Buying a vacation home is a Money Milestone many people consider after feathering their first nest. The National Association of Realtors reports that there are 8 million vacation homes in the United States, and given what a tough winter many people have had across the country, it is likely that that number will increase. Many of us are dreaming of buying a second home and spending the winter months in Florida, Arizona, or California. Before you turn your dream into reality and sign that purchase and sale agreement, there are five serious questions to consider:
Ask yourself “why.” Why do you want to own a second home? The perfect home for you will depend on your answer. Do you view the house as primarily an investment? Or do you want the house to mostly be used as a family retreat? According to NAR's 2014 Investment and Vacation Home Buyers' Survey (which details 2013 activity), vacation-home sales rose strongly, at 13 percent of all transactions, comprising their highest market share of existing-and-new-home transactions since 2006. Meanwhile, investment purchases -- excluding institutional investment activity -- declined from 24% of all transactions in 2012 to 20% in 2013.
Ask yourself if you can really afford the cost. The total price of ownership includes property taxes, insurance, and other carrying costs. Even when you are not using the house, you still pay water, gas, electrical, trash removal, landscaping, and other maintenance services, such as security and alarm monitoring systems. One expense that is specific to a vacation home is property management fees, especially if you plan to visit the house infrequently and are considering renting out the property. One cost owners of second homes usually forget to include in their budgets is travel expenses, which, depending on location, can be significant.
Ask yourself about optimal location. As with all real estate purchases, the adage of location, location, location is true for vacation homes as well and for quite a few reasons:
According to the NAR 2014 survey, almost 90% of people who bought vacation homes in 2013 planned to use the property primarily as a family vacation spot. So it makes sense that the typical home purchased was less than 200 miles from the buyer's primary residence. If getting there requires a flight, rental car and ferry, you probably won't use it much.
If you are buying the home as a multi-generational gathering place, you will want to chose a location that offers activities for various age groups and is easily accessible for everyone, which depending on how disperse your family is, might suggest you purchase close to an airport.
Location is also important if you change your mind and/or your circumstances change and you need to generate rental income or want to sell the house.
Ask your accountant about the tax implications. The tax implications of owning a second home are different than those of a primary residence, especially if you generate rental income from the property. The IRS has specific rules pertaining to different types of dwelling units and the length of time they are used for different purposes and the deductibility of associates expenses, which may include mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance, and depreciation.
Ask yourself when you may want to rent the house. Many popular vacation spots have a 'high' season when demand spikes. In Florida, peak season is winter when snowbirds from the Midwest and New England escape the snow. Often rental demand for your vacation home will collide with the timeframe during which you want to use it. So if you want to maximize your home's rental income, be prepared to give up some of that high season vacation time or choose a location with numerous seasons of rental demand, such as Lake Tahoe.
Before you take the plunge, think about how your use of the second home might change over time. You might use it often when the kids are young, less when the kids are older and involved in school activities and sports, and more when the children are out of the house. And there's another milestone to consider: Approximately one-third of buyers eventually move into their second homes full-time. So think about whether the vacation home you're buying now may be the one that will become your primary residence down the road.
Kimberly Clouse, is chief client advocate for Covestor,a registered investment adviser and online marketplace.