Summer is upon us and it’s that time of year where we wish we could be on perpetual vacation. While that may not be a viable option, buying a vacation home may be a possibility.
On the surface, purchasing a vacation home may seem pretty straightforward — find a place, buy it, and start living your best vacation life. But in reality, just like owning a “regular” home, vacation homes come with many of the same considerations as homeownership of any kind.
To help you determine if buying a vacation home is the right decision for you, let’s take a look at some things you’ll need to think about before you pack your bags for your home away from home.
Your Income Stream
Before investing your money into a vacation home, it’s important to critically evaluate your stream of income — especially if your vacation home will be attached to a mortgage or a loan that you’ll be paying off for years to come.
Yes, you may be able to afford a vacation home mortgage with your current finances, but homes are a long-term investment and you have to think about the “what ifs” to ensure you’re making a sound investment.
What would happen if you lost your job? Would you have the finances to fund two homes? Or what about retirement? Will the home be paid off or will you have the money to continue making the payments?
Unexpected things in life happen all the time, so ensuring your income stream is stable and can withstand the additional costs of buying a vacation home is necessary to your financial peace of mind, both in the present and the future.
Property taxes are an important expense to consider when buying a vacation home. Driven primarily by location, the amount people pay for property taxes on secondary properties can vary wildly.
New Jersey, Connecticut, and New York have some of the highest property taxes in the country at over $5000 annually, with Mississippi, Arkansas, and Alabama coming in at the low end, each with less than $1000 annually. (1)
Property taxes are also something that change over time. If you’re buying a vacation home in areas that are considered “up and coming” you’ll need to consider the fact that your property taxes will likely increase over time.
When you’re running the numbers for purchasing a vacation home, ensure property taxes, as well as any other municipal taxes or fees you may be subjected to, are included in your budget.
While it’s easy to get excited thinking about all the downtime you’ll have, the reality is that homeownership — and the accompanying maintenance — is going to be an ongoing task.
The level of maintenance required for your vacation home will greatly depend on the type of home you buy. For example, buying a beachside condo may require little maintenance on your part as much of it is handled by a property manager. However, the monthly cost still exists through HOA or condo fees that you’ll be paying.
If a remote lakeside cabin is more your speed, then maintenance will be your responsibility. In addition to normal home maintenance, you’ll also have to consider things like all the outdoor work. If a tree falls on the property, you’re on the hook for dealing with it. Depending on the location, you may need to perform additional maintenance relating to seasonal conditions like hurricanes, or winterizing the entire property.
The bottom line is that maintenance costs you time and money. Before you move ahead with buying a vacation home, set a budget for what you can realistically afford for your monthly maintenance as well as how much time you really want to spend on the upkeep of your property.
A vacation home will need comprehensive insurance just like your primary residence. The cost of your insurance will vary depending on the type of property it is, the location, and other factors.
Many insurance companies offer limited coverage for properties deemed seasonal, which means only certain things may be covered, like fire or smoke damages. That’s why it’s important to explore what will be covered before you start the process of buying a vacation home. While insurance companies won’t be able to give an exact quote without knowing the specific property, you can still gather information to educate yourself before you buy.
If you’re buying a vacation property that has any outbuildings, think about what sort of coverage you may want for these. Oftentimes vacation homes will have sheds filled with key items, so if these were to be destroyed or damaged, the out of pocket expense for replacement could add up quickly if you don’t have coverage.
Don’t forget to consider other things you may have on the property that could require insurance, like boats, jet skis, or all-terrain vehicles.
Accident insurance is also something you’ll need to think about, especially if you’re planning on renting out the property. Accidents happen every day, so if someone is hurt while staying in your house or damages a neighbor's property, you want liability coverage included in your policy in case you end up with legal or settlement costs.
On a final note, be aware of the fact that despite your vacation home being a secondary residence, costs for insurance can sometimes be higher than for your primary home due to additional risk factors like being in a remote location or not having someone living in the property full time.
The Real Cost of Renting
People often have an overly simplified idea about buying a vacation home and renting it out. Yes, it can be a great way to bring in revenue when you aren’t using the home, but there are many things related to renting that will require your time or money.
If you choose to handle renting the property yourself, you’ll be the one doing all the communication. This includes answering phone calls and emails, booking the property, as well as handling payments and deposits — and complaints.
There’s also the question of who will be handling the weekly or monthly turnover of the renters. Who is going to inspect the property after renters leave? Who will be cleaning the property and preparing it for the next guests?
While that may not seem like a big deal, if your vacation home is two hours away, that’s four hours round trip every weekend, just for an inspection, cleaning, and restocking the property. Is that a commitment you’re willing to make?
Plus, there’s the possibility of something going wrong. If there’s a leak under the sink, or the fridge is broken, who’s going to fix that? Can you find someone local? Or are you going to make the drive to take care of it?
While all of these possibilities can be handled in one way or another, people often grossly underestimate the time commitment to being a landlord of a rental property.
The other alternative is to use a rental company, but there will be a cost attached to doing so. The higher the level of service you’d like from them, the bigger the price tag will be. If you’re thinking of buying a vacation home as primarily a rental, it’s important to look at the rental rate versus what you’ll be spending on property management.
There may also be tax implications for your rental income, so talk to a financial advisor or accountant to get a better understanding of how this may impact your income taxes on an annual basis.
Buying a Vacation Home Requires a Solid Plan
Now that you’ve seen all the different potential implications that buying a vacation home has on your financial health, the best thing you can do is create a budget and a plan. By determining how realistic a second home is for both your time and your money, you’ll be best positioned to make an investment that makes sense for you and your family.
Brendan is the Managing Director for Waymark Wealth Management. He has extensive experience in comprehensive wealth management. His focus includes retirement planning, behavioral finance, investment portfolio construction, education funding, insurance & risk management, taxes, charitable giving, and estate planning. Brendan has an ability to take clients' complex visions and distill them down to simple action plans, helping them move from where they are today to where they want to be tomorrow.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.