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3 Things to Consider Before Moving to Paradise

By Matthew Frankel, CFP® – Feb 9, 2014 at 10:00AM

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A lot of people dream of buying a home in a tropical location and escaping winter once and for all. Here are a few things to be aware of before you do that.

A lot of people dream of retiring in a tropical location, or would at least love to buy a vacation home somewhere warm. Before you do, take in to account that the house may cost you more than just a mortgage payment, taxes, and homeowner's insurance.

Depending on where the property is located, there are several other things that can put a drain on your wallet when buying that home in paradise.

Hurricanes
Most "tropical" destinations are hurricane-prone. The only difference is how much. When looking for a home, check with a real estate professional and an insurance agent to determine whether or not windstorm coverage is required, and if so, how much you can expect to pay. 

As a general rule of thumb, in areas where windstorm coverage is required as a condition of getting a mortgage, expect to pay about 1% of the home's estimated replacement costs for your coverage. This could be much higher if there is something the insurance company doesn't like about the home, like substandard shutters on the windows. So, if your prospective home would cost $250,000 to replace, plan on at least $2,500 per year for windstorm coverage, and perhaps some initial costs to bring the property up to par (also known as windstorm mitigation).

Floods
Although hurricanes tend to cause flooding in coastal areas, it is very important to realize that windstorm insurance policies will not cover flood damage. Windstorm insurance covers things like damage to your roof caused by high winds. Not such items as fixing floors and drywall after there's 3 feet of water in the house.

Source: Leif Skoogfors

Flood insurance has become quite a hot topic over the past few months, as changes to the National Flood Insurance Program, or NFIP, have caused premiums to skyrocket for certain coastal properties.

While Congress tries to sort it all out, private options are starting to pop up. Flood coverage is limited to a maximum of $250,000 plus contents, and a policy in that amount will cost you between $2,613 and $12,805 per year, depending on the location of the property and how much contents coverage you decide to buy.

It is worth noting that if Congress decides to continue subsidizing flood insurance, the annual cost drops to the low end of that range, regardless of how flood-prone the property is. Contact an insurance agent who deals with flood policies in your area for specific details about what to expect.

Possible problems with the home itself
Aside from the fixed insurance costs mentioned above, there are certain issues that affect homes in tropical climates that are unfamiliar to those who live in other areas.

For example, in many older homes in coastal regions, the exterior of the home is made from poured concrete. In many cases, seawater was used to mix the concrete, causing corrosion of the steel reinforcement bars and producing a condition called spalling, which can cause the concrete to split and crack. Spalling can be fixed, but it'll cost you.

There are many more issues to consider. Landscaping is generally more of a burden in tropical areas.  Yards, plants, and weeds get overgrown much easier in these climates, as there is no winter season to impede growth. 

Termites are also a major problem, affecting many more homes in warm climates. Homes in these areas often require expensive termite treatments every few years to prevent the insects from destroying the wood structure. It is also very important that any home you consider purchasing has been kept up-to-date with its termite prevention, or else there can be serious structural issues hidden within the walls of the home.

Foolish final thoughts
This is by no means meant to be an exhaustive list, nor is it meant to dissuade you from pursuing your dream home. Everyone should be aware of what they are getting in to, so it's easier to budget accordingly. Just because you qualify for a $500,000 mortgage doesn't mean that the payment will be affordable when adding an extra $1,000 per month just to cover insurances.

Be sure to factor in expenses like these when formulating your budget and your dream home in paradise won't turn into a nightmare.

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