Economics of Owning a Vacation Home
Owning a vacation home has many positive benefits for family time, rest and relaxation. The financial points to consider when determining if the benefits outweigh the costs include the upfront and recurring costs, such as taxes, insurance and maintenance. Income opportunities may also be present, depending on the location of your vacation home.
When shopping for a vacation home, you should have at least 10% set aside for the down payment. Larger down payments and cash deals are very common on vacation homes. Mortgage rates for second homes are similar to those for first homes unless you plan on renting them out. If you have a first mortgage, you still need to meet the debt to income requirements, which are typically no more than 36% of gross income.
Don't forget about travel costs if you plan on viewing multiple properties before making a final decision.
Most states offer homestead exemptions for primary homes, and these lower the taxable value of the home. These exemptions are not available for second homes, which results in a higher property tax bill. When shopping for a home, increase your estimate for taxes if the current owner receives a homestead exemption.
Property insurance varies by region. Work with a licensed insurance agent to determine what risks are present in the area where you are looking for vacation homes. Regions along the coast in the Southeast need to have hurricane insurance, which can be hard to obtain on older structures and beachfront properties. Discuss perils such as flooding, earthquakes and other natural disasters with your agent prior to entering into a contract to ensure that coverage is available.
Every home has maintenance costs. However, a vacation home may sit vacant for long periods of time. Property management and home watch services offer options and peace of mind for property maintenance while you are away. Don't forget about the cost of lawn care, pool service, recurring monthly security monitoring charges and homeowners association dues, if applicable. Utilities, such as water and electricity, often have minimum use monthly charges even if you aren't using much of the utilities themselves.
If your vacation home is located in an area with a higher demand for rentals, you may be able to recoup some or all of your recurring costs. Property management companies also offer services to recruit and manage tenants. Good property management companies offer a stress-free way to collect extra income.
The Internal Revenue Service (IRS) no longer considers a home to be a personal residence if you rent it out for more than 14 days. For a complete list of deductions and potential tax benefits and responsibilities for a rental property, speak with a tax professional.
Weighing Your Options
Once you have researched and tallied up all of the potential costs associated with owning a second home, determine whether it is worth it. How many times per year do you plan to visit this home, and for how long? Renting a vacation home may provide a more affordable and less stressful way of visiting your favorite destination if you are only planning to visit a couple times per year. For frequent use and with the possibility of rental income, purchasing a second home could make more sense.
The Bottom Line
There are many factors, especially recurring maintenance fees, that go into the overall cost of owning a second home. It is important to research the area to understand your tax and insurance liability prior to entering into a contract for buying a vacation home. A vacation home is meant to be relaxing – not a financial headache.