If you're in any part of the country that got blanketed by snow and ice this week, you may be dreaming of warm, sandy beaches and fruity drinks decorated with little umbrellas. Soon, you may be wondering if you can afford a little vacation property someplace warmer.
Before your daydreams get ahead of your wallet, stop and consider whether a vacation property is truly affordable. It sounds pretty easy to rationalize a vacation home purchase. After all, you could recoup most of your costs by renting the property while you're not using it, right? In fact, the place could probably pay for itself!
While that's an easy argument to make for yourself when you're dying for warmer weather, it's not always the case. Know whether you're truly in the market for a vacation home or an investment property before heading out with a realtor to survey your vacation destination.
Two recent reports by the National Association of Realtors point out some interesting characteristics of vacation home buyers compared with investment home buyers. This information might help you place yourself in the most accurate category.
Only one-third of vacation home owners said their property was a good investment. Their strongest motivation for buying was recreational use. More than half wanted to pursue water sports, and nearly half of these homes were in resort or recreation areas. The typical vacation home is 220 miles from the owner's primary home. The average vacation home owner spent 39 nights in their paradise property each year. More than eight in 10 vacation home owners do not rent out their properties.
Investment property owners, however, purchased their properties for their ability to generate rental income. Owners lived an average of 10 miles from their properties, making them easily accessible for maintenance.
When figuring out whether a vacation home or an investment property makes sense for you, you'll have to answer some of these questions for yourself. For example, do you know that you want to own a home in a favorite vacation spot? If you think that owning property in the area would make your regular vacations cheaper, run some numbers to see if that's true. Think about whether you'll be happy traveling there every year, or whether you really want to see the world. How far would you be willing to drive for a regular weekend getaway?
Or, do you think you'd rather have a home you know will generate enough rental income to cover many of your costs? In that case, would you be willing to compromise some of your vacation criteria to maximize your investment? Would you be able to do upkeep on the property yourself, or will your second home be too far away? Will you have to hire someone to do the upkeep for you?
Then, start adding up your costs. If your dream vacation home sits on hill overlooking a placid beach, you'll need to do a lot of investigation into insurance. Coastal homes can be among the most difficult and expensive to insure, depending on your location. You'll also need to check out property appreciation and local taxes in the region where you're shopping for property.
Tax laws can defray some of your interest expenses, but they only discount your costs. Complicating this picture for many second home shoppers are specific tax rules for renting. You'll be denied some of your interest deductions unless you live in your second home for more than 14 days or 10% of the number of days you've rented the property, whichever is greater. (You can read more about residential rentals in this IRS publication.)
If you're still convinced that owning a vacation home can be a pleasure and a good investment, make sure you're not overly optimistic that you will rent the place every day that you're not using it. You'll want to assume that you'll be unable to rent the property for 25% of the year. If that's the case, how will you cover your costs?
You'll need to add up these factors and more to decide whether it's truly a good financial decision to buy a second home. If nothing else, this exercise will have provided some good distraction while you picture yourself in a warmer place.
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