Dreams for Sale: Considerations Before Buying a Vacation Home
July 30, 2021
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.
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