8 Things to Consider Before Buying a Vacation Home

Owning a vacation home may seem like a dream, but there are rental challenges and the housing market to consider.

Although investing in a vacation house may seem like a dream, it's a major decision that needs careful consideration.

According to Austin Allison, co-founder and CEO of Pacaso, a San Francisco-based real estate service that seeks to increase second home ownership, "a second home has countless life-enriching benefits, as it specifically gives you that place to spend time with friends and family and create memories which I find to be super important to set aside time for."

People appreciate those moments of calm and reconnection more than ever now, he continues, and there is something wonderful and pleasant about returning to a beloved hiking route or coffee shop.

But purchasing a vacation house requires just as much thought and work as vacation planning does. Here are some things to think about before you buy.

1. Weigh the pros and cons.
   
   
2. Be prepared to take on more responsibility.
   
   
3. Consider your lifestyle.
   
   
4. What are your financial goals?
   
   
5. Location is key.
   
   
6. Work with an agent who specializes in buying vacation homes.
   
   
7. Look at your rental options.
8. Answer the question: Is now a good time to buy a vacation home?

1. Weigh the Pros and Cons

You may be set on buying a vacation home, but you still need to consider the positives and negatives. Some of the pros include:

You can rent it out for extra income. You could create a passive income stream by renting out your vacation home to travelers.

It’s an investment. Not only does a vacation home offer rental income, but the property could also appreciate over time. Vacation rentals can increase in value, especially in areas with growing market demand.

It saves you money on your next vacation. Instead of spending money on a hotel or other short-term rental, you could save by taking a trip to your vacation home.

There could be tax benefits. There are significant tax advantages available to second home owners, such as deductions on your property taxes and mortgage interest. You may want to speak with a tax professional to discuss taxes on your vacation home or rental.

It could be an excellent place to retire. Depending on the location of your vacation home, it could be a great place to retire in the future. 

But there are also cons:

It’s expensive. Similar to your primary residence, you’re going to be paying the mortgage, property taxes, insurance and utilities.

There could be unexpected expenses. Owning a home comes with unexpected expenses. Plan to have a cash reserve ready to go for emergency repairs or routine maintenance.

It requires time and effort to maintain. You need to make sure your home is secure, even when you aren’t there. If you plan to rent out your vacation home, you also need to make sure the property is cleaned and well-maintained between each booking and be on call for any potential problems.

The down payment could be substantial. The down payment for a vacation home or second home is often bigger than it was for the mortgage on your primary residence. However, this depends on the lender. According to Chase, you will likely need to put down at least 10% because a second mortgage generally adds more of a financial burden to the homeowner.

2. Be Prepared to Take On More Responsibility

While there are many alluring reasons to purchase an investment property, Allison asserts that exclusive ownership of a second house has significant drawbacks, including a significant time and financial commitment.

The largest error second-home purchasers make, according to Allison, is focusing solely on the advantages of second-home ownership and omitting these continuing expenses and headaches.

Although the day-to-day management of the property can be delegated to a property management firm, you are still financially liable for its upkeep. If you want to rent out the house, this cost could increase dramatically.

Maintaining a luxury home with modern design, upscale furniture and decor, top-notch amenities and equipment, regular cleaning and maintenance, and larger time investment to care for the home effectively comes at an even higher expense.

3. Consider Your Lifestyle

How frequently do you intend to use your getaway home? When you're not there, will you rent it out? When the house is empty, who will look after it?

According to Allison, prospective purchasers should think about their lifestyle, how often they expect to use their home, and who will take care of it while they are away. The majority of the almost 10 million second homes in the United States remain vacant for 10 to 11 months out of the year.

4. What Are Your Financial Goals?

Daned Kirkham, senior director of real estate at Vacasa, an international vacation rental management company based in Portland, Oregon, says that all vacation-home buyers should establish clear financial goals early in the buying process.

“Is the buyer looking to generate income or simply cover costs? How much will the buyer use the home themselves or allow friends and family to use it versus welcoming paying guests? Is the buyer considering using a full-service manager like Vacasa or taking on the responsibility of management themselves? These are all important questions to address up front,” he says.

In order to make sure a particular property satisfies a buyer's financial objectives, according to Kirkham, who specializes in the selling of holiday rental homes, specialized real estate brokers should be able to provide rental revenue estimates based on competitive set data.

5. Location Is Key

Location is the most crucial consideration for second-home owners and would-be homeowners, according to Pacaso's 2022 Second Home Attitude Report. A house on the sea, such as a beach house or lake house, is preferred by the majority of people who want a second home, followed by a house with a view of the mountains.

If you have to take a flight every time you wish to come, a beach property might not be a realistic option. Allison pointed out that the study revealed that the majority (87%) of people desire to drive and that two-thirds of people (64%) travel or anticipate to commute to their second home in four hours or less.

6. Work With an Agent Who Specializes in Buying Vacation Homes

Work with a real estate agent who has experience purchasing second houses and is aware of how they differ from primary residences. For licensed vacation home agents, also known as Resort and Second-Home Property Specialists, the National Association of Realtors offers education and accreditation.

A real estate expert will also be more knowledgeable about local legislation if you wish to turn your second home into a rental property. According to Kirkham, "They'll be informed of local laws and the permission process, which might be complicated depending on zoning."

"Be sure to perform your due research and contact the governing city or county to discover how a home is zoned and how short-term rentals are controlled locally," he advises if your agent is unfamiliar with local laws. Even if the house had previously been rented out briefly, it is not a guarantee.

A knowledgeable agent can also direct the buyer to the best-fitting property. According to Kirkham, agents and brokers who have information on the performance of nearby vacation rentals will also be aware of the attributes that visitors to that market are looking for in a home and what extras make a listing stand out.

7. Look at Your Rental Options

According to Allison, it is simple to convert a vacation home into a short-term rental, which is subject to any applicable homeowner association rules or municipal legislation. "If permitted and located in a well-liked resort community, this can be a solution to lower the cost of second house ownership, but it also adds to the owner's trouble due to maintenance and visitor difficulties."

According to Allison, some of that can be delegated to a rental management company, but not all of it. He adds that because short-term rental demand fluctuates, revenue may not always be sufficient to repay debt.

8. Answer the Question: Is Now a Good Time to Buy a Vacation Home?

Everyone may experience this differently, and the present market unquestionably has a significant impact. Due to the tremendous demand for housing and the insufficient supply to provide it, home prices have increased dramatically since the pandemic's start. Demand for mortgages has recently decreased as economic worries have grown.

The mere fact that a vacation home is available and within your price range should not compel you to submit an offer. You might wish to consult a financial counselor and a real estate expert before committing to the purchase of a home because it is a significant financial investment.

For more info, connect with Tait Real Estate now!