Owning a small cottage by the lake, a cabin in the mountains, or a beach bungalow is something many families dream of. Somewhere they can visit on long weekends, during holidays, or for extended summer vacations. Should the time come to turn that dream into reality, there are a few things you should take time to consider.
Questions you should ask yourself before buying a vacation home are:
- Can you pay cash for your vacation home?
- Is the mortgage on your primary residence paid off?
- Are you are currently saving 15 percent of your income for retirement?
- Is your rainy-day fund well-funded?
- Are you saving for your child’s college education?
Taking out a mortgage or dipping into retirement savings to pay for a second home could turn your vacation home into a more significant investment than your budget may be able to handle.
Affording a Vacation Home
If you do decide to finance a vacation home, it is better to have a higher down payment. Consider investing at least 20 – 30 percent of the home’s cost as a down payment to qualify for a loan on the home. Even then, you may find that interest rates for vacation homes are higher than for your primary residence.
One option is to pay for your vacation home using saved assets. In high-demand areas, the costs of paying cash can be challenging. An opportunity to consider is purchasing the property as an investment property. Then, you can hire a property management agency to rent the property out when you are not using it to help defray the costs of your investment.
In some cases, rental income can make up the difference in the cost, allowing you to recoup your investment quickly and pay as little interest on the loan as possible. That is one case where financing your vacation home may be an attractive option. Keep in mind that you are still responsible for the condition of, maintenance of, and repairs to the property when you have renters. You will also want to work out a schedule that works for you so you will use your vacation home as well as making it available for rent.
Cost of Vacation Home Ownership
The costs of ownership go beyond the mortgage costs of buying a vacation home. In addition to the usual expenses related to buying a home (mortgage, insurance, etc.) there are additional expenses you'll want to consider as well, such as:
- Travel/commuting costs
- Property maintenance
- Property management
If you are paying for these things on two homes, you are essentially doubling your expenses. It’s important to note that since the vacation home is not your primary residence and remains unoccupied for extended periods, it may require specialized insurance that costs a little more than your average homeowner’s policy. Failing to get the right kind of coverage may open you up to denial if something were to happen.
Rent or Buy a Vacation Home?
Depending on how you plan to use your vacation home, and how often, it might be a better investment to rent a vacation home rather than to purchase one. Renting a home for one or two weeks in the summer is more cost effective than paying the expenses on a house you may only use a few times each year. Plus, you can use your vacation dollars to enjoy a change of scenery, rather than going to the same place year after year.
If you are only planning a couple of weeks or extended weekends each year in your vacation home, renting is the better financial choice for the average consumer. That is, of course, unless you are viewing this as a potential investment.
If you are planning to spend an entire summer or several weeks throughout the year in your vacation home, it might be worth considering purchasing a home.
Buying a vacation home is a long-term investment in your happiness and that of your family. It’s also a financial undertaking. Make sure you understand the scale of your purchase before you commit.