Owning your own vacation home, or secondary residence has pros and cons to consider. Let’s take a look at whether buying a vacation property is the right choice for you.
Should You Buy a Vacation Home?
Buying a secondary residence is similar to buying a home for your primary residence in that location and affordability will be top priorities. But there are a few other factors to consider with vacation homes, such as vacancy issues and different tax implications.
Location
One of the first factors you’ll want to think about before buying your vacation home is its location, including how far will it be from your primary residence. If you buy one too close to your home it will likely be considered an investment property rather than a second home, which can increase your down payment requirements and interest rates. If you purchase one that is too far away, you may visit less. However, driving to a vacation home can cost significantly less than buying airline tickets—especially if you’ve got a large family. The location of your vacation home will also dictate other issues, such as property taxes and rental policies. Some cities limit types of rentals or otherwise outright ban short-term lets, whether they are rentals directly through the property owner or through companies like Airbnb.
Affordability
Buying a vacation home comes with several expenses that are different from the expenses related to buying your first home. In terms of lending requirements, you’ll have to meet the same standards to qualify, like providing a stable income, a decent debt-to-income (DTI) ratio, and a healthy credit score. But there are other criteria with secondary homes. Banks will want to see that you can make payments for both your primary and secondary mortgages. Lenders may also have higher down payment requirements for vacation homes, although not quite as high as required for investment properties. You’ll need to put down a minimum of 10% for most banks. You cannot use an FHA loan to buy a secondary residence. Finally, the annual percentage rate (APR) for your mortgage may be higher than that of your primary residence, all other factors (like market conditions) being equal. Keep this in mind when researching how much home you can afford. Other costs to keep in mind include the annual maintenance for keeping up the property as well as any homeowner’s association (HOA) dues.
Vacancy
Unlike a primary residence, vacation homes are often unoccupied, which can have several consequences. For one, a vacant home may attract intruders or vandalism. It can also offer an opportunity to nab rental income with short-term leases. Consider how you will use the property when it is vacant. If you plan to rent out your home when you aren’t there for income, you’ll need to plan how often you’ll want to open it to renters. Renting it out for 15 days or less per year exempts your home from federal taxes. If your property is open to renters longer, you’ll have to report the income you receive and pay capital gains tax on it. However, you can deduct some of the expenses of your second home, but you’ll need to calculate how often you stay in it versus renting it to understand your tax obligation. Generally, lenders restrict the amount of time a secondary residence can be rented to 180 days. Otherwise, they consider the property to be an investment property, which has different loan terms and requirements.
Pros and Cons of Buying a Vacation Home
Pros Explained
Building equity: Your secondary home will build equity over time. You can borrow against that equity or do a cash-out refinance (if you qualify). Earning income: Your property can offer a reliable income stream, especially if it’s located in a popular vacation destination. Increasing enjoyment: A vacation home, as its name implies, provides a place to relax and unwind. Saving money: Vacation homes are a major expense, but on a per-day basis you can potentially save money over the cost of renting.
Cons Explained
Tax implications: Tax consequences for your secondary residence will be different than for your primary residence. Understand what deductions your vacation home qualifies for, and how income you receive will be taxed. Vacancy issues: Since you won’t reside in your vacation home full-time, you’ll need to prepare for vacancy periods. Leaving your house empty can lead to safety concerns while renting it out too often can classify it as an investment property, which has different loan terms. Additional costs: Vacation homes are expensive. You’ll be liable for the mortgage and other common expenses that come along with maintaining a house, including any HOA fees.
