Theres something so enticing about the idea of owning a vacation home. Its the vision of a special place that feels both familiar and an escape at the same time. It is a place to make memories. And a place your hard-earned dollars translate not only into luxury, but a return on investment.
However, like all large purchases, a vacation home isnt something you should jump into without lots of thought and number-crunching. Here are five things you need to consider before making an offer on a vacation home:
Okay, so being practical is probably the furthest thing from your mind when youre dreaming about a vacation property. But you need to make sure your choice is the best one for your lifestyle. Is the location somewhere youve visited often? Can you travel there easily from your primary residence? Are there activities youll be able to enjoy as you get older, or as young children potentially join you? Make sure youre not charmed by a pretty postcard – a vacation home should carry all the weight of that decision.
When you say yes to a vacation home, youre likely saying no to other destinations – at least for a while. If youre someone who loves to travel, committing to own property in just one spot might not be for you. Once youre paying for a vacation home, youll feel obligated to visit it many of the times you travel … are you ready to give up your wanderlust in lieu of a home away from home? And even if you are committed to spending all your leisure time in one place, are you ready for the reality of upkeep, maintenance and repairs that will be reality when youre the one responsible for your getaway home?
Residency Versus Renting
According to Zillow, there are three primary ways in which you can categorize a vacation home: as your primary residence, as your secondary residence, or as an investment property, and each has different implications when it comes to financing and taxes:
- Primary residence. If you plan to live in the vacation destination most of the time, youll be afforded the same perks as any other homeowner. This includes significant tax benefits, low interest rates for qualified buyers and the ability to put as little as 3 percent down on certain types of loans.
- Second home. If you want unlimited access to your vacation home, but wont live there most of the time, youll need to qualify for a loan equals the amount of your primary residence and your vacation home put together. Most lenders wont allow you to rent the home. But youll get the same tax benefits you do on your primary residence – plus the lower interest rates.
- Investment property. You can choose when to rent the house out for income and when to stay in it yourself (or share it with friends and family). Zillow says interest rates are .25 percent to .375 percent higher than second home rates, and your down payment usually starts at 30 percent. You qualify for the loan using your full primary residence cost plus your full investment home cost, but you can use rental income to help qualify. Depending on where you buy and how much work you put into it, renting your vacation home could offset the mortgage and net you money in the long run.
Theres more to buying a house than the cost of the mortgage, especially when it comes to vacation homes. Youll need to budget for a variety of costs associated with home ownership, especially if you dont plan to use the vacation home as your primary residence. Dont forget about:
- Bills – internet, water, gas, electrical, trash collection, landscaping, and other maintenance services – youll have to pay whether youre at the house or not
- Furnishings and location specific equipment – like a boat, skiis, kayaks or golf cart
- A property manager to check on and maintain the house if you dont live nearby
- A cleaning service to visit between renters
- Routine maintenance – you should expect to spend about 2 percent of your homes purchase price on maintenance annually
Insuring Your Vacation Home
Dont make the mistake of thinking your insurance costs for a vacation home will be comparable to those for your primary residence. Often, people buy vacation homes in locations that come along with higher insurance rates, thanks to geography. For example, houses in the mountains, on the waterfront or in flood plains will be more expensive to insure. And if youre planning to have regular renters, they may come along with increased insurance costs as well. Make sure you connect with a SelectQuote insurance professional who knows the ins and outs of your chosen vacation destination before you buy.
Still dreaming of that ski-out villa, cabin on the lake or apartment in the city? Dont let these five factors discourage you. Once youve laid all the costs and considerations on the table, you can make the right choice at the right time – and look forward to years of priceless memories at your new vacation home.