What to know before investing in a vacation home
With summer fast approaching, it might seem like the right time to finally get that vacation home you've long been dreaming of. Maybe you're picturing a house just steps from the beach, or a lakefront oasis where you can gather with your family.
Before making the leap on a second home, it's important to fully understand what that purchase entails.
Factor in all of the costs
"Owning two homes will mean you'll also be paying double for almost everything," Rocket Mortgage points out. "This can include another mortgage, property taxes, utilities, home insurance, homeowners association (HOA) fees and monthly heating and water bills." Other costs to take into consideration include furnishing and decorating the home, traveling to and from the property, and hiring a rental or property management company.
Costs will also vary depending on where you decide to buy, Kiplinger notes. "If you buy where skiing is popular, the heating bill could be substantial," the financial website says, while the "same goes for the electricity bill for air-conditioning in hot-weather locales." And then if you were to buy in coastal Florida, for instance, there's the reality that "you'll have to get hurricane shutters and have someone on hand who can quickly apply them and secure your property if you're away when a storm is approaching," Kiplinger says.
Consider your goals
Too often, people make "an emotional investment" when they buy a vacation home, says Travel + Leisure. Rather than focusing on the warm and fuzzy feelings you've gotten from recent trips to a location, prospective buyers should think carefully about how they'll use the home — and how often.
"And, more specifically, for buyers who want to use the property as a short-term or vacation rental, it's important to establish clear financial goals," Shaun Greer, vice president of sales and marketing at international home management company Vacasa, told Travel + Leisure. Further, how often you rent out your vacation home versus live in it will impact the taxes you pay and deductions you can make, according to Kiplinger.
Location matters
Location is "very important when it comes to a vacation property, especially if you plan to rent out the home," Rocket Mortgage says. Rather than focusing on areas already saturated with rental properties, try searching for areas where "there is an opportunity to fill demand."
Keep in mind, however, that while more appealing locations can lead to more interested renters, it can also push the price of buying higher. If you're looking for a bargain, "shift away from central locations and extend your search to outlying areas," Kiplinger suggests.
Research the neighborhood — particularly its rental rules
Buyers often make the major mistake of not doing adequate research on the area where they're buying. This is especially important for anyone planning to rent their home, as "some homeowners or condo associations disallow short-term rentals at all times, and some may prohibit renters from using facilities such as the pool or gym," Kiplinger says.
Also make sure the area will have other amenities you'll need, such as "strong cell phone and Wi-Fi service, as well as proximity to shops where visitors can purchase food and supplies," Travel + Leisure adds.
Don't skip a home inspection
In a competitive real estate market, buyers might feel tempted to move fast now and ask questions later. "Sellers often favor 'clean' contracts with as few contingencies and extra requests as possible," Kiplinger acknowledges, but "it's generally a bad idea to skip the home inspection."
"More buyers may be willing to buy sight unseen these days, but we find homeowners are more often happy with their real estate investments when they've visited the area during both the peak and shoulder seasons," Shaun Greer, vice president of sales and marketing at international home management company Vacasa, told Travel + Leisure.
Know that mortgages for second homes are different
Interest rates tend to be "slightly higher for second-home mortgages than for primary-home loans," according to Kiplinger. Additionally, it's necessary to make a down payment of at least 10 percent, and some lenders may require 20 percent.
Applicants should also know that minimum credit score requirements are also steeper for second homes. "With a loan-to-value ratio (the amount you owe on the loan as a percentage of the home value) higher than 75 percent, you may need a minimum FICO score of 680 to qualify (on a scale of 300 to 850), compared with about 620 to 640 for a primary-home loan," Kiplinger explains.
Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She has previously served as the managing editor for investing and savings content at LendingTree, an editor at SmartAsset and a staff writer for The Week. This article is in part based on information first published on The Week's sister site, Kiplinger.com.
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