1. Evaluate the pros and cons of purchasing a vacation home
Putting your money into another property is a big commitment. It’s important to fully understand everything you stand to gain and lose when considering buying a vacation home.
Pros of buying a vacation home
Some of the major benefits of buying a vacation property include:- Saving money on vacations since you won’t need an Airbnb or hotel
- Affordable vacations leading to more frequent or longer trips
- Investing in real estate, an asset that potentially appreciates
- Offsetting some of the costs of ownership via tax deductions
- Buying a vacation rental property for passive income
- Retiring at your secondary residence after selling your primary home
Cons of buying a vacation home
Make sure you consider some of the downsides that follow vacation home purchases, like- Budgeting for expenses like utilities, taxes and insurance
- Paying for maintenance costs even though the home may be vacant
- Hiring a property manager to handle the maintenance and manage renters
- Growing tired of visiting the same vacation destination
- Losing liquid cash due to the large second home purchase
2. Prepare your potential household for new vacation property responsibilities
Although buying a vacation property can result in a lot of fun, it’s also important to have a firm grasp on the responsibilities of vacation home ownership. Here are a few to consider:- Furnishing the vacation home
- Yearly time commitments
- Property management
- Property maintenance
3. Know what’s motivating the vacation home purchase
“Perfect” is a subjective term when it comes to property ownership. What is right for you and your family will largely depend on the purpose behind buying a vacation home.
Intended use
Your main motivation for buying a vacation home may be simply relaxing or having a space to escape from the hustle and bustle of everyday life. On the other hand, many people want to turn their second home into a money-maker, and the success of services like Airbnb and Vrbo makes it easier. Using your second home as a rental property will affect both your second home mortgage application and tax benefits. A rental property is seen as a business and qualifies for interest rates and taxes that are different from vacation home financing. Ensure you understand the full implications and discuss it with your lender and financial advisor.Activities
Do you have specific ideas for what you want to do at your vacation property? Are you longing to be steps from the slopes, with a roaring fire after a day of skiing? Maybe you want to spend time lounging by the pool or biking to wineries on backcountry roads. Consider how a vacation home destination aligns with your lifestyle, and which amenities you want to comfortably create a home away from home.Style
The style of a house can often take a back seat to the more important factors on this list, but it still matters. When it comes to architecture and interior design, are you drawn to contemporary or rustic chic? Mid-Century Modern or mountain chalet? Open concept plan with a great room or more traditional defined rooms?Whatever interior design you choose, make sure you have enough bedrooms and bathrooms to accommodate your guests in style and comfort. And look for a home with spaces for spending quality time together. Having a home you’re in love can keep you happy with the purchase for years to come.4. Choose a vacation home destination
With dozens of potential vacation home destinations, it’s essential that you are crazy about the location of your second home. You’ll frequent the same place, so make sure it’s the right fit for your family.Since real estate is a long-term investment, you’ll want your new home to have long-term appeal. Ask yourself the following questions:- Do I want it to be within driving distance so I can visit regularly?
- Is the destination family-friendly, or does it center around nightlife?
- Will visiting it require long-distance plane travel?
- Will my vacation home be in a different climate?
5. Determine your financial goals
- Assess your financial health: Review your credit score, debt-to-income ratio and current expenses to assess if your finances are ready for a second home.
- Create a vacation home budget: Create a budget for a second home mortgage, utilities and maintenance of your vacation home.
- Plan for emergency expenses: Add padding to your budget by planning for emergency expenses like roof repairs or clean-up after a natural disaster.
Understand vacation home tax obligations
Your vacation home may qualify for several unique second home tax deductions. Qualifying for these tax breaks can help you lower your overall vacation home expenses. Potential tax benefits include:- Mortgage interest reduction
- Property tax deduction
- Home equity loan deduction
- Energy efficiency deduction
- Rental expense deduction
- Rental depreciation deduction
6. Consider vacation home ownership structures
Being the sole owner of your vacation property isn’t the only option. In fact, there are several types of ownership to choose from.Co-owning a property within a limited liability corporation (LLC), for example, allows multiple people to own a single property. You will make decisions together, and expenses get split accordingly. While being a sole owner of a second home allows you to make all the decisions, you’re also responsible for all the expenses. Co-ownership can potentially reduce the stress of owning multiple homes.7. Avoid common vacation home mistakes
There are some established and reliable rules for buying a vacation home.
Don’t make emotional decisions
Having a vacation house you love in a destination you love is a great goal, but letting that passion cloud your judgment can lead to long-term problems. Deciding to buy a second home while your emotions are high after a recent visit may feel like the right move, but you might develop buyer’s remorse when those feelings fade. Instead, approach buying a vacation home from a calm, rational perspective to successfully manage expectations.Watch your budget
Once you’re attached to purchasing a vacation home, increasing spending to reach your goal can be easy. Remember that your budget is there to help guide your decisions and keep you out of financial trouble. Exceeding your budget will only increase your chances of biting off more than you can chew. Aside from high-level expenses like your mortgage, factor costs like lawn care and cleaning services into your budget.Don’t miscalculate your expenses
Many additional costs are associated with vacation home purchases aside from the sticker price. Understanding that you’ll be paying throughout the year for your vacation property — not just when you use it — is important to remember. Remember that you’ll need to furnish the house, pay for lawn care when you’re away and make repairs as needed. That’s all on top of property taxes, insurance and HOA fees.| Expert tip: Using a vacation home maintenance checklist while calculating your budget can help you best estimate your potential second home expenses. |
Underestimating property management
If you live far away from your vacation home, you’ll need help keeping the place livable throughout the year. For that, you’ll likely need to pay a property manager. This is especially necessary if you plan to rent it out. While the service is well worth the expense, it will affect your projected revenue. Remember that the type of house you own and the location of your home may also increase property maintenance costs. For example, a beach home may suffer from salt damage.8. Begin the home buying process
If your mind’s made up and it’s time to own another property, the next step is learning how to buy a vacation home. It should feel familiar if you own your primary home.- Determine if you can afford the vacation home. Track your monthly income and deduct your regular expenses. Do you have enough left over each month to cover another mortgage payment, utilities and maintenance?
- Get pre-approved for a second home mortgage. Talk to lenders to see if you qualify for a loan and how much that might be. They’ll look at your credit score, debt-to-income ratio and how much you’ll need for a down payment.
- Find your new vacation home. Apply the advice in step two to ensure you’re putting your money where it will have the best return on investment and add value to your vacation goals.
Buying a vacation home FAQ
Is it a good idea to invest in a vacation home?
Your readiness to invest in a vacation home depends on your financial health, lifestyle goals and ability to maintain the home throughout the year.
Is it hard to finance a vacation home?
There are many ways to finance a vacation. You can apply for a traditional mortgage or finance via fractional ownership, ultimately lowering your share of the financial burden.
What are the hidden costs of affordable vacation homes?
Some hidden (or sometimes forgotten) costs of any vacation home can include property maintenance, HOA fees and applicable insurance for your area.
