As the autumn weather begins chilling your bones, you may be having fond recollections of this past summer’s delightful and charming vacation. Wanting to recapture that enjoyable experience has you contemplating buying a vacation home at your favorite destination. But is that a good real estate investment strategy?
Hopefully you didn’t immediately succumb to the beauty, adventure, and allure during your vacation by making a down payment and signing paperwork while under that magical spell because there is a lot to consider before making the decision. If your preferred vacation is in a summer destination, right now is a good time to visit during the off-season before making a decision.
Something to keep in mind is if your vacation was a second honeymoon in the Caribbean, are you likely to make it there for three-day weekends? A better vacation home choice is probably a relatively local lakefront retreat, mountain cabin, or oceanside cottage. Before you make this big decision, consider if this was a one-time adventure or a place that you really want to call your second home.
Be sure to visit several times during different seasons of the year. If it’s a lakeside property and you want to be on the water, your first step should be buying a boat before buying a property. If it’s a mountain ski chalet, try a season ski pass first. If you’re considering a retirement home, do you really want an A-frame loft in the mountains where you’ll need to climb stairs to the master bedroom?
It could be that you do want to go back to that Caribbean beach every year or do some globetrotting. A passive rental income could be your ticket to affording this. That income could come from a vacation home that you rent out instead to visiting every year. You have choices but you should do the number crunching before making a decision. Start by crunching your return on investment.
A short visit with a property manager at your desired destination is likely to confirm that vacation rentals are not in very much demand during the off-season. You may be able to entice a long-term renter during the off-season but that requires giving a deep discount that cuts just as deeply into the ROI. All things considered, this isn’t always a bad thing. If you’ve firmly decide this is the place you want to retire or vacation regularly in the future, renting it out for a year or two can be a great way to use other people’s money to make the mortgage payments until you use it exclusively.
On the other hand, using that down payment money to invest in a metro area rental will deliver a much higher ROI. You can use the reliable profit to finance your globetrotting for a few years while the renters pay the mortgage and build your equity. When the time comes to retire or forego the globetrotting for a slower paced vacation, you can sell the metro rental to make a huge down payment on a vacation home that you’ll visit regularly. Maybe even pay all-cash.
Be sure to crunch all of the numbers. Because this is not your primary home, most lenders consider a vacation mortgage more risky. That means you’ll have to pay a higher interest rate and come up with a higher down payment. Of course, under certain circumstances you can find more creative financing from sources such as your retirement account or by leveraging the equity in your primary home.
Is the property susceptible to hurricanes, flooding, forest fires, or landslides? If so, your insurance is probably going to cost more.
Aw... the tax implications of a vacation rental home. If it’s for your exclusive use or rented less than 15 days a year, you will probably be able to write off expenses like mortgage interest and property taxes on the long form. On the other hand, if you rent it more than 15 days a year, it becomes more like a business. You can write off some expenses but also have to declare rental fees as income.
It’s wonderful having choices in real estate.
I hope this article has you thinking about the many possibilities of real estate investing. Please comment with your thoughts and experiences.
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