A lot of people dream of purchasing a vacation home where they can retreat during the summers and holidays. They envision scenes such as barbeques on the porch and family get togethers by the sea. While this can be a dream come true, second homes can be a lot of work to maintain and afford. Thus, there are lots of things to consider before purchasing these second homes.
Here are a few factors that you should consider.
There are a number of considerations that fall under affordability. If you are paying cash, you should evaluate if you will have enough liquidity left over in savings after the purchase to meet your financial objectives. If you need a mortgage to purchase the home, you will need to evaluate if you can afford the monthly mortgage payments. You will want to know that you can pay a monthly mortgage indefinitely as real estate is not a liquid investment. You may not be able to sell it quickly and even still, depending on the market, you may not even get what you paid for the home.
After assessing the cost of the purchase price, you need to ensure that you can pay for the other costs as well. For example, if you are buying an unfurnished home, you will need to furnish it. Additionally, you will need to provide all of the other household necessities such as appliances, utensils, plates, pots, pans, towels, linens etc. Upfitting a home can be quite expensive and can often be up to 25% of the cost of the home.
There are also ongoing costs that must be budgeted for such as utilities, HOA or condo fees, taxes and insurance. Additionally, there will be maintenance costs over time such as painting the exterior if applicable, HVAC unit repairs and replacement over time, roof repairs and replacement over time, plumbing repairs etc.
When buying a vacation home, you will want to speak with your accountant so that you understand possible tax implications. Primary and secondary homes have different tax rules than a home that is considered to be a rental. If you are going to be renting your home for more than 15 days per year, you will likely have to claim the rental income.
If you sell your vacation home, you may have to pay gains on the profits as well. So, as you can see there are many things to consider and discuss with an accountant.
Renting the Home
If you are interested in renting the home at all to offset costs, you will first need to know all of the rules. For example, not all homes can be used as rental properties. Some HOA and condo associations will set forth rules that do not allow for rentals. The reason being is that many government backed or sponsored mortgages will not allow a large percentage of the units to be rented. The HOAs and condo associations may want their development to be eligible for conventional loans and therefore, set strict rules that prohibit rentals.
It is recommended that you always approach buying a vacation home as though it could become a rental. This would provide you an option to offset costs if you were to have an unforeseen change of events such as loss of a job or become disabled and unable to work.
You have heard it before, Location Location Location. You should consider the prevailing climatic condition in the area where you intend to have your new home located. You should also consider such factors as atmosphere and scenery of the location. Do you want to live in a glitzy town or along the beach? Do you want a second home overlooking a lake or a wildlife reserve? Do you want a peaceful neighborhood that provides you with ample peace of mind? Are you considering living in your new property in the future? It is important that you know the answers to these types of questions.
Once you determine a suitable location that fits your goals, you should visit the area at least a few times. You will want to make sure that it is truly a place that you would enjoy spending a significant amount of time.
When considering locations it is very important to assess the distance from your primary residence. How easy is it to get there? Is it accessible enough for you? For example, if it is 5 hours away from our primary residence and you hate to be in the car more than 2 hours, that location may not be a good choice. It may sound good in theory, but chances are that you will not visit your vacation home as often as you would like if accessibility is not good. Most people do purchase vacation homes within a suitable driving distance. However, you may decide to purchase a home that requires air travel. If that is the case you should evaluate the flight options and ensure the availability and prices are in line with your expectations. Vacation homes can be great, but they are not great if you pay for them and never use them.
If you are considering renting your vacation home it is very important that you choose the location wisely. Talk to rental management agencies to inquire about rental rates and occupancy rates in the area in which you are considering purchasing. The most desirable spots for rentals are near oceans, lakes, rivers or mountains. The bottom line here is that you will want to ensure the property would rent and align with your rental income expectations.
Management of the Property
If your vacation home is “far” away from your primary residence, you should consider how you will handle property oversight. For example, if you make infrequent visits, you may want to consider who could check on the property. You may need to hire someone to do routine cleanings and inspect the property to ensure there are no issues that have come up such as plumbing leaks.
Protecting the Home
You will want to consider your plan for protecting the home when it is vacant. For example, you may want to consider putting the lights on timers or asking your neighbors to park in the driveway on occasion. You may also consider security or monitoring systems.
Before purchasing a vacation home, you should also check the crime in the area as your home may be unoccupied for periods of time.
Before settling on an ideal vacation home to purchase, you need to do a survey of the local real estate market. Find out, is the property market trending in one direction? Do property values have a history of increasing over time in the area? Point to note, you should never assume the market outlook of your current home is similar to the target location for your second home (Vacation home).