10 things to consider before buying a vacation property

10 things to consider before buying a vacation property

Buying a vacation home is a big decision. Consider these tips first.

How to buy a vacation property: Key tips to remember

  • Examine your financial situation carefully
  • Consult with local tax and real estate pros
  • Location is essential to your purchase
  • Renting out your vacation property may require management
  • Never count on the second property to pay for the first

If you’re wondering how to buy a vacation home or how to purchase a vacation property, take a few minutes to read our post below on how to buy a vacation property before you type “buying vacation home” into your browser and start studying the results. We’ve put together 10 important considerations — like the best time to buy a house — that can help you get your head around the idea of vacation home ownership before committing yourself to anything.

1.     Consider the pros

Vacation homes should increase in value over time, especially near beaches, mountains or national parks. They give you a place to stay when you’re on vacation, saving you the expense of hotels or resorts, which could lengthen your stay. If you work remotely, you could even work from your vacation home for a change. Vacation homes can also earn you passive income when you’re not there if you choose to make your vacation home into a short-term rental. More on that later in this post. A second home can make you eligible for tax deductions (more on that later, too), but you can’t put a number on everything. Some people would consider a destination getaway vacation home to be priceless. It should pay ongoing dividends in rest, relaxation, quality time with family and friends, and a heightened quality of life.

2.     Consider the cons

If you’re taking the idea of buying a vacation home seriously, you know that the cost of purchasing and maintaining a second home will be significant. It’s likely that you’ll at least double your current home-ownership expenses, which could cut into your savings or other future financial plans. Most Americans lack adequate funds for retirement, and few can afford long-term-care insurance. Both are expenses worth considering. Vacation rentals can be risky because they’re particularly prone to economic downturns, when people tighten their belts and cancel their vacation plans. If you’re renting, remember that your results will fluctuate seasonally as tourists come and go. Maintaining a second home from a distance could mean hiring a property manager. You might also need a home warranty

3.     Analyze your situation

Everyone’s situation is different, but the housing market has shifted a lot since the pandemic. It’s very much a seller’s market, as houses are in demand and supplies are low. Over the past couple of years, the average home has gained around $50,000 in value, and the average home now sells for more than $350,000. In recent years, many people have left urban and suburban areas for more rural parts of the country, seeking more land and space away from other people. It might be tough to find what you’re looking for in this market and even tougher to afford it. Before deciding to buy a vacation home, think carefully about your financial situation, goals and future plans for your family. As a homeowner of one or more homes, one way to save significant money over time is with protection plans

4.     Remember the down payment

When you’re all caught up in the enthusiasm of the idea of owning your vacation home, it might be easy to forget that you’ll likely need a significant amount of money upfront for the down payment, which can range from 25% to as much as 50% of the purchase price in some cases when particularly cautious lenders set up a second mortgage. You’ll want to make sure you have plenty of money ready for the down payment and thata your financial situation is in good shape. If you still pay a mortgage for your primary residence, your payment history must be in good order, and your loan must be in good standing with the lender.

5.     Can you really afford this?

Not everyone defines the word “afford” in the same way. Maybe things would be simpler if we all did, but deciding whether you can afford something can get complicated pretty fast. Is this decision responsible for yourself and your loved ones? Is it going to prevent you from doing other important things you’ve planned? Will it cut into your savings, retirement fund or college nest eggs? Have you planned for a second mortgage, another home’s operating expenses, or the cost of paying for a second home when it’s not generating an income? What is your credit score and your debt-to-income ratio? What does your emergency fund look like? If you can satisfy yourself with answers to all these questions and more, you may be ready to move forward.

6.     Do the math

Whether you like math or not, so much of deciding whether to buy a second home or not comes down to numbers. Taking out a second mortgage isn’t something to jump into without a firm grasp of all the financial liabilities and expenses you’re in for. Keep a close eye on the seasonal expenses related to the weather in the region of your second home. Extreme temperatures and related storms can impact your property in ways not initially obvious. What repairs might you expect to engage in on a regular basis? What about insects, rodents or other pests that could be invasive and cause damage? Make a table to cover all the possible expenses you can think of, and run it by a real estate agent and a lawyer for costs you might have overlooked.

7.     Remember the taxes

When thinking about how to buy a vacation property, another aspect of the true cost of your investment is the additional taxes you’ll be required to pay on your second home. You might even be able to write off the interest with a mortgage interest deduction. Still, you’ll need professional help from a tax pro to sort out all your options. You’ll need to consider federal, state and local tax laws for each property, not to mention property taxes, occupancy taxes and rental income taxes, should they apply.

8.     Don’t forget the fees

When buying vacation homes, as if those taxes weren’t enough to consider, you’ll also need to think about the wide world of fees that can apply to your new properties. These fees include what you’ll need to spend on property insurance, also known as homeowners insurance; a landlord insurance policy, if you’ll be renting your new place; flood insurance, if you’re in a flood zone; homeowners association (HOA) fees, if applicable to your new neighborhood; financial fees related to private mortgage insurance; and fees related to appraisal, inspection, loan origination and closing. Property management fees, should they apply to your situation, can cost up to 30% of the income you receive from rental fees. Of course, you’ll still be on the hook for any utility fees related to the new property and its use.

9.     Look into renting

Renting your second home can be a great way to earn extra income when the house would otherwise be empty, but you should never count on it to cover the costs of your primary residence. Rental markets are very competitive and finicky, just like the housing market, so give yourself plenty of financial wiggle room. One good thing about turning your new vacation home into a rental property when you’re not there is that some of the many fees we just went over will be deductible because this property could be considered a business expense. Unless you plan to rent your vacation home for fewer than 15 days, you’ll need to report that rental income to the IRS. Again, you should always consult with a real estate agent and tax law professional in the area where you’re considering a second-home purchase. They can provide more clarity on the details of your expected tax and fee obligations related to the potential investment and its intended use.

10.  Location, location, location

Buying a vacation home is sure to be both costly and speculative, so it’s best not to think of it as a surefire investment and to approach it with a degree of financial flexibility. However, suppose you can find the balance between periodically enjoying a second property as a personal getaway site and renting it out when you’re living at your primary residence. In that case, you may already be well on your way toward a decision. Just don’t forget how important location is to the entire equation, especially if you intend to count on rental income. You’ve got to offer a property in a location where people are interested in visiting consistently.

The information in this article is intended to provide guidance on the proper maintenance and care of systems and appliances in the home. Not all of the topics mentioned are covered by our home warranty or maintenance plans. Please review your home warranty contract carefully to understand your coverage.

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