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Things to Know Before Investing in a Vacation Home

Are you looking to buy a second home in your favorite vacation destination but not sure how to get started? Here are the most important things to know before investing in a vacation home. 

Vacation Home

What Should I Know Before Investing? 

Before investing in a vacation home there are multiple factors to consider and a lot of market research to do. Here are some of the most important factors to think about before taking action. 


Location, Location, Location 

Knowing where you want to buy is the first step toward purchasing a home, a second home, or a vacation home. You can choose your favorite holiday destination to buy a vacation home or choose another area. Wherever you choose, make sure you visit the area multiple times before you make the decision. 

Ask yourself questions like these: 

  • Will you be happy to spend your holidays there?
  • Is the value worth it compared to the area?
  • Will it help you make a little bit of income?
  • Are you willing to commit to this long-term endeavor?

If you are planning to rent out your vacation home you might want to consider a popular vacation destination.

It’s important to choose a place that you will be happy to visit often. Location should be one of the first things to consider while purchasing a vacation home. 

Budget

Budget is one of the most important factors to consider when buying a vacation home. You should review your finances and determine your budget for your next purchase. 

 

Keep in mind that the cost of your vacation home is not the only expense you will have to deal with. There will be other expenses such as: insurance, condo fees, HOA, taxes, and utilities. 

Taxes 

Vacation homes can be registered as rental properties or personal homes. If you limit your renting duration to less than 14 days and only a few times per year, it is classified as a personal residence.

If you rent out your vacation home for more than 14 days, regardless of the classification, you will have to report the rental income. If you register your vacation home as a rental property, you cannot benefit from the mortgage interest tax deduction. But if your expenses are more than the rental income, you can claim losses on Schedule E of your Form 1040.

That said, if you register your property as a rental, the IRS allows you to deduct your HOA fees from your tax payments. 

Is Owning A Vacation Home A Good Investment? 

Property

There are both pros and cons to owning a vacation home. It could be a beneficial investment if you do your research well and use your budget wisely. Before making a decision on whether you should invest in a vacation home here are some of the advantages and disadvantages you need to be aware of.

 

Investing in a vacation home can have various benefits. 

  1. If you go on holidays often, having a vacation home could save you money in the long run. For instance, if you go on a beach vacation for 2 months every year, you could save that 2 months’ worth of rent and put that into your yearly mortgage payments. That money will not go to someone else but to your own property.
  2. A vacation home can be customized and utilized according to your preferences and needs, you can even use it to store some of your seasonal belongings.
  3. If you happen to purchase a property in a popular or an up-and-coming destination, the value of the property is likely to go up over time. It can help you build wealth even if you don’t rent it out. 
  4. If you decide to rent it out, it can become a serious income source. 
  5. If you don’t primarily use your vacation home as a rental property, it could help you get tax breaks on mortgage interest and property taxes. 
  6. A vacation home could eventually become your primary home after you retire. 

As with any investment, there are some disadvantages to investing in a vacation home. Some of these disadvantages include:

  1. When you purchase a vacation home, besides paying the mortgage you will also have to pay property taxes, utilities, insurance, and other expenses. 
  2. Financing a vacation home could be tricky, lenders may charge higher interest rates and want higher down payments than they normally would for a primary home. 
  3. A vacation home, just like any other real estate property, could lose its value over time. 
  4. Maintenance of your vacation home is your responsibility unless you want to hire someone to do it for you. 

How Do People Afford Rental Properties?

Owning a rental property can be a good source of passive income. But there are some other factors to consider if you are planning to invest in a rental property such as location, maintenance, and budgeting.

Most people who invest in a second property look for financing to make the purchase. There are multiple financing sources varying from long-term to short-term that can help you get started.

Portfolio loans are mostly used by investors for one or more properties.

Short-term loans are a very useful option for investors who need cash to invest in a vacation property before they secure long-term financing.  Short-term loans include hard money and bridging loans as well.

Multifamily loans are used for 2-4 unit vacation homes or apartment buildings. Multifamily loans include government-backed loans, short-term family loans, and conventional mortgages.

Conforming loans are a common option for vacation rental investments due to the qualification criteria being not as strict as that for a primary house. It may require a %20 down payment and a credit score no less than 680.

If you're planning to invest in a property you should do your research well and understand your finances. You can consult a professional about the best loan option for your budget before applying.

We have a team of realtors who are always ready to provide knowledgeable guidance that will help you through this journey seamlessly. It does not matter what kind of property or lot size you prefer, trust us to help you find the most ideal vacation homes for you. Schedule a consultation with us and start your journey today!

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