5 Things to Think About Before Buying a Vacation Home
August 18, 2021
Watch Sand Hill Global Advisor's video about the most important things to consider before buying your dream vacation home in this frenzied real estate market, such as the cost, location, investment potential, tax impact, and exit strategy.
Vacation living can be fabulous. The stress of daily meal preparation, schedules and work commitments fade away, allowing you to reconnect with family and friends in a way that can be challenging to do in your regular life. As soon as you return home from a great vacation, it is common to think, “How soon can we return!?” The purchase of a second home in your favorite vacation spot may seem like a dream come true — and may feel like a good financial move if you’re continuing to rack up expensive rental or hotel bills visiting the same place year after year. But buying a second home is a big commitment worthy of careful consideration. Here are five things to think about before you dive in:
1. Cost: Can you afford it? This might seem pretty obvious, but beyond the initial cash outlay for the purchase there are insurance, maintenance, and possibly property management expenses to consider. If your vacation home will sit vacant for the majority of the year, hiring someone to keep up the yard and make sure there aren’t any unwanted visitors – human or animal – should be added to your list of expected routine expenses.
2. Location, Location, Location: Is your ideal vacation home within driving distance from your primary residence or does it require a full day of travel to get there? While the image of a remote, tropical paradise may be dancing in your head, homes in faraway places aren’t likely to be used very often, making them expensive on a per visit basis. Additionally, the maintenance and insurance requirements can be more significant if your piece of paradise is in a flood, hurricane, or forest fire zone.
3. Investment Potential: Will your vacation home simply be a “use” asset or are you expecting it to do double duty as an investment asset as well? While it might seem like you just can’t lose when investing in real estate, estimate the expected return on your investment by viewing comparables in the area to determine if the money could be better invested elsewhere. Most vacation homes aren’t used as often as planned, so buying a place with rental potential can help offset the expenses you’ll incur and possibly put it in the affordable range or better yet, make it profitable.
4. Tax Impact: If you decide to rent your vacation home for more than 15 days per calendar year, the IRS will want their share of your income. However, you will be able to deduct operating expenses like insurance and repairs based on the number of days it was rented versus maintained for personal use. And like your primary residence, mortgage interest expenses and property taxes are fully deductible according to the IRS.
5. Exit Strategy: Do you plan to pass your vacation home to your kids someday or sell it when the market is particularly hot? Perhaps today’s vacation home is where you plan to retire. Thinking about your ideal ownership time horizon before making a purchase is important. If you plan to be in it for the long haul, finding a place with year-round appeal that will work for your family now and in your Golden Years can make good sense.
If buying a piece of Shangri-La means sacrificing your long-term financial goals in other areas, the cost is too high. But for many, owning a vacation home is a dream realized.
Video Disclosures:
Sand Hill Global Advisors (“SHGA”) is a registered investment adviser with the Securities and Exchange Commission however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. SHGA may only transact business in the states where the firm is noticed filed or otherwise exempt. For disclosures, including additional information on credential designations of SHGA representatives please see our Form ADV Part 2A and 2B Disclosure Brochures, which can be obtained by clicking here. SHGA is separately owned and unaffiliated with any other firm or entities mentioned or featured in this video. Third party firms and their employees are not affiliated with or employees of SHGA. This should not be construed as a recommendation, endorsement of, or sponsorship by SHGA. The views expressed are those of the third party and are provided for information purposes only. Experiences expressed are no guarantee of future performance or success and may not be representative of you or your experience. This video presentation may discuss certain investment products and/or securities and is being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, insurance, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect SHGA’s views as of the date of the video. Such views are subject to change at any point without notice. You should not treat any opinion expressed by SHGA as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. SHGA does not guarantee any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision. For disclosures, including additional information on credential designations of SHGA representatives please see our Form ADV Part 2A and 2B Disclosure Brochures, which can be obtained by clicking here.
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