Experts: 5 Things To Know Before Investing in a Vacation Home
Written by
Cynthia Measom
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Molly Sullivan
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Fresh air, abundant sunshine and leisurely days — it’s easy to get caught up in all the wonderful things owning a vacation home can offer. But before you rush to sign on the dotted line, don’t forget about the investment side of things.
Investing isn’t only about money, it’s also about your time and the possible sweat equity you might have to put into the property. To help you understand what you’re getting yourself into, here are five things to know before investing in a vacation home straight from the experts.
Costs Involved
You should consider how you are going to purchase the home among other things, said Maureen McDermut, a realtor with Sotheby’s International in Montecito, California. “Do you need to take out a mortgage?” she said. “What about the property taxes? Is the home in an area where you could sell easily and still make money if things change? You’ll also need to purchase homeowners insurance for the property.”
If you’re taking out a mortgage, also consider the amount of the down payment you’ll need. The minimum down payment for a conventional loan is 3%. Another expense to consider is whether there are any HOA fees. HOA fees can run from around $100 to over $600 per month.
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Use of the Property
You should decide what the prime objective is for the property you want to buy, such as for rental income or personal use, said Paul Brazell Acosta, director of realtors at Cloud Nine Spain.
“Problems can arise if buyers are looking to purchase a holiday home which they intend to use for part of the year themselves, but with which they also want to earn a decent rental income,” he said. “In this highly common scenario, there is often a conflict between head and heart as the criteria for investment and personal enjoyment both need to be met.”
Acosta said a degree of compromise needs to be factored in if you’re buying a property for both rental income and personal use.
“For instance, buyers may like the idea of owning a holiday home in the hills, surrounded by nature — but is this the sort of place that would appeal to holidaymakers looking for a family holiday in the sun?” Acosta queried. “A balance that satisfies both financial and emotional needs is often hard to find, but an experienced agent with plenty of local knowledge should be able to guide and assist in cases like this.”
Opportunity Cost
“Many who purchase a vacation home end up having that be their main vacation every year,” McDermut said. “Whether you go for a couple of weeks in the summer or even spend an entire season there, many people still want to travel elsewhere. Will you be able to do all the things you want to do if you purchase a second house?”
Upkeep Responsibilities
Rinal Patel, realtor and owner of We Buy Philly Home, said that you should consider whether you will handle the maintenance of the vacation home or if you will hire someone. “And most of all,” she said, “be certain that you are ready and financially able to bear the cost because the maintenance of an additional property (second home) with appliances, amenities and furnishings will be expensive, and might not be worth all the trouble if you won’t even be needing the property so often.”
According to State Farm, the rule of thumb is to set aside 1%-4% of the home’s value for annual maintenance costs.
Importance of Location
“Location is key,” Acosta said. “The closer to the beach and amenities […] the better, as it will tick more boxes for more people. Easy access to the airport, and to public transport, will also give you an advantage over more isolated properties.”
Even if you’re not planning to rent your vacation home, you’ll still want to think about location. There may come a time when you’ll want to sell, and the things Acosta mentioned will make the home more attractive to potential buyers.
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