When you’re on vacation, the allure of securing a place in paradise year round can be intoxicating. How can you bottle that vacation bliss? Buying a second home is the most commonly contemplated answer.
Vacation home ownership offers distinct perks. However, it also entails a significant investment of money, time and other resources. Like any major financial decision, it’s worthy of careful consideration. Ask yourself the following questions before you purchase a vacation home.
1. Can You Afford a Second Home?
This is the most important question to ask yourself. Vacation home ownership can be expensive, with costs extending beyond the down payment, mortgage, taxes and insurance to include:
- Upkeep and fees: Maintenance may include yard work, pool care, cleaning, repairs, etc. Buying a condominium might divest you of some of these demands, but generally there’s a condo fee to pay in return.
- Furnishings and supplies: Unless you buy a fully furnished home, you’ll need to pay to outfit your vacation property.
- Travel and entertainment: Don’t forget to factor in travel costs to and from your vacation home, plus the additional costs associated with vacationing - e.g., eating out, entertaining and enjoying local recreation.
2. What Mortgage Rate Can You Get On a Vacation Home?
Interest rates on second home mortgages are typically on par with primary residential mortgages. Furthermore, mortgage interest and property taxes are tax deductible. Be aware though that interest rates and tax laws change if you own three or more homes and/or if you rent a property.
3. Do You Want to Travel?
If you consistently enjoy one vacation spot, buying a second home in that location might make sense. However, if you prefer a variety of travel experiences, a vacation home investment might tie you to one destination, leaving you feeling like your options are limited.
4. How Frequently Can You Visit?
Consider your schedule flexibility and the distance to your potential vacation home. Both factors are prime determinants of how frequently you might visit. I would suggest calculating your annual expenditures to support a second home, then dividing the total by the estimated number of visits per year. This yields a per-trip cost that can be compared to the cost of other vacation alternatives. (For more, see: Vacation Property Walkthrough: Renting Out a Vacation Home.)
5. Should You Rent Your Vacation Home?
One way to defray the costs of second home ownership (and justify occasional use), is to rent out your vacation home. While this can generate income to offset ownership costs, renting also brings additional expenses and responsibilities such as:
- Cleaning services.
- Property management.
- Additional maintenance requirements.
- Wear and tear.
- Additional tax reporting requirements.
Tax note: People often anticipate income tax benefits associated with real estate depreciation expenses for vacation homes. However, relatively low income limits prevent passive loss utilization for many individuals. Be sure to seek tax advice before considering rental property ownership.
6. Do You Enjoy Hassle-Free Vacations?
A vacation should be a time to relax and enjoy, but second home ownership comes with responsibilities and repairs. If you don’t want to take care of these while visiting, then a second home might not be right for you.
7. Is the Property Easy to Maintain?
Some properties are easier to maintain than others, like condos versus single family homes. It’s important to evaluate the costs and time involved, plus resources available locally.
8. Have You Visited During Different Seasons?
Second home ownership is year round (unless you buy a timeshare unit), while most tourist destinations are highly seasonal. While you might love a location during your vacation, it could offer a completely different experience at other times of the year. Be sure to visit during off season, to explore the climate, community, resources, etc., particularly if you’re thinking of living there year round in the future.
9. Are You Vacationing With Young Kids?
A summer getaway with young kids can be great, particularly if one parent doesn’t work and you can "summer away." However, children’s habits change as they age. For example, tweens and teens often become engaged in summer sports, social networks and other activities that might tie you to your primary residential location during summers to come.
10. Are You Buying At the Top of the Market?
The real estate market has been hot for several years, as the economy recovers and interest rates have remained historically low. While a low interest rate environment makes financing affordable, an uptick in rates or a downturn in the economy could negatively affect future property values. If you’re buying now, make sure you’re in it for the long haul and that you’ll be comfortable if the value of your vacation home fluctuates.
11. What Is the Projected Resale Value and Tax Impact?
It’s always important to consider potential resale value for any property you purchase. Real estate in vacation destinations can be highly cyclical, meaning that values can vacillate far more than other year-round locations. Evaluate historical values to get a feel for possible resale value. Also, beware that second home sales do not qualify for the principle residence.
12. Could Your Vacation Home Become Your Retirement Home?
Many of these considerations apply if you intend for your vacation home to become your retirement home in the future. Additional recommendations include proximity to family and friends, and renting for a year before making a permanent commitment. If you hesitated on a few points, traditional vacationing might still be the best solution for you. Conversely, if you’ve made it through this list and are still excited by the prospect of a vacation home, then it’s time to delve further and meet with a financial advisor who can help you develop a plan that evaluates financing, tax, and related financial matters, relative to your financial and life goals.