A lot of people dream of buying a vacation home, but don't have a solid understanding of the ups and downs of ownership. While a vacation home can be a solid generator of income, the reality is your actual costs are likely far higher than the price you pay for the home. Before you dive in, make sure you have a good understanding of what you're getting yourself into to avoid some unpleasant surprises after you close.
First the bad: the hidden costs
When shopping for a vacation home, there are several other costs you need to be aware of. If you plan to buy a home in a coastal town, your lender will most likely require you to buy insurance for windstorms and floods (yes, they're separate). Each of these can be pricey, and you should plan on at more than 1% of your home's value annually for each one if you're in a disaster-prone area.
So, on a $250,000 home, plan on spending at least an additional $5,000 annually, and this doesn't include standard expenses like property taxes and insurance. That translates to an extra $416 per month on your mortgage.
Also don't forget that depending on where you are, property taxes can be much higher for non-primary residences. In some cases, your annual tax bill can be four times as high as it would be for a full-time resident!
Also, many vacation homes are in communities with features like pools and elaborate tropical landscaping. For this reason, a lot of properties come with much higher homeowner's association (HOA) fees than you're used to. Fees of several hundred dollars a month are quite common in vacation-oriented communities.
Be ready for some issues you're not used to
Vacation homes are generally located somewhere very warm and salty, or very cold and snowy. Both weather extremes have unique issues and expenses which don't affect most primary homes as much. The list of these is far too long to list here, so let's consider a few of the big ones.
At the beach, a lot of houses are made of concrete in order to better withstand hurricane-force winds. These are prone to a condition called "spalling", which basically happens when the rebar inside the concrete rusts and bends, cracking the concrete in the process. Although this takes years to develop, and primarily affects older homes, it can easily lead to tens of thousands of dollars in repair work. Homes in colder climates are more prone to frozen pipes and excess heating costs, the extent of which depends on the location.
The fun part: making some money
Many people afford their vacation homes by renting them to other families when they're not using them. When crunching your affordability numbers, make sure you add up all of your costs accurately, but also don't forget things like seasonality and other drags on your income.
Are you planning to buy a beach house in a northern state? You'll probably only be able to count on consistent rental income for a few months out of the year. Planning on buying in a location where there already is an abundance of rental properties? You may need a license to rent your property to vacationers, and it most likely won't come cheap.
Do your homework!
While a vacation house can be very rewarding for you and your family, both as a home away from home and as part of your long-term wealth planning, the bottom line here is to be sure you know what you're getting into. Before you start to seriously look at properties, make a realistic list of expenses involved with ownership and make a reasonable estimate of how much income you can expect to bring in. Once you've done this, you'll know how much you can afford to spend on a property and you can avoid surprises later on.