Especially in times like these it’s so good to have a change of scenery. The COVID-19 pandemic has left us all feeling cooped up. As a result, there has been an increase in sales of second homes, also called vacation homes. The opportunity to be able to stay safe in another location greatly appeals to would-be travelers who are sticking closer to home this year.
Here are 5 things to consider before buying a second home:
The Importance of Location
If you’re planning to purchase a second home and spend any amount of time there, you will want to consider the location of your second home. If you are someone who prefers to be near the ocean then you probably don’t want to invest in a mountain resort condo.
Once you have figured out the general area where you’d like to spend your vacation time, it would be wise to connect with a local real estate agent who can advise you on everything from the rise and fall of property values to zoning restrictions.
Cost of Investment
Probably the most important consideration before purchasing a second home is can you afford it? Do you have money for the down payment, mortgage payments, property taxes, and possible HOA dues? Even if you plan to rent out the property when you aren’t using it, you need to be able to cover the cost of those items yourself in case of things like a downturn in the vacation rental market. With this in mind, it will be important to calculate how much you can afford to spend on a second home.
Additionally, is your second home costly to get to? If you purchase a property a couple of hours drive from your primary residence, then the cost of you traveling to get to your property is pretty much a tank of gas and maybe some snacks for the drive. However, if you are purchasing a beachfront condo in Belize, then you also need to take into consideration the cost of plane tickets.
In order to purchase a second home you will likely need to take out a mortgage. In order to qualify for a mortgage loan possible lenders will want to look at your debt-to-income (DTI) ratio. Most lenders are looking for applicants who have lower than a 35% DTI.
Lenders will also take a look at your credit history. Be sure to pay your debts on time and try to pay off any outstanding credit card debt. That will help increase your credit score, which lenders like to see.
According to the Internal Revenue Service (IRS), a vacation home can be classified as a personal residence or a rental property. If you choose to rent out your vacation home for more than 14 days in a calendar year, then it will be categorized as a rental property according to the IRS. As such, if your property is categorized as a rental property you won’t be able to write off your mortgage interest as a tax deduction. You’ll want to talk with your tax advisor about the implications of owning a second home on your taxes.
Renting Out Your Property
If you plan to rent out your second home to help with the mortgage payments, you need to consider that the costs associated with renting out your home as a vacation rental can be more costly than a long-term rental. The property will need to be professionally cleaned and maintained more often during peak rental periods.
Also, if you purchase property in a condo or in an HOA, you may be subject to rules that prohibit you from renting out your second home. And certain cities with very high occupancy rates, such as New York City, have been trying to implement strict regulations for vacation rentals.
By taking into consideration the above items before you make the decision to purchase a vacation home, you will help to understand your possible obligations and better manage your expectations. That way you if you do decide to go ahead and purchase a second home, you can enjoy it as you desire to – as a place to get away from the hustle and bustle of normal life.