Buying a vacation home or a second home is a huge decision. It has significant personal and financial benefits. The most obvious reason is that it’s a vacation spot. Having a vacation home saves staying in a cramped hotel room, eliminates the inconvenience of making bookings, and eliminates concern about the cost of rental fees and dining out every time you want to travel.
“A second home has numerous life-enriching perks, as it particularly gives you a place to spend time with family and friends and make memories,” claims Austin Allison, co-founder and CEO of Pacaso, a San Francisco-based real estate service to increase second home ownership.
A vacation home can offer a variety of other financial advantages over time. As the value of the house rises, you accumulate wealth. If you decide to rent the house when you’re not using it, you may also generate a sizable passive income stream.
Things to Consider When Buying a Vacation Home
Whether you’re thinking about buying a vacation home now or in the future, here’s what to know when buying a vacation home.
Decide How You will use your Vacation Home.
A vacation home can be your primary residence if you don’t have one. If the cost of buying the house isn’t more than the conventional loan limit in your location, you can be eligible for a home loan with just 3% down and benefit from homeowner tax advantages.
You can also utilize the vacation home as a second home, but a loan will probably require a down payment of at least 10-15%. You’ll get the same tax benefits as if the house were your principal residence.
Buying a vacation home to rent out may help you to cover the monthly mortgage payment when it is not occupied.
Determine Your Financial Goals
Knowing about the potential costs of buying a second home is crucial.
There will be PITI (principal, interest, taxes, and insurance) costs if a mortgage exists. Whether you pay for them yourself or with money from rental income, owning a vacation home comes with additional costs besides your monthly mortgage payment.
These costs typically consist of
- Maintenance and repairs
- Furniture and household items
- Management and vacancies (if you rent);
Vacation homeowners can consider short-term overnight rentals through services like Airbnb, HomeToGo, or FlipKey and in-season rentals through a nearby real estate broker to offset costs.
However, a second home’s nature might also result in additional expenses. Who will monitor the property in case of a storm if, for example, you’re 150 miles away? Will someone come by frequently to look for vandalism or theft?
Before making a purchase, check the accessibility and cost of insurance if you’re considering purchasing property near the ocean or in a forest. You cannot obtain or maintain a mortgage without the necessary insurance coverage, so ensure it is available and reasonably priced.
Work with a Local Agent who specializes in Buying Vacation Homes.
Work with a local real estate agent who has experience purchasing second houses and knows how they differ from primary residences. The National Association of Realtors (NAR) offers education and accreditation for licensed vacation home agents, also known as Resort and Second-Home Property Specialists,
A real estate expert will also be more knowledgeable about local legislation if you want to turn your second home or vacation home into a rental property.
A professional agent can also direct the buyer to the best-fitting property. According to Kirkham, brokers and agents with information on the performance of nearby vacation rentals will also be aware of the attributes that visitors to that market are looking for in a home and what features make a listing stand out.
Pros and Cons of Buying a Vacation Home
Before buying a vacation home, you must consider the advantages and disadvantages of buying a vacation home. Some of the pros include;
You can earn extra money by renting it out. You might earn a passive income by renting your vacation property to visitors.
It’s an investment. A vacation home not only provides rental income but may also increase in value over time. Vacation rentals can appreciate in value, particularly in places where market demand is increasing.
It helps you save money on your upcoming vacation. Instead of paying for a hotel or other temporary rental, you might save money by visiting your vacation home.
There may be tax advantages. Second-home owners can benefit from considerable tax breaks, such as property taxes and mortgage interest deductions. You should consult a tax specialist about your vacation property or rental taxes.
It is expensive. You’ll be responsible for the property taxes, mortgage, insurance, and utilities, just like you would with your primary residence.
There may be unanticipated costs. Owning a property has unexpected costs. It takes effort and time to maintain. Keep a cash reserve on hand for urgent fixes or routine maintenance. You must ensure your home is secure even when you are absent.
The down payment might be significant. The down payment on a vacation or second house is sometimes greater than the down payment on your principal residence. This, however, is dependent on the lender.
Buying a vacation property is a wise investment. However, before you begin house hunting, you must consider several things, such as how you’ll use the house, your financial budget, location, financing, renting out the vacation home, working with a local agent, and many more.