.
Sources are deemed reliable but not guaranteed.