Thinking about taking the plunge and buying a vacation home? There are a lot of reasons to do so in favor of renting a place every year: it’s often cheaper in the long-run; it’s nice having a second home you can escape to; you can rent it out to earn some extra income; and more.
Despite the many pluses of buying a vacation home, it’s also a big decision and requires careful thought and planning. If you’re having trouble deciding, ask yourself these following five questions from Frontdoor.com’s article, Five Questions to Ask Before You Buy a Vacation Home. It’ll help you make a concrete decision on whether or not you want to purchase a vacation home.
Five Questions to Ask Before You Buy a Vacation Home
Where’s a good place to buy?
According to article author Morris Dye, buying a vacation home is like getting married: “After enjoying the destination as a casual visitor, it’s time to make a long-term commitment and settle down.”
There are some core issues that need to be considered before choosing the location of your vacation home: where you currently live, your budget, and whether or not you’ll rent out the vacation property. The best way to proceed is to ask yourself these three questions:
- How will you get there? According to the National Association of Realtors, more than 80 percent of vacation-home buyers choose locations within driving distance of where they live.
- Will you need rental income? Most vacation-home owners do not rent out their properties, but if you need the extra income, it’s best to choose a popular, high-demand location near oceans, lakes, rivers or mountain recreation areas.
- Will the location suit your future lifestyle? Interests and lifestyles change over time, so this means thinking about a place that’s big enough for a growing family, or choosing a location within range of a wide variety of different recreational activities.
Can you afford to buy a second home?
David Hehman, CEO of EscapeHomes.com, advises buyers to do their due diligence when calculating the cost of owning a second home. To avoid a financial nightmare, consider three key factors:
- Financing: Mortgage companies may charge higher interest rates and/or require higher down payments for second homes. Hehman advises seeking assistance from a mortgage broker to find creative ways to finance the deal.
- Insurance: Get several insurance quotes. Desirable vacation-home locations often have higher risk of natural hazards such as hurricanes, floods or forest fires, and this can mean higher insurance costs.
- Maintenance: Hehman suggests setting aside about 2 percent of the home’s value each year for maintenance – roof jobs, exterior paint, etc. If a buyer hires a management company, expect them to take 20 to 50 percent of the rental income.
Is it a smart investment?
Tom Kelly, co-author of How a Second Home Can Be Your Best Investment, suggests that a vacation home is a smart investment as long as you’re careful.
“Before making an offer, set aside your rose-colored glasses for a moment and learn all you can about local zoning laws, construction standards development plans and other factors that may adversely affect the long-term investment value of the home you plan to purchase,” he stated.
Kelly also believes that it’s best to look for a place that has value as a rental property because most people overestimate the amount of time they’re going to spend at their vacation home.
How will a second home affect your taxes?
Owning a second home will have a major impact come tax day, so the National Association of Tax Professionals advises buyers to be aware of a few important differences in the way second homes are taxed.
- Homes rented out for fewer than 15 days during a given year are considered personal-use property by the IRS. Owners are not required to report the rental fees as income, and no other deductions (aside from mortgage interest and property taxes) are allowed.
- If you rent out your second home for 15 days or more during the year, all rental receipts must be reported to the IRS as income. Operating expenses such as utilities, repairs, insurance and management fees can be deducted against the rental income, with deductions allocated according to the number of days the property was rented versus the number of days it was reserved for personal use.
- Travel expenses related to maintaining a rental property may be deducted in some circumstances, but no travel deductions are allowed for properties rented out for fewer than 15 days.
Are time shares or joint ownership good options?
Time shares can be a good option, as long as you’re in it for the long haul. They can be bought and sold like any other personal property, but the Federal Trade Commission warns that sellers usually get less than the original price. So it’s wise to only buy a time share if you plan on using it.
Be careful when considering a time share. The FTC emphasizes that buyers should never sign a time-share contract before thoroughly evaluating the obligations and benefits of ownership.
Joint ownership of a vacation home is a good way to cut down costs, but it also does not come without risks. Make sure your relationship with your partner is strong. Draft a contract that explains the details of the partnership and stipulates exactly what will happen if either party wants out of the deal.
Decisions, Decisions, Decisions
You can find the full article here. We hope this helps you decide whether or not purchasing a vacation home is right for you. And if you do get one, don’t forget to invite me over – I’ll bring the pizza!