It’s your favorite time of year to travel to fun, fantastic retreats with family and friends. You have the best times and create wonderful memories at____________(you fill in the blank) seaside, lakefront or ski resort. You’re certain that these beautiful times can be repeated regularly and forever if you spend more time at that cherished location. You decide that owning property at your favorite retreat is the answer. Whoa! While many people find owning a second home pure relaxing pleasure, others find it turns into a money pit and lots of additional stress. Here are the top mistakes that we’ve seen vacation home buyers make and how you can avoid them.
Vacation Home Location
We all remember the 3 most important rules for real estate – Location, Location & Location. Many fail to remember that this rule is just as important for a vacation home as it is to your residence or business property. The majority of second homes are purchased near a lake or beach and the closer to the attraction, the better. No one wants to drag their beach chairs and cooler or skis any further than they have to.
You’ll also want to make sure your property is reasonably close to your current residence. Surveys show that average distance to a vacation property is 180 miles from the primary residence. This also means that 80% owners are able to reach their second home by car. Faraway property locations can be incredibly alluring, but if time consuming and complicated travel is required to get there, the home may see little use.
Failure to determine purpose
Are you purchasing the home because it will be a spectacular investment; that it will generate tons of cash flow; or because you and your family want to spend as much time as possible in the area? If you picked the 3rd reason, then you are headed towards a good decision.
Owners that purchase second homes for as a lifestyle accessory end up being the happiest owners. They have not set themselves up for the disappointments of rental income being lower than expected, expenses being higher than anticipated and tenants not caring for their prize investment. For most second homes, rental seasons can be very short, December – February for skiing or June to August for the beach or lake. There is usually little money to be picked up outside of the prime season, however expenses and maintenance requirements extend throughout the year.
Not knowing what you can afford
Most people buy a second home to unwind and reduce their stress. The last thing you need is a property that you cannot afford to support. Even if you can afford the property, what other financial goals may have to be compromised to own the home? Will your retirement goals be set back a few years; will you have to reduce your children’s or grandchildren’s educational savings goals?
Have you talked with a CPA about the tax implications? Second homes that are used more than 14 days per year are classified as personal and only real estate taxes and mortgage interest are fully deductible. There may be a proration deduction of other expenses if your home falls under the special vacation home rules. Needless to say, these rules get complicated and you may end up with less tax deductions than were envisioned.
Mortgages and insurances also usually cost more for second homes. Lenders charge higher rates for vacation homes because they realize that in a financial crisis, an owner will let the second home go quicker than a primary residence. Vacation homes are frequently near water and may require additional insurances such as flood and wind in additional to liability and casualty. Standard insurance coverage may also be higher due to the fact that the home sits empty much of the time.
Making an emotional decision
Who has not been caught up in the moment of a wonderful vacation surrounded by friends and family and thinks we can repeat this all the time if we buy here? Unfortunately decisions made at times like this frequently cause buyer’s remorse.
A well thought out decision made over many months of research and consideration, including input from professional advisors, greatly increases chances of long-term satisfaction with the home. You will want consider factors such as; do we want to be committed to this area long-term; do we like to vacation in many different areas or just one; do your family and friends live close enough to spend time regularly?
The hassle factor
Owning a second home carries many of the same requirements of your primary home. You know how much time, energy and expense it takes you to maintain or hire help to maintain your principal residence. Now factor in that your second home is 3 – 4 hours travel each way and decide how much additional time and money it will take to care for the property from a distance. If you plan to keep it up yourself, how many hours and dollars should you allocate annually? Is this workable for you?
If you plan to rent the property some of the time, how will you handle the problem tenants? Many vacationing tenants have very high expectations of their temporary retreats. They may lose keys, run up the heating, a/c and water costs, and not treat your furnishings as you would. They will expect you to resolve concerns at a moment’s notice from 200 miles away. Communities are also becoming more restrictive on short-term rentals and the local regulatory authorities are finding new ways to watch your activities. You may even need to hire a local property management agent that charges 18 – 25% of your rental income to handle these issues.
All in all, owning a vacation property can be a very rewarding proposition for you and your family. The most satisfied vacation homeowners are the ones who took the time to do the research, and usually purchased the home as a lifestyle enhancement. Take the time to think through your vacation home purchase so that you, your family, and your friends are setup to create cherished memories for many years to come.
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