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3 Important Things to Think About When Shopping for a Vacation Home

Mar 28, 2020 by Matt Frankel, CFP
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Are you considering buying real estate in your favorite vacation spot? There can be some good reasons to buy a vacation home -- a home you own can be far more comfortable than a hotel or rental property, and you can potentially use it to generate income when you aren't using it, just to name a couple.

However, buying a vacation home is a major financial decision, so it's important to know what you're getting into before you sign a purchase contract. Here are three things, in particular, you should pay close attention to when you start shopping.

HOA or condo association

If the vacation home you're planning to buy is in a community with a homeowners association (HOA) or is a condo, you'll want to do a bit of digging into the state of the association.

First, find out the current dues and how much they've changed in recent years. Rapidly escalating dues can be a sign of financial trouble in an association. And, you might be shocked at how high some condo association dues can be, especially if your only real estate experience is with single-family homes.

Second, ask your real estate agent to get a copy of the association's recent financials. Your lender is going to want to see that the association has substantial reserves and doesn't have a history of making special assessments, so it's important to know what you're dealing with before applying for a loan.

You should also see whether there's a high delinquency rate among owners. Not only is this a major red flag for lenders but everyone else's dues can also rise if many owners aren't paying.

Condo financing issues

One common obstacle when buying a vacation home is financing, and this is especially true if you plan to buy a condo.

First and foremost, you can certainly finance a condo that you plan to buy as a vacation home. The qualifications for you are largely the same as if you were applying to buy a primary residence, with the caveat that if you already have a mortgage on another home, your income will need to justify both mortgage payments.

When it comes to the property itself, however, it can be tricky to finance a condo, especially in popular vacation destinations. The reason is that in order for you to qualify for second-home or vacation financing (as opposed to an investment property loan), lenders generally want to know that the property is residential in nature.

The exact requirements vary by lender, so ask your mortgage lender to get an idea of what they'll be looking for. However, they'll typically want to see that a certain percentage of the units in the condominium are owner-occupied (by either full-time residents or second-home owners) and that the entire property is residential in nature -- in other words, a condo that also has hotel rooms in the same building could be against your lender's rules.

Local rental restrictions

Last but certainly not least, if you're planning to rent your vacation home out when you aren't using it, you'd better make sure you're allowed to.

To make a long story short, many places (especially popular vacation areas) have strict laws that govern rentals. For example, my wife and I are planning to buy a vacation home in Key West, Florida, within the next year, and the city won't allow rentals of less than 30 days unless you have a special "transient" license. Plus, individual condo properties and homes in neighborhoods with HOAs can set even stricter rules.

An experienced local real estate agent will likely be able to inform you of any local or building-specific rental restrictions, but this is must-know information before you buy a vacation home.

The Millionacres bottom line

Buying a vacation home can be a smart move. Not only will you have a place to vacation without worrying about paying for a hotel, but a vacation home can also pay for itself in many cases by being rented out when you aren't there.

However, if a vacation home is in your plans, be sure to include the association and building nature in your due diligence, as well as any local restrictions that might limit your ability to earn rental income. By keeping these things in mind as you begin your search, you can avoid some big headaches along the way.

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