Before the real estate crash occurred, all the rage was taking the equity out of your home and purchasing a vacation home in a warmer climate. Money was fluid and it was easy to get a 2nd home without much thought at all. Communities in Florida, California, and the Carolinas were getting bought up like crazy and after the crash happened, these communities were ravaged by foreclosures and short sales. These days I am here to assure you that it is STILL a great idea to own a vacation home, but you must proceed with caution and make sure your decision is for the right reasons. In the following paragraphs, we will go over the all the positives there still are to owning a vacation home. I am here to be positive reinforcement to your decision and not deter you like so many other “professionals” these days.
This is a main reason that combats the detractors these days with regards to vacation homes and that is they can be used to generate income for yourself. This is definitely a positive when calculating from a financial perspective if you can truly afford the property after the 20% has been put down. Yes, a lot of people can put money down to purchase a home, but can you afford the costly upkeep that comes with a property you are not using for more than a month or two throughout the year. Remember, you will always have to pay for your mortgage payment, utilities, association dues (if purchased in a community), and management company (if you will have a 3rd party take care of your home when renters are using it). You must treat this home as if you were running a business and that is if your income does not exceed your expenses you aren’t profitable, and last time I checked businesses that aren’t profitable will fail. Another main factor in ensuring your rental is a success financially is to do your research on the area you are purchasing and make sure average rental income is at a rate which can support the expenses.
For example, you may love to have a home in the Orlando/Disneyworld area, but if you look closely at the rentals, the market is saturated! Most houses that you can buy for $200k-$300k are only renting for $700-$1,000 per week. Yes, if you can be booked 90% of the time you are looking to see $3,000-$4,000 per month, but how far will this really get you? After you pay your mortgage PITI (Principal, Interest, Taxes, Insurance), utilities, association dues (which can run in excess of $500 per month), and your management fee, you will be LUCKY to break even. On the flip side, if you can spend $400K for a home in the Carolinas on or near the ocean, you can rent it out for $2,000-$5,000 per week. At this rate, you are making sure you are profitable and making money on the property.
Always remember, just because you may have the resources to purchase a home where ever you’d like, this does not ensure you will make money. I hear all the time from people that they are okay with breaking even, well breaking even just means you will be paying a mortgage on this home for 15, 20, 30 years. If you are making money and can start paying down your house sooner, you could eliminate your mortgage in 10 years or less. At this point, your debt now truly becomes an asset.
Piggybacking off the previous subject dealing with the financials of owning and maintaining a vacation home, the fact of the matter is as an owner, you now currently have a built in vacation you and your family can use throughout the year. This is why you should make sure that you purchase a vacation home in an area that you are familiar with or is an area where your family frequents on vacation. If you like spending time near the ocean in Florida, why would you purchase a home in Texas or Arizona? If you can’t take advantage of the home, then there is no reason to purchase it because this is a monthly payment that is not going away. It makes no sense to pay for a home throughout the year and have no intention on using it at least a few times a year, you are paying for it in the end. This home can be used by you, your family, and friends for the years to come and can become a staple of summer vacations, holidays, or a way to get away from the snow and colder weather.
If I can reference treating this home like a business again, why would you open a computer repair company when you are passionate about being a pastry chef? See how this makes little sense? You need to make sure your purchase is strategic and will provide that benefit annually.
If planned correctly, you could be spending a lot of time in this home after your working days are over when you are ready to start your retirement. Even though the real estate values may have decreased drastically when the recession happened, home prices are back on the rise yet again and should continue to rise. When taking this into account for retirement, would you rather purchase a home at today’s value to use in 20-30 years, or would you rather wait until you are 55+ to purchase a home? In order to get the best deal, the sooner you can purchase the home, the better.
As mentioned in the previous point, if you buy sooner, you can enjoy this home with your family for years before you are ready to move in full-time. By renting out the place before it is needed, you are essentially letting the house create cash-flow so that it pays for itself. Another possibility you can entertain is purchasing a cheaper home that might need some work done to it. If you don’t plan on moving in for some time and want to slowly finish the home to your liking, this is the way to go. You can find a home in an excellent location for a cheaper price just because it might be outdated on the inside. Well, if you can allocate a couple thousand to repairs annually, you can fix up this house in no time. Then, when the time is right, you can retire to a fully remodeled home in your most desired location. You will then know that you have spent significantly less on your home than your neighbors because you put the hard work in to rehab your home.
As with any home, your goal with a vacation home is to be able to make money from the property if you ultimately decide on selling it. There is no reason to obtain another property if there is no consideration into if you will be making money on the sale of the property. If you treat this like an investment, you need to do your due diligence and make sure you are not overpaying or paying a premium for your property. If you fall victim to this, it will take you many years to dig out of this hole. You can put yourself thousands of dollars in the hole by making a poor and misinformed decision. Since the concept of a vacation home or a 2nd home in general is that it is a luxury item, you need to make sure you can afford this debt by either paying for all or most of the home, or at the very least making a profit from it on an annual basis.
Currently, interest rates are extremely reasonable for getting a loan on a vacation home. Interest rates have only gone up a fraction after years of historic lows as the market rebounded and began to build itself back up again. Now would probably be the best time to purchase a vacation home as your interest rate would be low to where you can allocate more funds to the principal balance of the residence and get it paid off in a more timely fashion.
Another reason you might want to pull the trigger on buying a vacation home is the fact that there still is a decent amount of inventory left. Yes, the market has begun to heat up with prices starting to rise and inventory levels beginning to decrease, but in areas where a lot of rental properties are available, Florida for example, the inventory is still plentiful. This area still has a large quantity of homes that are for sale, in short sale, or in foreclosure. Banks still have a decent amount of properties that they need to get rid of. If the area and price is right, it is still a good time to buy. As previously mentioned, if it is in an area you can turn a profit on, you are still in good shape. If you can buy a home where there is a surplus of inventory, when those homes are finally all sold, you will only see an appreciation in value as the demand begins to gain momentum.
If there is one thing you should almost never do is think that purchasing a vacation home means buying a timeshare. Even in the best of economies, it is still extremely difficult to sell your timeshare if you ever wanted to get out from under it. These purchases in 99.9% of cases are filled with fees and blackout dates for using your time. You are almost always limited to the time of year you can go. There is always a yearly maintenance fee of over $1,000 per year and it always goes up. In theory, you are paying thousands of dollars for a week or two of time each year. It is more beneficial to just plan a vacation and forget about a timeshare.