Once you’re closing on the vacation home you’ve just bought, you may actually need a vacation. In other words, if you’re pondering purchasing a vacation home, it’s quite a process, and there’s a lot to think about first.
But if you ultimately decide to go for it, you aren’t alone. According to the National Association of Realtors, the vacation home market is doing very nicely. From January to April of 2021, vacation home sales were up 57.2% over the previous year. Meanwhile existing home sales are up 20% from a year ago.
“We are seeing a surge in searches for second homes,” says Alison Bernstein, founder and president of Suburban Jungle, a real estate advisory and tech platform aimed at helping people move from cities to the suburbs. The company is based in New York City, with offices throughout the country. Bernstein has New York clients heading one, two and three hours away — but also as far away as Texas, Florida and Colorado.
Bernstein says with “the multitude of options now,” such as far more professionals working from home, “there has been a huge push for the second home market.”
But just as planning for a vacation takes a lot of time and consideration, so does buying a vacation home. Before you make a purchase, do the following.
1. Weigh the Pros and Cons
Even if you’ve made up your mind to buy a vacation home, it’s still a good idea to consider the positives and negatives. Some pros would definitely be:
— It’s an investment. Like your primary home, a vacation home will hopefully and probably increase in value. Especially in popular areas near beaches or mountains, you may be able to sell your vacation home for substantially more than you bought it for.
— You can earn money by renting it out. If you aren’t going to live in the vacation home throughout the year, you could create a passive income stream by renting it out to other vacationers.
— You’ll save on vacations. Depending where the vacation home is, maybe you’ll have to spend money on gas or airfare, but otherwise, you’ll already have a place to stay.
— You can enjoy longer vacations. After a while, it’s hard to justify spending $100, $200 or $300 a night at a hotel, and so you cut your vacation short after a certain number of days or maybe a week or two. But this is your vacation home. In fact, if you work remotely, you may be able to work from your vacation home. You can decide the length of your vacation instead of how long you can afford to stay at a hotel.
— It can boost your quality of life. It’s not all about money. A vacation home will allow you to a place to recharge and relax, and family members and friends could potentially join you.
But there are also some negatives:
— It’s expensive. The cost of buying and maintaining a vacation home is steep. You’re going to be paying another mortgage, plus property taxes, insurance and utilities, just as you do with your primary residence.
— The costs could mean you save less for other things. Consider the bigger picture: Will you have less to save for your kids’ college fund or your retirement?
— You’ll have to maintain another home and keep it secure. How long will your vacation home be empty? With today’s technology, you can probably set up cameras and monitoring equipment to allay your concern. But pipes can freeze in the winter. A raccoon could chew a hole in your roof and move in.
— You might want a change of scenery. In a few years when the novelty of your vacation home has worn off a bit, will you long to go on a vacation somewhere completely different? And will you feel that it’s impossible to take a vacation anywhere else, since you’ve put so much time and money into your vacation home?
2. Crunch the Numbers
As noted, you might be paying two mortgages as well as double other costs. But there are less obvious numbers that you should also consider, according to Baron Christopher Hanson, lead consultant and owner of RedBaronUSA, a business turnaround consultancy that includes a real estate development startup, M3MOD, which specializes in coastal, rural and mountain homes made of reclaimed wood, brick and stone.
“Be very careful to account for what your vacation home will totally and actually cost for 12 full months or during all four seasons — including the most common local surprises being sprung on vacation homeowners as of late,” Hanson says.
Expenses to watch for include homeowners association fees, required landscaping or mandated infrastructure projects. But mostly Hanson warns of the hidden local costs that come with maintaining a vacation home — surprise but easily predictable costs that real estate salespeople may not mention upfront.
“Will it ever become cold enough for your pipes to freeze and burst? Will you, your family or any guests or renters require additional furnishings or gear or appliances to physically use and live inside and out all year long? Will the property ever become hot or moist enough to encourage aggressive molds, pests or building material decay?” he asks.
He points out that renting out your vacation home may bring in extra money, but it can also cost you.
“Random guests typically do not care about your bills, the damage they cause or the furnishings they ruin — unless you have a property manager that stops by once or twice during each guest rental to restate your house rules and keep an eye on how your vacation home asset is actually being used,” he says.
Carefully vetting each renter upfront and having a rock-solid vacation rental-by-owner contract in place is essential, Hanson adds.
3. Answer the Question: Is Now a Good Time to Buy a Vacation Home?
The answer will be different for everyone. The pandemic has really roiled the market over the last year or so. At the start of the pandemic, nobody could move fast enough, it seemed, as many people left densely populated cities for less-populated suburbs and towns.
The demand to buy homes is still high, but with construction costs spiraling into the stratosphere, many builders are finding they can’t afford to build modestly priced homes. Upscale and higher-end vacation homes, however, may be more plentiful.
But in general, there is a housing shortage, and that’s driving prices way up, maybe more than you’ll feel comfortable spending.
4. Think About the Down Payment
It may need to be significant. “Second homes can initially alarm lenders. Unless you are paying cash, a 25% to 35% or even 50% down payment may be required to secure a second or third property beyond your primary home, especially if its price increased dramatically beyond actual value during COVID’s real estate hysteria. Be sure to have your second home financing well in place before you shop or sign any binding offers,” Hanson says.
5. Consider Taxes
You’ll probably be able to take advantage of a mortgage interest deduction on your vacation home, and thus lower your taxable income. In most cases, if you’re single or married and filing jointly, you should be able to deduct the full interest on mortgages up to $750,000.
You also might be able to write off the interest on a home equity loan on your vacation home.
You’ll want to discuss taxes and vacation homes with a tax professional, especially if you’re thinking of renting out your home. So much of whether you can get a tax break or not depends on whether you’re really using your vacation home. If you buy a vacation home but never really use it, beyond checking on it every once in a while, the Internal Revenue Service may see it as not a second residence but more of an investment, which means different tax rules apply.
6. Review Rental Income Options
If you plan to rent out your home, you’ll need to report the rental income on your taxes unless you only rent it out for under 15 days. In that case, you get to keep that income tax-free.
If you do a mix of renting and vacationing, things get more tricky with your taxes, but if you’re doing a lot of renting, because your vacation home is more or less a side business, you can deduct a lot of the expenses that go with maintaining your rental. Again, consult a tax professional.
7. Test Your Assumptions
In case you haven’t noticed, when buying a vacation home, you need to be thinking about the cost. A lot.
Along those lines, Chuck Vander Stelt offers anyone considering buying a vacation home something to think about. Vander Stelt is a real estate agent and the founder of Quadwalls.com, a real estate agency in Valparaiso, Indiana.
Earlier it was noted that you can rent out your vacation home and make money. But Vander Stelt says you shouldn’t buy a vacation home with the idea of renting it out to justify the cost of buying the house. Because what if things don’t pan out?
“The short-term rental market is incredibly competitive and already filled with second home owners trying to eke out next month’s mortgage payment by attracting a short-term renter,” he says. “Unless you are ready to become an expert in marketing your property, your short-term rental income will be pretty inconsequential.”
In other words, that rental money is great if you can get it, but don’t count on it.
And the thinking that the vacation home is an investment? Well, it may be — but it also may not be.
“Don’t buy a second home as an investment,” Vander Stelt advises. “The annual carrying costs and volatility associated with home prices in second home communities makes owning a second as an investment both costly and remarkably speculative. The only winner will be your real estate broker when you buy and sell the home.”
All of which is to say, after you daydream about your new vacation home, you want to challenge your assumptions. Be critical. Perhaps you’ll come to realize you can afford a vacation home without any real challenges, but if it’s starting to feel as if you’re working hard to create a financial house of cards that’s going to collapse — hopefully you’ll recognize that.
And Vander Stelt isn’t trying to talk anyone out of buying a vacation home. He just wants homeowners to understand what they’re getting themselves into and to buy a vacation home for the right reasons.
“It is feasible to buy a second home if you are really going to get meaningful usage out of the home. If having the second home will improve the quality of your life, you should buy one,” Vander Stelt says of vacation homes. “If you will only ever get to use the home less than 30 days of the year, stick to renting other people’s properties. Let them pay the taxes, maintenance, insurance and mortgage.”
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7 Things to Consider Before Buying a Vacation Home originally appeared on usnews.com
Update 08/09/21: This story was published at an earlier date and has been updated with new information.