December 7, 2015

5 Questions to Ask Before You Buy a Vacation Home

What if you knew of the perfect cozy retreat by the sea, in the mountains, or out in the wilderness, where you could clear your head and be one with nature? What if you didn’t just know about it, but you owned it?

According to USA Today, the perks of having a vacation home seem clear: Taking vacations can increase workplace productivity and has numerous physiological benefits, like lowering blood pressure, slimming waistlines, and reducing depression. And investing in another home has the potential to generate returns on your money, which might sound particularly attractive in the current market conditions.

That said, there are a number of pitfalls waiting for the unwary vacation-home buyer, like failing to consider accounting and maintenance details, or failing to be honest about how the house will really be used.

To prevent your peaceful oasis from turning into an added headache, we’ve come up with a few questions to ask yourself before buying a vacation home:

1. Will you actually have the time to use it?

According to CBS News, Americans are taking fewer and fewer days off of work, and on a trip-by-trip basis, the average vacation is a mere four days. Before you sink a lot of time, money and heart into buying and fixing up the perfect vacation home, be honest about whether you’ll truly get there often enough to make the venture worthwhile. If your time off is limited, are you going to want to spend the majority of it in the same place each time?

2. Where should your vacation home be?

Say you’re lucky enough to be roaming through vineyards in the Hudson Valley, or hiking through Torrey Pines in San Diego, or even sipping umbrella drinks in Fiji. It’s easy to get caught up in the moment and think, “I should totally buy a home here.”

That might be a good idea if you live a short puddle jump away, but if you don’t, think realistically about whether you’ll get enough use out of a second home so far away from your first.

Bear in mind the cost of flying (or the cost of gas for driving), the hassle of traveling on popular weekends when lots of other tourists have chosen to get away too, and your friends’ and you family’s ability to join you.

After all, even though you might envision this home as the perfect place for your annual family reunion, that won’t do much good if your family doesn’t have the time or money to fly halfway across the country.

3. How are you going to finance this purchase?

If you have the cash on hand to buy a house outright, feel free to skip past this section. Otherwise, you might need to explore financing options. Banks often require higher credit ratings for second homes than for first ones. Mortgage lenders generally look for a favorable debt-to-income ratio, and the rules might feel a little stricter than you remember from your first go-round.

You have a few options beyond taking out a second mortgage, like selling assets (e.g., stocks or bonds) to pay for the place. You also can withdraw from your 401(k) to buy a vacation home (but proceed with caution). One potentially strong way to increase your purchasing power for a second home is to take out a home-equity credit line on your primary residence. These often offer more favorable terms than second mortgages, but do come with the risk of losing your primary home if you default on your payments.

As is true for buying a primary residence, remember that the cost of buying a vacation home is more than the house itself. There are closing costs, insurance, taxes, and however much it costs in creating a home that works for everyone.  One bright spot is that mortgage interest is tax-deductible. You can enjoy this deduction for the mortgage interest on your first and second home, which according to Kiplinger is up to $1.1 million in mortgage debt.

4. Should you rent out your vacation home?

The obvious appeal of renting out your vacation home would be to offset some, or maybe all, of your costs. But, there are a few things to consider before putting out a “For Rent” sign.

Again, we’ve got to talk about taxes. Generally, you need to claim every dollar you earn on your tax forms, but there are certain exceptions. For example, if you rent the place out for 14 or fewer days per year, you don’t have to pay taxes on it—no matter how expensively you rent it out during that time. If you rent it out more than that, though, you have to pay taxes on all your rental earnings.

When you’re making money from the home, the maintenance of your property can become a business expense. There’s a delicate balance of calculating costs and deductions based on the split between the time you rent out the house and the time you occupy it, so be sure to read up on all the rules before diving in.

More costs here, too: You’ll need to insure your property, and you might want to consider redesigning the home so that it’s accessible to all kinds of renters, regardless of their age or disability.

5. What are the alternatives?

Maybe you’d rather go somewhere new every time you vacation. Or maybe the financial responsibility of a whole new mortgage doesn’t sound like a walk in the park. Or maybe you’re just not confident that the expenses of home repair, property taxes, insurance, tenant management, general upkeep, and, of course, the cost of the home itself will actually pay off in the long run.

There are other ways to enjoy regular, relaxing vacations without buying an entire second home. If, however, you like the idea of owning something, but aren’t sure you’ll use the property often enough, maybe a timeshare would make more sense for your situation.

In the end, keep your sights on the ultimate goal: a place to rejuvenate your mind and body. In some cases, knowing that your favorite place is yours and that you can return at any time is very powerful. In others, the fear that your little piece of heaven is more trouble than it’s worth can ruin any vacation you might take there. At the end of the day, the key is to make the decision that best suits you and your family.

Keep Reading: How to Insure Your Vacation Home

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