Is buying a vacation home a smart investment? When purchasing a second home to use as a vacation home, you may want to consider renting it out when you’re not using it. If this is something you’re interested in, there are several factors to consider. Let’s examine those factors and the positives and negatives of buying a vacation home as an investment.
Considerations When Buying a Vacation Home
When considering a vacation home purchase, there are a few factors that can affect your decision, including:
Your Stage of Life
Your age, whether you have children or not, the age of your children, and how much you travel can all affect your budget and needs for a vacation home. They help you determine the viability of purchasing a vacation home and guide what type to buy.
Total Costs
You’ll need a mortgage if you don’t have the liquid assets to purchase a home outright. Rental property home loans have higher credit scores and down payment requirements. Buying a vacation home is a big decision that must be fully understood before committing. Insurance is another cost you need to consider. If you plan on renting it out, you’ll need rental home insurance versus general homeowners’ insurance.
Also, don’t forget about maintenance costs. You’ll have the standard upkeep costs and may incur additional damages from a tenant. If distance or time prohibits you from maintaining your vacation home, a property rental management company may be a good option.
Location
Regarding any aspect of real estate, it’s been said that the three most important aspects are location, location, and location. That applies to vacation rentals as well. Make sure it has a broad appeal so it’s easier to book versus something that may be a niche that would interest only you and a small percentage of renters.
Laws and Regulations
Every area will have different local and federal government regulations and laws regarding vacation homes and rentals. Since some places don’t allow you to rent your property, you must be aware of any restrictions. The fines for renting in a restricted area can be pretty steep.
Marketing
Having the best vacation rental in the area is meaningless if no one knows about it. Have a solid marketing plan in place to rent it out right away. You can go the Airbnb or VRBO route, which takes care of marketing for you, or you can market it yourself via local ads, social media, or by hiring a property manager to handle all aspects, including marketing.
The Positives of Owning Vacation Rental Property
Owning a second or vacation home has benefits beyond additional income. Some of the positives of buying a vacation home as an investment include:
Property Appreciation
Most real estate appreciates over time, and vacation property is no different. In addition, as you pay off the mortgage, you’ll have more equity, giving you more purchasing power. Each of these makes long-term ownership of a rental property a great strategy.
Tax Advantages
Since owning rental property of any kind, including vacation homes, is a business, myriad tax benefits exist. These allow you to write off expenses like marketing expenditures, mortgage interest, repair and upkeep costs, and property management fees. Since each state and locale is different, you should check that out.
Enjoyment
If you buy a vacation home, you’re most likely purchasing it somewhere you enjoy visiting. Although you may not make much money on the rental, you still have the enjoyment factor to consider.
Family and Friends
Many who purchase a vacation home as an investment rental property consider it a personal investment rather than a financial investment. Having a place you love and spending time with your friends and family may be worth more than any financial gain.
Convenience and Familiarity
Often a vacation home starts as a dream that eventually becomes a reality. The best part, of course, is that it’s all yours. You can leave all the non-perishable supplies you need there to increase travel convenience, and it’s familiar, which can also be nice.
The Downsides of Owning Your Own Vacation Home
As with any investment, there are also negatives to consider, such as:
Expenses
Of course, there are expenses relating to owning property. You may have planned all the recurring costs and maybe even set some funds aside for unforeseen expenses. Even so, something could come up beyond what you’ve prepared for, perhaps putting you in dire financial straits. When renting a property short-term, it’s harder to monitor with the high turnover of renters. Many people with no emotional investment in the property can quickly lead to issues with repairs.
Higher Risk
In addition to the inherent financial risk with any investment, you also have to consider the tendency that vacation homes are more adversely affected by economic downturns. You also have to think about natural disasters causing damage, especially in an area with far different weather patterns to which you’re accustomed. Make sure you have insurance that covers everything.
Reduced Flexibility
Owning a vacation home will make you want to stay there regularly rather than spending additional money to vacation elsewhere. If you’ve owned the property for some time, you may wish to try somewhere new. If you rent it, you must leave it available for rent during the best times of the season, further limiting your flexibility. Also, getting a reasonable price can take months or years if you want to sell.
Is Buying a Vacation Home a Smart Investment?
The easiest way to determine if buying an additional home is a smart investment is if, in the worst-case scenario, you can afford the vacation home even if there’s a downturn in the market, lack of rentals, or significant unexpected expenses. Since predicting income from rentals and increases in values is extremely difficult, you should be able to ride any storm. A vacation home would be a smart investment if you can do this.
If you’re looking for a rental property loan to finance your vacation home, contact our expert team at Titan Funding. You can reach us at 855-912-8313 or via our secure online contact form to get started.
*Featured Image – Beautiful home in village by Wall Boat is licensed with CC0 1.0