Ready to buy a Vacation Home? Here’s How to Know if You Are
So you’re thinking about buying a vacation home? Congrats! Owning a second home is a great way to diversify your investments and generate additional income if you rent it out when you’re away. While this is an exciting next step, it’s essential to know what owning a second home is like, the responsibilities that go along with it, and the advantages and drawbacks. To support you in making the decision, below, find six signs that you’re indeed ready to take the leap and purchase a vacation home.
You’re financially stable and can afford it.
Before even thinking about purchasing a second home, it’s important to ensure your finances are solid. This includes having little to no debt, having a cushy emergency fund with at least three to six months of living expenses, and having money set aside for important future expenses such as retirement and your kid’s college funds.
Once those things are taken care of, you can begin to save up a down payment on a vacation home. You must also factor in all the other costs and expenses that come with owning another home, including mortgage, utilities, maintenance fees, insurance, upkeep, property taxes, and furniture.
You’ve chosen a location.
Having chosen a location you want to purchase a vacation home in is another sign that you’re ready to buy. Keep in mind that vacation homes in very popular areas can be more expensive. It’s also important to consider your family’s current and future needs and how the area will accommodate those needs. For example, if you buy a vacation home with the plan to move there after you retire, but it’s not in a convenient location, or it’s a party town, it may not be the best fit.
Also, if you want your vacation home to indeed feel like you’re on vacation, you’ll likely want it to be far enough from your primary home so that it feels like you’re getting away, but not too far that it makes it challenging to travel there and visit often. If you’re not already familiar with the area you’re planning to buy the vacation home in, visit there during different times of the year to get a feel for what it’s like to live there.
You’ve done your research.
If you’ve done your research on the local real estate market you’re planning to buy in, you’re definitely on the right track toward buying a vacation home. You should be informed on whether prices are rising or falling and whether the mortgage rates are high or low. From there, you can decide if it’s the right next move for you and your family or if you’d rather wait a bit before committing.
You have a plan for the property.
It’s smart to have a game plan for what you will do with the property before buying it to see if it makes sense for your family. Will you be renting it out as an additional income source when you’re not there? Do you plan on listing it on Airbnb? If so, you’ll need to have photos taken of the home, have a rental agreement and payment processor ready, and have someone come in and clean the house and check for damage in between guests. You may consider hiring a property manager but keep in mind that comes at a cost. There are many logistics to figure out, and having a plan will make the experience much easier.
You’re informed on how it’ll affect your taxes.
Owning a second home will also affect your taxes. It’s essential to familiarize yourself with the changes to ensure buying a second home is a good idea. For example, if you rent out the vacation home, rental income is taxable, and you must declare it on your tax return and pay taxes on it. The good news is you may be able to deduct certain home expenses on your tax return.
If you decide to sell the vacation home in the future, you may pay capital gains tax, which means the IRS taxes you on the net profits you earn when selling the property. Speak to a tax pro to get all your specific questions answered and ensure you know exactly what you’re getting yourself into.
You’re ready to take on the responsibility.
Owning a second home is not just a matter of paying the mortgage and all the additional costs. It will also require time and energy to manage and care for the home on top of the responsibilities of owning your primary residence. It may be a lot to handle at times. Ensure that you’re up for the challenge before committing to buy a vacation home.