How to buy a vacation home
Buy a vacation home (and rent it out)
Mention the word “vacation,” and your mind automatically goes to beautiful and exotic destinations, an escape from your everyday world. How about a potential financial investment that not only provides you with a getaway when needed, but also an income opportunity when you’re not there? If this sounds like you, perhaps buying a vacation home is the right option.
Decide what you can afford
Deciding if you can afford another home is an essential factor right from the get-go, but it may be a bigger question than you think, including state and local laws, financial regulations and tax implications. There are a few things to take into consideration:
Will you be using this residence regularly?
This is an important factor because how you claim the property could have an impact on the type of loan you can qualify for as well as tax implications. If it’s going to be your primary residence, then standard loan options would apply.
If it’s a second residence, and you need to take out a loan to purchase it, keep in mind that lenders won’t let you rent out the property. If you are using this as an investment property, then the loan options are a little different. Generally not quite as friendly, but with the potential rental income, it could be a solution that works.
Will you be renting this property out?
As mentioned above, there are some financial restrictions when it comes to renting your vacation property; however, there are also benefits from the additional income. Some things you’ll want to take into consideration are:
- Whether these will be short- or long-term rentals
- How flexible you’ll want to keep the scheduling, and when you’d like to use the property
- Whether you’ll want to work through a local real estate or property management company or a self-service style rentals website
Do you have the financial flexibility to pay for a vacation home?
When it comes to paying for your vacation home, there are a couple of options; take out a loan or purchase it outright. Buying it outright would have the most advantages, but only do so if you have the financial ability to pay in full without taking from things like retirement savings.
Drawing against something like your 401(k) comes with penalties and tax liabilities that would significantly reduce the amount of money you’d walk away with — not to mention you’ve drawn against something that was earning you money, costing you more in the long run.
Taking out a second mortgage is also an option when buying a vacation home. As with a first mortgage, you can prequalify and receive a conditional approval letter before you start looking for a property.
Do you also have the financial ability to pay for potential damage and repairs?
Repairs are just one of the many responsibilities of ownership you will encounter. Just as with any property, there are going to be those moments where something goes wrong — the garbage disposal needs to be replaced, plumbing leaks, the microwave has died, etc.
You need to be sure that you’re in a financial place where these types of things can be comfortably covered as they come up. After all, this is your vacation property; it’s supposed to be a place of relaxation and escape, not one that overwhelms you because of repairs and maintenance.
Another thing to keep in mind is that if you rent the property out, tenants may not treat your home away from home as nicely as you would. While deposits and cleaning fees are collected for just this kind of reason, it can also leave some renters with the belief that they can leave it as they please and potentially cost you more than any money you may have collected in advance.
When purchasing a new place, unless it already comes furnished, you’ll need to purchase furniture, potentially some appliances, floor coverings, window treatments and more. You may also want to paint or remodel certain areas to meet your tastes.
Utilities are another consideration and if your property includes landscaping, water features, a pool or spa, care and maintenance for those things will need to be accommodated for as well.
Finding the right vacation home
Now let’s move on to the fun part — finding the right vacation home for you. This is a very personal decision and one that can be determined by several factors:
Where am I happiest when I’m not at home?
This may seem like a pretty simple question, but if this is your escape destination, it’s a crucial one. Where would you like to be? Do you live in the city and want an escape to the country? Are you a beach bum at heart and a place next to the ocean would be your ideal home away from home? Or perhaps the mountains are more your thing with a cabin by a lake? Whatever it is, make sure it’s where you want to be, and someplace you’ll enjoy going.
Do I want to be somewhere close to family?
As family members grow up and move on, you can sometimes find everyone fairly scattered out. Perhaps your ideal vacation home is somewhere closer to them or someplace more centrally located so that everyone has the opportunity to come out to the property and reconnect. Having your own space when visiting family (rather than staying in a guest room or local hotel) may have more comfort advantages, too.
Location vs. ability to rent out
There’s no right or wrong answer to this question, and it may be that the answer is both. If you’re looking at this as an investment opportunity in addition to a vacation getaway, however, you’ll want to pay a little closer attention to location and desirability from a potential renter’s perspective. How close is the property to the beach, a lake, hiking trails, shopping, city life and historical landmarks? Keep in mind things that would attract someone to want to rent this particular property.
The process of renting out your vacation home
As mentioned in the financial section above, renting out your vacation home when you’re not using it could provide you with the income needed to help pay for the mortgage or offset your initial investment cost. How to find good renters, however, without it becoming a full-time job on your end, may require the help of professionals.
Hiring a property manager
While this would be an obvious expense, you’d have the advantage of a local expert taking the work out of the rental process for you. This typically includes finding and qualifying rental candidates, processing applications and paperwork, collecting fees, arranging for cleaning or any repairs and more. They’re working for you and looking out for your best interest while keeping you free of the work involved in the overall process.
Going through an online service
There are some fees involved, and you will have to manage the rental overall, but a vacation rental website is a convenient option. You can determine the timeline for the rental as short- or long-term, decide what you require for a deposit and necessary cleaning fees and what would be included (kitchen supplies, furniture, internet services, etc.).
It’s essential to keep in mind that you’ll want to take steps to ensure that when others are using your vacation home as a rental, they appreciate and care for it every bit as much as you would. You’ll want to be sure to keep detailed records of income and expenses for tax purposes.
When it’s all said and done, this is your vacation home and needs to stay a place that you’ll enjoy visiting over and over again. In between those moments, you have an excellent opportunity for additional revenue by renting it out, and potentially paying you back.
These are just a few of the elements to consider when purchasing a vacation property and renting it out when you’re not using it. Contact the team at Chase for more detailed information on loan options, financial assessments, tax laws and considerations, investment portfolio strategies and more. You may want to consider speaking with a financial advisor who could best assist you in all areas and help guide you in the direction of your vacation destination and rental property goals.