The idea of owning a vacation home is a luxury that few people are able to consider. However, if you find yourself fortunate enough to do so, you need to look at both the pros and cons and how they fit into your lifestyle. From a practical and financial standpoint, does investing in a vacation home make sense for your family?
Honing in on the Motivation
The first thing to consider is the motivation behind investing in a vacation home. What are you hoping to get out of it, and are you buying for the right reasons? The definition of “right” will vary from person to person, but it’s worth thinking about. Generally, the motivation for buying a vacation home will fall into one of these three categories:
• Buying for the purpose of accruing equity. People commonly purchase vacation properties in order to accrue equity and give their money a place to grow. If this is your motivation, you need to make sure to fully research local market trends and understand the potential risks of an investment. If you dot all of your I’s and cross all of your T’s, however, this could be a solid financial decision.
• Buying for the purpose of having a vacation destination. For many people, the idea of buying a vacation property has less to do with finances and more to do with personal enjoyment. Plenty of people buy vacation properties for just this – to vacation. If this is your motivation, it’s still a smart idea to keep the long-term in mind in case you ever need to sell.
• Buying in order to rent. The third major reason for buying a vacation home is to rent it out. Depending on where the property is located, you may be able to rent it out to vacationers throughout the year. Before purchasing for rental purposes, make sure you’ve carefully researched rental rates, comparable properties, and associated risks.
However, none of these three reasons are the most common motivating factor for buying a vacation property. In most cases, it’s actually a combination of the three. Most people want to invest in these properties for the purpose of building equity, increasing cash flow, and simultaneously enjoying a place to occasionally vacation and relax.
Seven Factors to Keep in Mind
If you find yourself in this category and want to enjoy the benefits of building equity, increasing cash flow, and having a “free” place to vacation, you’ll want to keep the following things in mind prior to making an investment:
• Visit before buying. Under no circumstances should you buy a vacation home that (a) you’ve never seen in person, or (b) is in a destination you’ve never been to before. Just because you read an article about why X is the hottest vacation spot of the year, that doesn’t mean it makes financial sense to gobble up real estate. You’ll likely be spending a lot of time there, so you want to make sure you enjoy the area, it’s easy to get to, and it lives up to the hype. As for the actual property, visiting before buying is self-explanatory. If possible, try to spend a few nights at the home to get an idea of how livable it actually is.
• True upkeep cost. Have you considered the upkeep costs of owning a vacation home? For example, a beach house on the shoreline will cost a lot more to maintain than a cabin in the woods. If the property is part of a Homeowners’ Association, do you have a clear understanding of the expectations and annual fees? If it’s a unit in a condominium building, can you find out if major renovations are coming up? Do your due diligence, and don’t assume the price on the for-sale sign is all you’ll have to fork over.
• Cost to furnish. One of the big upfront costs will be furnishing and decorating. Have you considered how much initial purchases like beds, appliances, linens, and dishes will cost? This can be as much as 25 percent of the purchase price, in some cases. If you overlook this step and have to skimp on decorating, you may find it hard to attract renters.
• Property overseer. Most vacation homes are – by definition – not right next door. Have you considered how you’re going to oversee and manage the property from a distance? While much of the paperwork and logistics can be handled from afar, there are certain tasks that must be dealt with in person. In these cases, you need a local property manager or overseer. Don’t assume this will fall into place; have a plan!
• Tax implications. The tax implications of buying a vacation home can go one of two directions. It will either greatly increase your property taxes, or you may find a way to reduce your tax burden by using specially allocated funds for the purchase. Talk with your financial advisor to determine the full ramifications of adding another home loan to your portfolio.
• Market outlook. When considering a vacation home, you need to look carefully at the local real estate market. Is it trending in one direction? Do property values have a history of increasing over time? Don’t assume the market outlook in another city or state is the same as where you currently live.
• Future living arrangements. Here’s one important question to consider when thinking about buying a vacation home: could you ever see yourself living there? If the answer is “no,” you may need to reconsider. You should always be willing to live in any property you own.
Green Residential Professional Property Management
At Green Residential, we’re committed to providing Houston landlords with access to quality property management services. In fact, our family has been in the property management business for more than 30 years and takes great pride in satisfying our clients. Whether you need help finding tenants, retaining them, or even evicting them, we can help. For additional information on our various property management services, please don’t hesitate to contact us today!