Have you been on the fence about whether or not it’s time to purchase your own vacation home? Many dream of owning a piece of paradise but aren’t sure where to start. Buying a vacation house often requires detailed planning and a lot of tax and mortgage know-how. The daunting process can turn off many interested buyers, but it doesn’t have to be as complicated as it seems. If you’re eager to invest in a second home in your dream locale, fear not — we’ve collected everything you need to look for in this guide. Let’s get started!
Calculate your budget over the long term
As is the case for every economic venture you dive into, the first thing to do is come up with a realistic budget. Ask yourself if now is the best time to invest in a vacation home. Read up on the local real estate market, and make sure that you’re willing to spend as much as the average vacation spot is going for in your desired area.
The down payment for a second home in areas like historic St. Charles can be much higher than your primary residence, with many lenders requiring that you put down anywhere from 25-50% of the purchase price upfront. The varying median sale price of vacation spots in your area is a good thermometer to gauge when discussing affordability. Don’t forget to factor in the inevitable cost of repairs and renovations, especially if you’re planning on renting the property throughout the year.
Make sure you qualify for a second home mortgage
To qualify for a second home mortgage, you must meet a series of requirements determined by the lender. These include:
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A maximum debt-to-income ratio of 50%
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A minimum average credit score of 620
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A minimum down payment of 10%
You should be in good standing and eligible for a new mortgage if you meet these minimum requirements. For additional funds, you can also ask to take the equity on your first or primary home out as cash for the down payment. Besides this, it’s advisable to have at least two to three months of income saved up or “in reserve” in case your source of income diminishes — and many banks will demand that you have more than six months in reserve. As always, make sure you apply for preapproval on the mortgage, and get in touch with a good real estate agent to help guide you through the process.
Real estate values can vary widely
The value of vacation home realty can swing back and forth quite noticeably, especially if your area is experiencing a spike or low streak in popularity. Still, the price of real estate in trending locales tends to climb over time, making vacation homes one of the safest and most effective investments out there.
Investigate the details behind any noticeable swings in valuations in the short term. Prices can be inflated, housing shortages may be on the rise, environmental factors might play a part, and local incomes could also fall — all without you having much control. Another good way to judge if values are stable or rising is to compare the number of open properties available now versus five to ten years in the past. If there seems to be consistent demand, investing in a vacation home is a good idea as long as you have the budget to ride out periodic dips or booms in value.
Read up on the local neighborhood
Of course, everyone knows that the first rule of real estate is location, location, location. When it comes to vacation homes, that rule is even more critical. It’s always a good idea to spend considerable time on the ground and in person in your chosen locale, ideally at different times of the year that fall outside the regular “high” season. Take some time off in the “off” season to investigate the area.
Get to know your potential new neighbors and ask them for any advice on what’s the best plan of action. Is holiday traffic a major issue? Has the environment changed dramatically in the last few years? If you’re going to leave your home vacant for an extended period of time, meet with a few local property managers to get a feel for how they do business. Even though you might be purchasing a little piece of heaven, it’s vital to become a part of the community and to get realistic about local culture, traditions, and seasonal events.
Be aware of possible maintenance costs
It’s easy to fall into the trap of purchasing a vacation home and ignoring the need to keep your investment up to date over the long haul. A second home is more than just an opportunity to escape the hustle and bustle of everyday life. It requires a careful eye and regular attention to detail, so the property doesn’t fall into disarray. Beachfront properties need periodic clean-up, mountain chalets need regular roof repairs, and heating and cooling systems will more than likely receive quite a beating if the climate varies a lot from season to season.
A poorly maintained vacation home can quickly become a money pit if you’re not up to date with any pest, mold, or rodent infestations that may be growing in your getaway abode. Be sure to factor in costs for landscaping, trash removal, and water or tree damage as well, as you don’t want to be caught off guard with regular maintenance costs that can pile up and become overwhelming.
Tax benefits are up for grabs
With a second home comes double the costs. Additionally, you’ll need double the know-how on property taxes if you’re going to make your investment work for you in the long term. You can cash in on numerous tax benefits with vacation homes, but you need to know where to find them. Some of the most common tax breaks include:
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Mortgage interest deductions. These will vary depending on whether you claim your vacation home as a primary residence, an investment property, or a “second home”
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Determine if the home is a personal residence or rental, as primary residences are eligible for tax benefits upwards of $750,000 if you’re married, while rental properties can receive tax breaks as long as you receive income on it for more than 14 days/year
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Property tax deductions. State and local property taxes are both eligible for a tax break up to $10,000 per year if you’re married and $5,000 if you file separately
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Interest on a home equity loan can also potentially be written off on a vacation home
Determine if you’re going to rent
With the advent of the sharing economy and the rise of resources like Airbnb and VRBO, more and more people are experimenting with converting their vacation homes into home-sharing properties. Getting all the details right is essential if you plan to use the home as a rental. If you rent out the property more than 14 days per year, you’ll probably need an investment property loan. The good news is that, although these loans carry higher mortgage rates than first homes, you can usually use a portion of the property’s rental income to cover the cost of the loan.
Lenders are increasingly aware of the home-sharing phenomenon and are more and more likely to give vacation home buyers more wiggle room when applying for these kinds of loans. Just make sure you’re upfront with your lender before completing the paperwork. The last thing you want is to discover that your rental behavior doesn’t fall under the requirements of your chosen loan.
Learn about the “high” and “low” seasons
Vacation homes go through seasonal highs and lows in popularity, traffic, and opportunities for rental income. That’s why it’s crucial to weigh the pros and cons of investing in these properties early on. You want to be comfortable with the idea of flexibility when investing in the home’s continual upkeep throughout the year. If you’re not in a position to maintain an emergency fund to cover the costs of a drop in rental income or changing climate and demand, we suggest thinking more about the best time to invest. After all, maintaining a vacation home is a long-term process.
Get in touch with a real estate agent today
If you’re considering taking the first steps toward an investment in a vacation home, look no further than Lukins Home Network. We have the expertise you need to navigate the process of purchasing your dream vacation home!
