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After a summer of camping and getaways, you may decide you want to purchase a second home at your favorite destination. You’re not alone. In 2016, 12 percent of buyers bought a vacation home.
As you contemplate a vacation home purchase, it’s important to remember that buying a second house is complicated. Below are some steps to take as you start researching whether vacation homeownership makes sense for you.
1. Research local laws and community regulations
Although only 8 percent of vacation homebuyers said they purchased their property with the intent to rent it, popular nightly rental websites are making the situation more common.
If you do buy a second home and plan to earn extra money by renting it, you need to understand the rules regarding short-term rentals.
You’ll want to check the laws and ordinances in the municipality where you’ll be buying to answer the following questions:
- Are short-term rentals allowed? If so, are they only permitted in certain zones?
- What business licensing and tax collection is required?
- Are there any limits on the percentage of homes that can be used as short-term rentals?
- What are the requirements for trash, parking and noise?
Additionally, you’ll want to check the property records and title report to see if there are any covenants, conditions and restrictions on the property. Is there anything that would prevent you from renting the house? Perhaps it is part of a homeowners association. If so, you need to make sure the HOA allows short-term rentals and if so, under what conditions.
2. Plan for expenses
Before making a purchase, make sure your budget can withstand the expected and unforeseen costs of owning a second home.
First, if you plan to have short-term renters, make sure you can secure insurance for this purpose. Many traditional insurance policies won’t cover this use. Make sure you can get a policy and know its cost before you buy.
If your vacation home is part of an HOA, determine the cost of dues, especially since they may be more expensive in a resort area. Contact the HOA manager to get copies of the community’s financials and minutes. See how dues have changed and what special assessments the board has levied in the past.
Additionally, you’ll want to plan for expenses related to maintenance, landscaping and repairs — and don’t forget those costs may vary from those of your primary residence. Remember, homes in resort areas — such as in the mountains — may require more maintenance due to harsh weather conditions.
If you rent your vacation house, you may incur more maintenance, along with fees for property management, cleaning and marketing. If you intend to use sites such as VRBO and Airbnb, make sure you can comply with their terms and conditions.
Finally, talk to a professional about the tax consequences of buying a second residence, both short term and long term. How you decide to use your vacation home will affect how you are taxed and what you can deduct.
3. Understand the market
Renting out a vacation home may help pay for it. However, it’s important to be realistic about the rental income you can anticipate. Ask an area Realtor for information about prices and vacancy rates in the local vacation rental market.
Remember, demand may fluctuate considerably. Plan to have vacancies, and make sure your budget can absorb periods with no rental income.
It’s also important to buy in a healthy real estate market so you can sell the home if needed. Ask your local Realtor for a candid assessment of the long-term health of the area before you buy.
Purchasing a vacation home is exciting and complicated. For tips and to learn more, contact Black and Buono.
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