5 Questions to Ask Yourself Before Buying That Vacation Home
You've always dreamed of owning a second home. Whether a cabin nestled in the mountains or a beachside bungalow, a vacation home is a hallmark of success, a token of your hard work. However, a vacation home isn't the right choice for everyone. Before you start looking at homes and shopping for mortgages, ask yourself these five questions to decide if a second home makes financial sense for you.
If you vacation several times per year and enjoy visiting the same destinations, a vacation home is a perfect fit for your vacation style. However, if you vacation infrequently or prefer to see a new place each time you travel, buying a vacation home probably isn't right for you.
If the answer to this question isn't a definitive “yes,” stop here. Buying another home shouldn't come at the detriment of other important financial goals. Rather, a vacation home should be a bonus after funding retirement accounts, planning for long-term care, and paying for a funeral. (Not sure you've planned for everything? Use US News's checklist to see.)
If you have extra money after meeting savings goals, determine how much you can afford to spend on a vacation home. Having a solid understanding of your finances ensures you're not tempted by homes you can't afford. Examine your income and monthly spending to determine how much you can afford to spend on a second home each month. Then, use your down payment savings, loan type, APR, and property taxes to estimate the mortgage size you can afford. Doing this on your own can be complicated, so use an online calculator to help.
The mortgage and property taxes aren't the only second home expenses to account for. Between maintenance and repairs, HOA fees, homeowners insurance, utilities, and security, the costs of maintaining a second home can put a sizable dent in your budget. You also need to think about the costs that will really make your vacation house a home. For example, if you opted to purchase a smaller home, does it make sense to build an additional (yet budget-friendly) bonus space, such as a pre-fabbed steel structure to protect your car or a wooden shed to store seasonal belongings? Both of these options are economical ways to add square footage without paying for it in a mortgage — for example, a small, pre-engineered steel building has low labor costs and is energy efficient, while a wooden structure can be built with inexpensive plywood and paving stones — but you’ll need to plan for them. Additionally, if you plan to rent your second home to fellow vacationers, include property management, cleaning, and marketing fees in your calculations.
Renting out your property defrays some of the costs associated with a vacation home, but don't expect it to be a money-making venture. There are expenses associated with renting a property, such as property management fees, marketing, lodging and income taxes, vacation rental insurance, an increased rate of wear and tear, and regular cleanings for renters (maid services usually charge $110 - $220 in Pensacola). Managing the rental property yourself only saves money if you live close enough to drive over. Otherwise, travel expenses will eat up what money you save on property management. A property manager can charge a percentage of the rental value or a flat rate (e.g., $100 a month).
Before deciding to rent out a second home, ensure the numbers make sense and that you're prepared to sacrifice vacations during peak season. You may also need to make some modifications to accommodate renters and make your home more desirable. For major projects, choose a contractor carefully, and always clearly specify what work you want done and what you’re willing to pay for it.
Buying a vacation home in a sleepy town with a declining market might land you a great deal, but it will be hard to sell without losing money. A home in a thriving vacation destination, on the other hand, is costly, but offers great resale potential. If you plan to sell your vacation home in the future, ensure you buy in an area with a strong real estate market. Heed Zacks's warning that if you sell, you're not eligible for a capital gains exclusion unless the home has served as your primary residence for at least two years before selling.
Armed with answers to these questions, you're ready to make an informed decision about whether a vacation home is a smart choice for you. If you decide it doesn't fit with your financial goals, don't let that stop you from traveling! There's a whole world out there to see, and your retirement years are the perfect time to explore it.
Written by Guest Blogger: Jim McKinley
Image via Unsplash