A vacation home sounds great. Your private little getaway to use when you really want to get away. However, before you make your vacation home purchase, ask yourself some important questions – the kind of questions that might save you money and headaches.
Have you spent time in the place you’re considering as a vacation home? If not, do. Whether it’s a lakeside cottage or a ski lodge in the Sierras, spend time in the region where you’re considering a purchase. It may be great the week you visit, but when the seasons change, you could be vacationing next to a rock concert venue or a destination site for college kids during Spring Break.
Visit several times during different times of the year. If you like the second home during all seasons, you’ll probably enjoy your little hideaway. On the other hand, if the average temperature is -10 degrees in the winter months, chances are you won’t use your second home as much – even if skiing is your passion.
How will you get there? Sure, you loved your two week vacation in Hawaii, but it’s expensive to get there. The National Association of Realtors® reports that 80% of vacation home owners choose a location within 50 miles of their primary residence.1 Why? If it’s easy to get there, they’ll use that vacation home more often.
Will you need rental income to help pay for your vacation home? If so, choose a home with lots of activities that renters will enjoy. Repeat renters are a great source of income to off-set the cost of your vacation home.
On the other hand, if you don’t plan to rent, and many vacation home owners don’t rent, you have more options that fit your preferences. In other words, a slope-side chalet will appeal to skiers and snowboarders, but the beach crowd will look elsewhere.
Is the location of the home a popular tourist destination site? Buying a vacation home in a desolate region with little activity won’t tempt renters to spend a week at your place, even if it’s a beautiful home. If it’s in the middle of nowhere with few activities, renters won’t be too eager to help pay the mortgage on your vacation home.
What are the total monthly costs of your vacation home? You know what you paid, and you know the monthly mortgage payment. But, what about local taxes, beach association fees, management fees, and other expenses? You could easily find yourself in over your head financially if you don’t add up all the costs associated with your vacation home.
Who will keep an eye on your get-away when you’re not there? Many realtors offer property management services in vacation spots. Talk to several different realtors to find one who can really watch your home. Provide the management company with all necessary keys and contact the property manager regularly for updates.
Vacation home owners can expect to pay between 20% and 50% on property management costs based on the services provided by the management company.1
Who’s going to handle upkeep? A vacation home will require regular upkeep just like your primary residence, and if you’re not handy, it’ll cost money to keep your vacation property in good shape. Many vacation home owners spend a lot of time scraping, painting, fixing roof leaks and other chores – the kind of chores you want to escape by going on vacation. If you’re not handy, and can’t afford a handyman, chances are a vacation home is just going to create headaches and expense.
Is the home you’re considering in a low-crime zone? Leaving your vacation home unoccupied makes it simple for the bad guys to get in and steal and vandalize your dream. Choose a location that has a low crime rate to improve your chances that your vacation home will be safe when you’re not there for months at a time.
Can you afford a vacation home? Many lenders charge higher interest rates on vacation homes because they may not be occupied or rented out all of the time. Before you even start looking for the ideal hide-away, talk to your bank representative about financing options.
Will I have to pay more taxes on a vacation home? According to the IRS2, if you rent your vacation home for fewer than 15 days a year, property taxes on your first and second homes can be declared Schedule A deductions. The paperwork is pretty simple in this case.
However, if you rent out your vacation home for more than 15 days a year, you’ll encounter a lot of new paperwork when tax time rolls around in April. Rental income is taxable and you’re a landlord. You can deduct vacation home utilities, insurance, and management fees, but you’ll be required to notify the IRS of rental income earned when renters stay for more than 15 days a year.
A vacation home may be a great investment. It can earn money for your family. It can also be turned into a great place to retire after selling your current primary residence. Just make sure to consult professionals before buying, to determine if a vacation home is right for your family and your future.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.
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