Purchasing a second home is a big step, so you’ll want to give it a good amount of thought before committing to anything. First and foremost, you’ll want to decide how you will use the vacation home.
Will it be a primary residence, second home, or will you rent it out? Answering these questions can help in the process of purchasing your vacation home.
Types of Vacation Homes
Most people look to purchase their vacation homes in scenic places with outdoor activities, either for the summer or the winter (or both). See our article about “Best Place to Buy a Vacation Home: A Guide to 10 Seasonal Spots” for a list of options. Wherever you decide, your vacation home will be an investment!
How a vacation home is an investment
There are many reasons why a vacation home is an investment. We can start by talking about the possibility of renting out the property and making an income from doing so. There is also the fact that property values tend to appreciate over time, especially homes in areas with growing market demand.
But remember, to rent out your vacation home you need to be informed about the tax rules. Tax regulations, depending on the jurisdiction, can give you some tax deductions. These deductions can include mortgage interest, property taxes, and even some costs associated with renting out the property.
And, perhaps most importantly, with a vacation home you will always have a place for your personal enjoyment.
How to buy a vacation home
Buying a vacation home is an exciting process, but it doesn’t mean that it can’t be complex. Thinking of that, we’ve created a step by step guide of how to buy a vacation home:
Set your Budget
Consider your current financial situation and the cost of the property, closing costs, ongoing maintenance, property management (if renting out), utilities, insurance, property taxes, and any associated fees.
Decide how you'll finance the purchase
Options include cash, mortgages, or home equity loans.
Choose the Right Location
How far are you willing to travel? How is the real estate market in the town or city you are considering? What about the potential for future growth, amenities, climate, and other personal preferences? These are a few of the questions you should ask yourself when choosing the right location for you and your family.
Also, it is wise to consider major nearby attractions, transportation options, and the presence of medical facilities.
Research Local Real Estate Market
Do a little research into the real estate market in the area where you are considering buying a home. Understanding if it is a buyers’ or sellers’ market will give you some context regarding prices of properties for sale in that area. Also, you’ll want to know the average price per square foot, and it would help to compare the price of your home to similar homes in the area. See our article on “comps” for more information about this.
Decide on Property Type
Do you know what type of property you are looking for? Try to know as much as you can about what you want in your vacation home and what you can afford. Be aware that there are options, such as condos, townhouses, single-family homes, etc. In all cases, you will want to be aware of any potential maintenance needs and fees.
Hire One of Our Local Real Estate Agents
Our local agents provide insights into the area. They will provide you with listings that fit your criteria, and guide you through each detail of the process of purchasing your home.
Consider Rental Potential
If you plan to rent the property out, inform yourself about local rental rates and rental platforms and their policies (like Airbnb or VRBO). Also, be sure to familiarize yourself with local regulations concerning rentals in the area.
Visit Potential Properties
Make sure to visit the area and the home you are considering buying. Stay in the town or city for a while and get an idea of how it is living there. When you visit the home, be attentive and assess its condition and suitability. Pay attention to things like how the neighborhood is, noise levels, and the overall impressions of the area.
Make an Offer
Have you found a property that you like already? If so, great, you’re one step ahead of the game. If not, don’t worry, with so many options, you’re bound to find something you like soon. Make sure to work closely with a real estate agent that listens to your needs and concerns and who is ready to help you achieve your goals without spending unnecessarily.
A good real estate agent will help you make a competitive offer, based on research and data. Finally, ensure your offer includes contingencies for inspection, financing, and any other relevant activities.
Conduct a Home Inspection
It is important to hire a professional to inspect the property. A professional will be able to find any potential issues, be they structural, electrical or plumbing related, and record them. If there are any serious issues, you can renegotiate the price of the home.
Tax and Legal Considerations
Consult with one of our tax professionals regarding potential tax implications, benefits, and obligations of owning a vacation home. Make sure to be informed about local regulations, especially if renting out.
What state has the highest percentage of vacation homes?
Florida is by far the state that holds the highest percentage of vacation homes. The famous “Sunshine State” has become a sought after location when homebuyers are considering a vacation home. Whether to use it as a second home or as an investment property.
As a second home, its beach climate makes the stay pleasant. And this same climate brings tourists to rent out available properties.
What to consider when deciding to purchase a second home or an investment property?
Consider your primary goals. Do you want the house to live part time in it or to generate income. Remember that a second home is a property that the owner enjoys, whether for vacations, weekends, or part of the year.
It can be rented out occasionally, but its primary purpose is for personal use. While an investment property is primarily purchased to generate income, usually by renting it out, it could be a residential rental property, a commercial space, or even a piece of land expected to appreciate.
How does owning a vacation home impact my taxes?
A vacation home brings several tax implications. How it impacts your taxes depends on how you use the property.
Personal use
You can have some advantages with taxation by being able to deduct the same expenses as with your primary residence: mortgage interest and property taxes.
Rental Use
If you rent out your vacation home for more than 14 days of the year, then you need to report your rental income on your tax return. However, you can deduct most costs associated with the management and upkeep of the property. To increase your deductions, treat your vacation home like a business and be involved in the process.
Are there any restrictions on how often or when I can stay in my vacation home?
If you are the solo owner of the property, you can stay in your property as often as you would like. If you are renting out the place, of course you need to arrange with your tenant, and there are laws about how long you can stay there.
But don’t forget, the number of days you spend in your vacation rental can impact whether the IRS classifies your home as a business or a personal residence, which in turn can affect how many deductions you can take at tax time.
