Some of the real estate shopping shows on cable TV give the impression half the nation is on the hunt for a beach-side mecca.
Certainly that’s true for a good portion of Americans. A full 12 percent of all homes sold in the U.S. in 2016 were for vacation purposes, reports the National Association of Realtors, compared to 16 percent in 2015. The average price was $200,000, compared to $192,000 the year before. Thirty-six percent of the buyers snapped up beach properties, 21 percent lakefront homes and 20 percent homes in the country for their family getaways.
It can be easy to visit a charming little hobby farm or ocean side surf shack and see it as the answer to your leisure-time prayers. But if you’re seriously considering putting your hard-earned money into a second, recreation-oriented abode, you also need to be practical.
“Financial advisors call a purchase like this ‘lifestyle investing,’” notes Amin Dabit in Realty Times. “Like any investment, buying a second home comes with both benefits and potential drawbacks, so it's important to consider how a vacation home fits into your long-term plans before taking the plunge.”
Some practical and financial issues to consider:
- Obtaining a mortgage for a secondary home is often not as easy as obtaining your first mortgage; many lenders require a debt-to-income level of 42 percent or less before they’ll even consider a loan. That means if your gross annual income is $100,000, your cumulative debt obligations for the year can’t exceed $42,000, including the secondary mortgage.
- Your income may be strong enough to support another mortgage, but will it be strong enough if the economy takes a downturn? In forecasting such a downturn, you probably shouldn’t take on a second mortgage unless you would have the financial means to take care of all your bills and expenses for at least two years before money runs out.
- Are the majority of your assets tied up in real estate? In general, analysts recommend no more than half your net worth be wrapped up in a single asset category — especially when that category is the volatile real estate market.
- Consider your intended long-term use of the property. Will you live there intermittently, save it as a retirement home, lend it to friends and family, fix it up and flip it, rent it out or a combination thereof?
- Be realistic about whether renovations are necessary. The beauty of the house and location may turn your head, but that won’t seem as important down the line when you’re faced with exorbitant (but necessary) structural, plumbing or electric reconstruction.
- What are the tax implications? Up to $1 million of the combined mortgage balances on your primary and secondary homes may be eligible for a write-off. You must report rental income (and be taxed on it) if the place is rented out more than 14 days annually, but that also means you can deduct rental expenses including repairs and depreciation. Be aware that some cities and counties impose their own taxes in the form of lodging, accommodations, hotel, bed, tourist and/or transient occupancy taxes.
- How much will homeowners insurance cost?
- Will HOA fees and regulations be of issue?
- If you intend to rent, are you sure the place is sufficiently attractive and well located to attract renters? What level of rent income can you expect? What are the logistics in being a landlord? Are you ready for challenges such as high-maintenance tenants, maintenance issues and marketing?
- If you intend to make a profit by reselling the place, are you financially able to own it for at least five years to amortize the high transaction costs involved?
- Take an objective look at the site of the home and repeat the real estate mantra in your head: “Location, location, location.” The site, surrounding community and region as a whole will significantly impact the likelihood the property will rise in value in the coming years. You should also consider whether area amenities and recreational opportunities will be enough to keep you and your family happy and content when visiting.
- How far away is your potential getaway, and how often will you realistically be able to visit given time, family, health and cost restraints? The median vacation home is 200 miles away from the owner’s primary home, according to the National Association of Realtors.
A Wall Street Journal article earlier this year warns buyers against snapping up vacation homes before conducting research. Rookie mistakes, advises writer Jeff Brown, include focusing overmuch on purchase price, rental rates and recent market trends, underestimating the challenge of finding renters and failing to account for costs related to cleaning, management, routine maintenance and repairs.
“The owners most displeased are ones that rush the purchase decision because they are blinded by their dream,” says real estate guru David Angotti in the story. “They fail to understand location, view, features and other amenities are critical to the overall revenue, and just want a vacation home.”