Rent First Then Buy
You’ve enjoyed a resort community as a typical vacationer and are thinking of making a major investment in a vacation home. Before you buy, you should rent the home or a similar home close by. If you plan on using the home year round then you should rent for each season and see what it’s like. A home during the summer is very different than a home during the winter and you need to experience both.
Buy If Your Holding Period Is At Least Five Years
Real estate is not a liquid investment, so if the market declines you shouldn’t expect to cash out quickly. This goes double for vacation property, which is more susceptible to market downturns than primary residences. That’s why it’s better to have a long time horizon so you can ride out the ups and downs of the real estate market. The longer the better.
Make Sure Your Vacation Home Can Be Rented
Even if you plan on using the home yourself with no intention of renting it out, buy a home that has good rental potential. That’s because homes that can be rented are more valuable and it’s always better to have the option of renting to others in case your plans change.
During the last down market, many homeowners who wanted to sell could not do so at their desired asking price so they rented their home instead and rode out the slump until the market improved. The fact that their home was could be rented allowed them to recoup a large portion of their carrying costs while they waited for the market to come back.
There are also significant tax advantages to renting your vacation home so you should seek homes that will give you that option.
Properly Budget Carrying Costs
In addition to your monthly mortgage, you’ll need an estimate for taxes, insurance, utilities and maintenance costs, including landscaping, caretaker, repairs and periodic exterior painting. You should set aside about 2 percent of the home’s value annually for maintenance costs.
And after you sum up all those costs add at least 10 percent for contingencies unless you don’t mind surprises. If you live far away from your vacation home, add transportation costs, too.
Location Location Location
If you plan to buy a vacation home, your best bet is to choose a community located close to a major metropolitan region. Over 80 percent of second-home buyers choose a house within driving distance from their primary residence.
Most buyers want to visit their home frequently so proximity within 90 miles of their primary residence is a big plus. Avoid buying property in far off isolated locations because you’ll significantly limit your resale potential.