A lot of people dream of owning a vacation home, but the reality of it can be intimidating. When to make this big investment is a tough decision. But it can also be one of the smartest — depending on the why, where, and how.
Whether you’re tired of paying high rental prices or you’re ready to take advantage of the other side for a change, here’s what you need to consider before buying a vacation home.
Reasons to Buy a Vacation Home
The Extra Income The biggest perk: you make money. Airbnb hosts alone earn up to $900 a month on average, while hosting in more desirable cities can produce up to 4x more than that, especially if you take on some of the rental delegations yourself.
Your Own Getaway Let’s not forget, unlike a full-time rental property, this is a place you can enjoy too! You can escape to one of your favorite areas any time of year. Bachelorette parties, family reunions, birthdays — no more ‘seeing what’s available.’
The Money You Save Let’s say you typically spend 2 months at the beach every summer. Your annual mortgage payments could actually be comparable to that. Popular destinations jack up rental costs because they can, so now you can put that money toward building equity instead.
The Tax Breaks When you rent out a home for more than 14 days, you’ll have to pay taxes on the income it brings in. BUT you can also write off almost any “ordinary and necessary” business expenses you incur, like hosting fees, cleaning costs, supplies, etc.
Planning for the Future Real estate values tend to go up over time, especially in popular vacation towns, which helps you build long-term wealth. Whether you eventually decide to sell it to cover the costs of future travel, healthcare, and more, or it becomes a place to enjoy retirement, it’s a win, win.
Questions to Ask Yourself Before Investing
While these benefits and those of real estate investing, in general, are very tempting, there are a few things to ask yourself before you pull the trigger.
Is your net worth diversified? No more than 40% of your net worth should be in real estate. So if this investment tips you over that scale, it’s probably not a good idea.
Can you afford a second mortgage? If your income isn’t stable enough to support a second mortgage (or the unexpected expenses you can expect to come with it), a vacation home will be the first to check off the list.
Do I already have $750K in mortgage debt? If the answer is yes, additional interest will not be deductible.
How will a second home affect my taxes? Mortgage interest and property taxes on both first and second homes may be claimed as Schedule A deductions (according to NATP). If you rent for 15 days or more during the year, you can expect a lot of additional paperwork — like reporting all rental recipients to the IRS as income. But this also means getting those tax benefits we mentioned earlier.
Have you picked the right location? If you’re looking for a good return on investment, a popular tourist destination is typically the best choice. Work travel is another big opportunity. But make sure it’s a place you enjoy being too — whether it’s for personal vacation time or maintenance visits. Have a good understanding of the area, including how you’ll get there.
Is this a place I’m allowed to rent out? Every city and municipality has its own regulations when it comes to rental properties. For example, in Key West, rentals for less than a month are prohibited without a pricey “transient” license. So if renting is a big factor in whether or not you can afford a vacation home, make sure you do your homework.
Do I plan to own this place for a long time? If not, then the costs will most likely outweigh the benefits in the end.
Other factors to consider:
Do I want to be a landlord or have time for the upkeep?
Do I like staying in the same place every time I vacation?
Do I vacation for 4 weeks or more each year in the same place?
Is this a place I’d like to retire?
Will buying this property improve my life or my family’s?
K Wealth Advisors
If you’re looking for personal guidance as you start looking into possible vacation home investment opportunities, contact K Wealth Advisors to schedule a GoodFit meeting. If you are looking for more general information on starting your real estate investing journey, try BiggerPockets.*
*K Wealth Advisors has no affiliation with BiggerPockets or its subsidiaries. It’s just a great website dedicated to Real-Estate investors of all types to help get you started.
Insightful Planning to Live Your Best Life. #IPtLYBL
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