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Buying a Vacation Home
Owning a vacation home is more affordable now than it has been in years. It is not longer the impossible dream, but there are basic steps that must be taken to prevent the dream from becoming a financial burden.
Estimate all the costs like insurance, utilities, HOA dues, maintenance and any needed repairs or upgrades before you close the deal. Don't forget you will have to lay out some cash to furnish it. If buying your vacation cabin is a stretch, it may take away some of the fun of your getaway. And don't count on rental income to cover the entire cost of your vacation home. Rental income may offset some of your expenses but you should be able to afford it without rental income..
Before you invest in a vacation property, consider the location, proximity to home, pricing trends and the expected return on the investment. Many buyers take equity out of their current home to make a down payment on a second house. That's fine if the market continues to appreciate, but if it flattens or falls, you can get into big trouble in a hurry, as many investors found out over the past couple years.
Many lenders require buyers to put down at least 20% on a second home, and some require 25% or more. Renting out a vacation home is a good way to cover some of the cost, but short term vacation rentals can be difficult for the lenders to accurately predict cash flow.
The lesson is clear: Be conservative in estimating rental income--and don't expect your vacation home will pay for itself immediately and in perpetuity. A vacation rental home can offset a lot of the expenses, but it takes a good management company that you really trust. You should never buy a second home on the assumption that it will pay for itself.
If you plan to rent your vacation home, keep in mind that renting your property puts you in conflict with the calendar: The most lucrative times to rent are the same times when you and your family will want to enjoy the getaway. If you use it a lot in high season and for all the holidays expect a substantial reduction in income.
Here are some things to consider before buying your vacation home:
Answer the following questions - Why do you want a second house? Is it for vacation or retirement, or is it a financial investment? How much do you expect to use it? How much can you comfortably afford? Thinking it through carefully will help point you in the right direction for the location, price and type of second home you ultimately purchase.
You will need to organize your finances - This is a big investment, so check your credit report, get all your loan documents and insurance information together before you contact a realtor and start looking for a house in the area of your dreams. Pre-qualifying for a loan will make your search easier.
Check out several areas to see how each matches your wish list for recreational activities, such as golf, arts and culture, dining, swimming, boating, hunting, fishing and hiking. Compare costs and make several scouting trips to promising regions.
Location, Location, Location – This seems obvious but you want a vacation home that's convenient to your primary residence, but still far enough away to create a sense of escape. The easier it is to get to the more you will use it.
Calculate how much time you and your family plan to spend at your vacation home. Then decide how important rental income may be for you to comfortably afford it. Can you be flexible enough to use it when it is not rented, or will you need to block dates in advance? If the vacation house of your dreams is a stretch, you might consider something smaller or in a different area.