As the weather warms up, many people are thinking about summer plans—and possibly dreaming of buying a vacation home. Although it may sound appealing, purchasing a vacation property isn't something to be entered into lightly. If you're considering this major commitment, here are some important questions to ask yourself.
What's your budget?
In addition to the cost of the property itself, you need to consider other expenses such as:
If you'd need to take out a second mortgage to finance the purchase, you'll have to decide if getting further into debt makes sense. Do your due diligence to see if you're a candidate for a second mortgage, including reviewing your income-to-debt ratio (lenders look for a number below 36 percent) and your current credit score.
How will you use the property?
A key factor in the financial calculation is whether you'll use the home solely as your personal vacation residence, turn it into a rental property, or some combination of the two. Many people use rental income from a second home to offset the mortgage until the property is paid off.
The IRS has strict guidelines that will determine whether you can write off rental expenses for the days you are not occupying the home. If you rent out the home for fewer than 15 nights per year, you can keep the income without reporting it to the IRS. If you rent it out more than that, you must report the rental income, but you also qualify to claim certain deductions. Be sure to consult with a qualified tax advisor to make sure you are following the guidelines.
Who will manage the property?
If renting the vacation house is part of your plan, consider who will take responsibility for:
Overseeing the property (including handling cleaning, repairs, and the like)
If you live a considerable distance away from the second home, hiring a local property manager is an expense that can't be overlooked.
What kind of insurance will you need?
Insurance is a necessary protection for any piece of property, and vacation homes can present additional risks. There are many options to choose from, so it's important to do your research. Some insurers may offer a second-home endorsement to your primary residence coverage instead of selling you another stand-alone policy, which may be a more affordable choice.
Other insurance considerations include:
Location: Be sure to look into the neighborhood crime rate, natural dangers common in the area (such as flood or hurricane risk), and the history and state of the property itself.
Amount and type of liability coverage: Whether the house will be vacant for extended periods or rented by many tenants over the course of the year, it's imperative to ensure that you have sufficient coverage.
How easy would it be to sell?
If you decide to sell the property eventually, you'll want to be sure you can make a profit. Popular vacation areas tend to have higher property appreciation rates, but location isn't everything. You should plan to invest in upgrades and maintenance along the way to maximize the return on your investment.
Making a wise choice
Buying a vacation house can be an exciting accomplishment (and possibly a great investment), but it requires serious consideration, especially from a financial standpoint. Ensuring that you have the means to comfortably purchase a second home—and recognizing the additional expenses that come along with it—is key to making a smart decision that your family will enjoy for years to come.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Fixed insurance products and services offered through CES Insurance Agency.