Purchasing a vacation home is an exciting prospect, particularly if you’ve worked hard your entire life so you could do such things once your working days were over. But there is a lot to consider in order to ensure it’s a positive addition to your life. For instance, if you plan to generate income by renting it, who will take care of the property for you? Is it located in an area that makes sense from a resale standpoint?
There are many issues that need to be worked out, and you need a coherent, logical plan in place once you’ve made the commitment. It can seem a little overwhelming, which is why Mortgages for America has put together this guide to help you on your way.
Can You Swing It?
First and foremost, you need to determine how this will fit with your budget. There are a few creative approaches to making your vacation home dreams a reality. For example, it may make sense to purchase a smaller home, then build or add a structure on the lot to serve as a detached garage or storage space. This strategic move provides you with square footage at a bargain price. Another option is to select a property just outside your target area, but close enough to enjoy the benefits you seek. And of course, a fixer-upper is always an option.
No matter your budget, Sensible Money suggests meeting with a financial advisor, who can help you decide whether it’s the right time to make such an investment. Your financial picture should be a healthy one, meaning you have an acceptable debt-to-income ratio, you’ve saved sufficiently for retirement, and you have enough equity in your primary home and sufficient cash to handle a 25 percent down payment plus closing costs. It’s important to get a comprehensive picture of your whole financial situation before deciding to buy a vacation home.
Look closely at median home prices over the past several years where you intend to buy. This can give you some idea of home sales in recent years, and may lead you to look elsewhere. Have property values appreciated? Finding a property in the right neighborhood can make a world of difference, and it can also be beneficial to find a home that is easily maintained.
Also, wherever you’re planning to look, if you intend for the property to be a source of passive income, make sure that it’s not too remote or difficult to reach to be attractive for potential renters. Don’t forget to factor in the tax rules, which will depend on whether your second home will be primarily for personal use or for renting.
Alternately, remember that this can be a great place for you to vacation, as well! Just make sure you’re being safety-conscious to avoid falls.
If you’re going to rent it out and plan to use a property management company, count on as much as 8 to 12 percent of your rental income going toward these services. That may seem like a lot, but it can be a real bargain compared to the time, expense, and trouble of trying to manage it yourself. A property management company can also market your vacation home in ways that expose it to a wide range of prospective vacationers.
Carefully screen prospective managers. Ask about the extent of their experience and what kind of services they provide. If there’s an emergency, can you count on them being available? Make sure you get client references and see what they say as well.
Renting out your vacation home requires other considerations, too, and in order to be successful in the long run, you should start out as any other business would. That means covering concerns like writing a business plan, choosing a business structure, selecting a name for your new venture, and getting an LLC operating agreement. It can all sound overwhelming, but there are plenty of online resources to help you along the way.
High insurance premiums can cut into the profit you can make from renting, and they can certainly place a strain on your personal finances. Consider asking an insurance agent how you can control your insurance rates on a vacation home. Some options may include having a central alarm system, bundling your home and auto insurance policies, and a loyalty discount if you’ve been with a carrier for a certain number of years.
Carefully compare your finances to the level of financial commitment of buying a vacation home, particularly if you’re retired or are about to retire. How you plan to use the property may have a lot to do with whether it’s a viable investment for you.
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