4 Factors to Consider Before Buying a Vacation Home

A vacation home opens the door to guaranteed retreat and temporary escape from your daily cares. There’s no researching where to go or struggling to find the right deal. It’s an always-there familiar sanctuary set up the way you want. However, several considerations demand attention before falling into the allure of owning a vacation home. Even seasoned homebuyers who know the home-buying process must navigate with care. Weigh these factors:

For informational purposes only. Always consult a licensed real estate professional before proceeding with any real estate transaction.

The Purpose of Purchasing a Vacation Home

Vacation home buyers should be absolutely clear on how they intend to use the second home. A few questions to ask themselves are:

• Is the property meant to give residents more space?

• Can the property attract renters who will pay top dollar to stay in the home?

• Does the property allow city dwellers an escape?

• Can the property be an investment to forego paying capital gains?

• Will owning the property help save money on vacations?

• Is the property somewhere to retire in a few years?

These questions are not always obvious. Some people may buy a small vacation home to avoid paying hotel fees, only to find they want to retire there and will need more space. Therefore, it helps to set priorities and consider other possibilities before buying.

Know the Rates

The rates and fees associated with homeownership are intended to help people purchase a place to live year-round. However, those paying the purchase price of a vacation home may encounter different regulations, loan terms, rates, and fees.

A second home is defined as one where the owners intend to occupy the home as a primary residence for at least part of the year. Second homes can have rules imposed on them to qualify. They may need to be a certain number of miles away from the homeowner’s primary house. A second home cannot be part of a timeshare agreement or controlled by any management firm at any time during ownership.

Those not renting the second home can usually provide a 20% down payment and secure a loan with about the same rates as a regular mortgage. But if you plan to rent to offset costs, it becomes an investment property.

An investment property is defined as one that takes advantage of tax benefits or generates appreciation or rental income.

Investment real estate loan rates can be up to .38% more than a conventional mortgage. They usually require at least 25% down, if not 30%.

Additionally, how vacation homes are taxed is different. Local authorities may have different rates for second-home properties. For example, South Carolina’s property taxes for primary residences are charged at 4% of value. Second homes are assessed at 6% of property value. Any homestead exemptions will likely not apply to the vacation home. All that increases the property tax burden on the owner.

Plus, as an income-generating property, revenue can be subject to federal income taxation even if you live in the home part of the year. Consult with a tax expert if you’re considering buying a second home.

Factor in Additional Expenses

Besides paying another mortgage, weigh the costs of furnishing, heating, landscaping, and maintenance. Second homes may sit empty for months. If no one’s watching, pests or unwanted tenants can creep in. And what if something goes wrong? Frozen or burst pipes that leak for months will cause thousands in property damage. Appliances can short out, cause fires, or stop working.

Homeowners should take precautions to protect their homes when empty. It could be installing a security system or hiring cleaners. Factor these expenses into the total budget.

Check the Neighborhood

Zoning restrictions differ in every neighborhood, so looking into the regulations before buying is wise. That’s especially true if you’re interested in the short-term rental market, as local authorities are increasing restrictions on these operators down to where they can run. Even condo homeowners associations often limit the number of rental units that can operate in their complexes or how often a unit can be rented.

Some officials are happy to let homeowners perform their DIY improvements, while others may need to hire specific contractors or qualified professionals for certain jobs. It generally comes down to how likely the homeowner’s actions are to affect their neighbors. For instance, those purchasing a home in a more rural neighborhood may be less likely to be affected by these ordinances.

The excitement of buying a vacation property shouldn’t be discounted. It does help to be prepared before speaking to lenders, your accountant or tax advisor, and settling on a property that fits a homeowner’s needs.

For informational purposes only. Always consult a licensed real estate professional before proceeding with any real estate transaction.

Frequently Asked Questions About Buying a Vacation Home

Is it a good idea to invest in a vacation home?

Investing in a vacation home or vacation property can be a wise decision if you choose the right location and property, like a ski chalet, cabin in the countryside, or beach house. It offers the potential for rental income, property appreciation, and a personal retreat. However, it’s crucial to consider factors like market trends, maintenance costs, and your long-term financial goals. Researching popular vacation destinations and understanding the local real estate market can significantly impact your investment’s success.

Can a vacation home pay for itself?

A vacation home can pay for itself through rental income (rental properties), especially if it’s located in a desirable tourist destination with high demand. Platforms like Airbnb and VRBO make renting out your property short-term easier. However, achieving this requires effective management, competitive pricing, and consistent occupancy. Remember the costs associated with property management, maintenance, and taxes, which can affect your overall profitability.

What is the debt to income ratio for a second home?

Mortgage lenders typically require a debt-to-income (DTI) ratio of 43% or lower when approving a mortgage for a second home. This ratio measures your monthly debt payments against your gross monthly income. A lower DTI ratio indicates better financial health and increases your chances of securing favorable loan terms. It’s important to evaluate your current financial situation and ensure you can comfortably manage the additional debt.

Is it hard to finance a vacation home?

Financing a vacation home can be more challenging than securing a mortgage for a primary residence. Lenders often require higher credit scores, larger down payments (usually around 20% or more), and more stringent income verification. Interest rates for second homes can also be higher. However, having a strong financial profile, a good credit history, and a substantial down payment can improve your chances of obtaining favorable financing terms.

Will buying a second home reduce my taxes?

Buying a second home can offer certain tax benefits, but it depends on how you use the property. If you rent it out, you can deduct expenses like mortgage interest, property taxes, insurance, and maintenance costs. However, personal use of the property can limit these deductions. Consulting with a tax professional can help you understand the specific tax implications and benefits based on your situation and usage of the second home.

What types of vacation home loans are there?

A vacation home loan is a mortgage designed to purchase a second property or secondary residence intended for personal use in a vacation destination.

Vacation home loans come in several types, each with unique features. Conventional loans are standard mortgages with fixed or adjustable rates, requiring at least a 20% down payment. In contrast, jumbo loans cater to high-value properties exceeding conforming loan limits and demand stricter credit and higher down payments.

Home equity loans and HELOCs allow homeowners to use equity from their primary residence to finance a vacation home, offering fixed and variable rate options. Additionally, government-backed loans like FHA or VA loans are less common but available under certain conditions, and portfolio loans offer flexible terms for unique financial situations.

Is it better to buy a vacation home or an investment property?

The decision between buying a vacation home or an investment property depends on your goals. A vacation home provides personal enjoyment and potential rental income but may come with higher maintenance costs and less rental demand flexibility. An investment property, a type of property typically used solely for rental income, can offer better cash flow and potential appreciation but lacks the personal use aspect. Evaluating your financial goals, risk tolerance, and lifestyle preferences is key to making the best choice.

Updated March 2024