Many Americans dream of owning a second home at their favorite getaway spot where they can spend weekends, summers, and retirement years with family and friends. This sounds fantastic, but is it achievable?
If you are ready to turn your getaway dreams into reality consider the following steps.
1. Decide Your Ideal Location
Before you begin your search for a vacation home, you should carefully consider your goals and needs. Start with asking yourself the reason for buying a second home. This will shape the answer as to where you should look. For example, do you plan to use the property only as a getaway with your family or will you want to rent it out from time to time?
If it is a place that only you and your family will use then it should be easily accessible for everyone and offer a variety of activities for all age groups. However, if you intend to use it as a rental property most of the time then you should choose a location with potential income.
Make sure you do a little research to find a location that meets your individual needs.
2. Determine How Much You Can Afford
Owning a vacation home should be a pleasurable experience and not a source of stress. So before you jump the house hunt, you should budget your expenses thoroughly. There are big expenses like monthly mortgage payments, down payment, and closing costs. But there are also other additional expenses that one can easily overlook like unexpected repairs, ongoing maintenance, utility bills, furnishings, and travel to and from the home. All these expenses have to be factored into your budget early.
If you are planning to rent out the property, determine the expected rental income. But, be prepared for the worst-case scenario if you are not able to rent it out as much as you planned.
3. Consider the Tax Implications
When people start thinking about buying a vacation home they often overlook the tax implications. The tax consequences of owning a vacation property are more complicated than a primary home. If you are going to rent the property out for more than two weeks in a year then you will have to report your rental income to the IRS. However, you can deduct some of your operating expenses like maintenance fees and utilities when you file your taxes.
The total mortgage deduction is up to $750,000. So, your vacation home will not qualify for a mortgage deduction if your primary residence is equal to this amount.
If you sell your property later on you may have to pay capital gains tax. However, you can avoid this if your vacation home becomes your primary residence for an extended period.
Consult a tax professional or a financial expert regarding your tax-related questions before you start on the home buying process
4. Research Other Alternatives Of Owning A Vacation Home
There are many options to owning a vacation home such as purchasing a home with friends and family members, fractional ownership, vacation clubs, timeshares, and condo hotels. However, before you pursue any of these options you should carefully weigh the pros and cons.
If purchasing a home with friends or family members be cautious of the potential challenges. Owning a home with other people requires a lot of compromise and teamwork. You will also have problems if one of your partners has trouble paying the mortgage. Will the other partners cover it?
Experts say to tread carefully with alternative ownership forms like timeshares, vacation clubs, fractional ownership, and condo hotels. It will be difficult to resell these properties and they may not retain their value over time. So, do your homework before you decide on any of these options.
5. Enlist the Help of A Local Real Estate Agent
Purchasing a vacation home is more complicated than a primary home. Working with a local real estate agent can simplify the process. Expert real estate agents are familiar with the local market and comparable properties and can help you navigate local taxes, transaction fees, zoning, and rental ordinances. They may also be able to manage your vacation property when you are away. Therefore, working with a local expert will ensure that you get the best deal.
Purchasing a vacation home can be a ticket to relaxation. But, one should not get caught up in the moment. You must do your research and know the advantages and disadvantages before moving forward. If you make the wrong choice then it will not only lead to financial loss but also spoil your precious vacation days.
Ready to purchase a vacation home? Contact our loan expert today for a pre-approval. We also offer cash-out refinances at competitive rates.