Some people love to go to the coast and some people dream about a vacation home in the mountains.
According to the National Association of Realtors Economists’ Outlook Blog entitled “Vacation and Investment Home Sales: A Breakdown for 2017” by Amanda Riggs, about 30 percent of homes sold in 2016 were purchased by investors and vacation home buyers. And while Riggs points out that vacation home sales have been on the decline, the author also states that “81 percent of those vacation home buyers feel that now is a good time to buy…“
In a May 2018 article, “Second-Home Sales Rebound Across International Luxury Vacation Markets” by Christie’s International Real Estate on the Luxury Defined Blog, luxury sales in second-home markets are on the rise and reports decent growth of 19 percent year-on-year in 2017.
If you and your family have a vacation spot that you like to return to once or twice each year, it could make sense to invest in property located in your vacation spot. After paying a weekly rental fee every year, purchasing could be a good investment in the long run. Here are a few things to consider:
1. Will you rent your vacation home when you’re not there? Perhaps in considering this option, with steady rentals your vacation property could pay for itself. Remember that any rental income must be reported to the IRS.
2. Don’t forget about maintenance costs. Whether you rent it out or not, there will still be maintenance costs to consider.
3. And taxes and insurance. Are you thinking about beachfront property? And in addition to your standard homeowner’s policy, you’ll likely need specialty insurance such as, hurricane and/or flood insurance.
4. And speaking of taxes, if/when you sell your vacation property, you may have to pay capital gains tax, since it’s not your primary residence.
While some have the wherewithal to pay cash for their second home, many may need to finance the property. The mortgage loan process may be the same, but there will be some differences.
Moneytips article “Financing a Primary Residence vs. a Vacation Home” outlines a few of the similarities and differences between financing a primary residence and a vacation home. According to the article, things your lender may consider include:
1. The intent of the second home – Will it be for your exclusive use or will it also be rental property?
2. Extra risk/cost factors – Based on location, are there added costs to consider?
3. Debt-to-income – If you still have a first mortgage, the lender will look at your collective DTI.
4. Credit score – It may need to be even higher than for a primary home to score a decent rate.
5. Required down payment – The lender may require a higher down payment.
6. Stability of income – As with your primary residence, you will need to prove the stability of your income to show meeting your monthly payment obligation won’t be an issue.
Purchasing a vacation home can be a big financial decision. Just like buying a primary residence, purchasing a vacation home can be both exciting and confusing, and you’ll need to consider your unique financial situation to make the best decisions for you and your family.
Do you already own a vacation home? Please share your experience in the comment section of this blog post.