Buying a vacation home can be a thrilling achievement. In fact, there are few purchases which generate as much excitement and high level of expectations. Buying a vacation home is ultimately more than just a financial decision. It is a complex emotional decision as well. The purchase of a second home is an investment both in terms of money and lifestyle. For a second home to successfully “payoff” as an investment, there are several issues prospective buyers should consider.
1. Why do I want to buy a vacation home?
Purchasing a vacation home is quite different from buying a primary residence. Potential buyers should give careful thought to the purpose of their vacation home. One of the deciding factors aside from the financial costs will be your personal situation. Do wish to purchase the property as a long-term investment or use it strictly for personal enjoyment? Or, it might be a combination of personal and financial objectives. Some individuals may prefer to purchase a vacation property which can be later used as a primary residence in retirement. Therefore, you will likely need to evaluate both your present and future needs when planning the purchase of a second home.
2. What type of housing is right for me?
When it comes to purchasing a second home, there a multitude of housing options available; everything from a rural cabins with acreage to luxurious condos in resort locales. There are preliminary factors to consider such as convenience, location, space requirements, the range of recreational and social amenities and prospects for future resale value. Obviously, properties with scenic views (e.g., the beach or a mountain ski resort) in popular vacation destinations will garner higher demand. Popular areas are hardly immune to the price fluctuations of real estate cycles. Condominiums in large (e.g., Boston or downtown San Diego) metropolitan cities may also enjoy widespread popularity. As usual, location is the crucial factor. Condo units which offer breathtaking city skyline views and are located near a wide array of cultural and social amenities may appeal to a large spectrum of buyers with different interests. A detached home is advantageous in providing more indoor and outdoor space and privacy but it incurs significantly higher financial costs and requires a greater level of personal responsibility in terms of repair and maintenance. Maintaining a second detached home at some point may become a cumbersome chore, thereby losing its initial appeal as a “vacation getaway.” Taking into account this perspective, some prospective buyers, preferring to avoid the headaches of absentee homeownership, may find apartment style condo ownership far more convenient and less worrisome as the management staff can attend to maintenance and security concerns. It can also be more difficult to sell a home in a secluded rural area, particularly during market downturns. For anyone interested in purchasing a vacation home as an investment, careful thought should be given to purchasing a property which appeals to a broad segment of buyers.
3. What are some of the financial costs of owning a vacation home?
Purchasing a second home requires a tremendous outlay of financial capital which deems it a luxury and not a necessity. A vacation property should never be financed by tapping into the equity of your primary residence or by withdrawing funds from emergency savings accounts and retirement plans. Never stretch your budget to “accommodate” the purchase of a vacation home. Generally, serious prospective buyers who can afford a vacation home may finance the purchase through cash or an almost cash payment. Getting pre-approved is essential. Financing requirements for vacation homes are extremely stringent. Usually, the downpayment is 20% and many lenders actually require a higher minimum (e.g., 25% or 30%). Lenders will examine many aspects of your financial situation including but not limited to your credit score, amount of liquid assets, debt obligations and your capacity to generate present and future income. Lenders will want to assess the level of cash reserves you have and your ability to make payments (which include insurance, interest and taxes) on time.
There are also many “hidden costs” to purchasing a vacation home including expenses for utilities and maintenance. Condo fees and HOA dues are another concern. Prospective buyers should check with the condo association about the reserve funds. Some condo associations may lack sufficient reserves for repair. The impact of condo fees should not be minimized as they can increase over time, exerting a sizeable influence in your ability to financially maintain ownership of the property and may possibly affect the resale value. High condo fees do not necessarily translate into a higher future value for the property. Review the range of amenities and your frequency of use. Insurance coverage can be a weighty financial expense as there will be many variables to evaluate including how the vacation home is defined, whether it garners seasonal rental income, climate and environment.
4. What are some common mistakes?
• Having an overly optimistic projection of the future resale price.
• Overestimating future rental income.
• Not understanding the tax implications of using the vacation property as a rental.
• Trying to flip the property as quickly as possible and not having a realistic outlook.
• Buying a foreclosure because “it’s a great bargain.”
Other mistakes include not realizing that buying during a “market downturn” can be as problematic as purchasing during a “market upswing”, jumping into a purchase simply because “prices may never be this low again” or purchasing a property on an emotional whim without doing the necessary research.
For informational purposes only and not intended as advice.