Buying a Vacation Home: How to Locate Your Sweet Spot

May 24, 2023 By Susan Kelly

There is no greater feeling for a musician than performing "in the pocket." You know you've entered the zone when everything from the beat to the tone to the sensation is perfectly where it should be. You may also be "in the pocket" financially if you have a manageable amount of debt, substantial savings for retirement, and enough cash flow. You should probably consider purchasing a second house if this is the case. It is undoubtedly an indication of one's level of success in owning a vacation property. And if you make good purchases and stick to what's familiar to you, the rewards might last you a lifetime. So, what are the things to consider when buying a vacation home?

Second-Home Sales Are Soaring

The market for vacation houses is quite active right now. The National Association of Realtors reports that sales increased by more than 57% compared to the previous year. The cost of vacation homes is also going down. According to the National Association of Realtors (NAR), the typical price of a vacation house sold in 2014 was $150 000, 11% less than in 2013.

There is also the possibility of finding deals. Almost half of all second homes bought were considered "distressed properties," meaning they were either in foreclosure or sold via a short sale.

Five Questions to Ask Yourself

Try before you buy is good advice to follow whether you're considering splurging on a beach home or a mountain lodge. Spend some time in the neighborhood by renting a house or apartment in the immediate vicinity. Put the following questions to yourself as well:

Who will watch after your property when you can't be there? If you do not have any friends, relatives, or neighbors that can be relied upon in the area, you may want to consider hiring a property manager to take care of the home while you are away.

Will you waste your precious time off maintaining and cleaning, or will you relax and enjoy yourself? A member of the Bogleheads forum who owns a vacation property shared the following on the topic: "My wife and I purchased vacation home approximately a twelve-hour drive away on Florida beach." It was wonderful to say, "I have vacation home," but at the same time, the upkeep is a headache, and it's difficult to get professional assistance in resort areas. He continues, saying, "My buddy purchased a home on the lake. Instead of going out on his boat, he spends much of his time mowing the lawn and paying the bills.

Will the fact that you rent out the property limit the time you spend there yourself? You'll probably want to spend some time at your second home during the high season in the region, but doing so may cause you to miss out on profitable bookings.

How much time do you think it will take to get away? According to the National Association of Realtors (NAR), the average buyer of a second home acquired a property located 200 miles away from their main residence. However, according to the owner who was just mentioned, there is a twelve-hour journey to the beach. That's quite a haul for a weekend trip that was completely spur of the moment.

Will you find that you have different hobbies as time passes? Whether you're into snowboarding or mountain biking right now, a knee injury might end your active lifestyle in the future. If you spend most of your time on the sofa reading a book, you may as well not have that breathtaking panorama.

Pluses and Minuses

If everything else remains the same, the choice can be driven more by concerns about money than by a desire to have fun. Buying a main dwelling is relatively straightforward compared to purchasing a second home. Lenders will scrutinize applicants considerably more closely if they have taken on more debt.

The mortgage interest rates for second residences are often higher, and the down payments are typically larger. You may get a loan for your regular residence with as little as a 3% down payment, but if you want to buy a vacation home, you should plan on putting at least 10% of the purchase price down. The cost of your insurance will almost certainly go up as well, particularly if you are required to get a policy that covers rental properties.

Then there are the concerns about the administration and upkeep of the property. Property management costs might range from 20% to 50% of the monthly rent collected. A decent rule of thumb for determining how much money should be set aside each year for repairs and upkeep is to put away between 1.5 and 2 percent of the house's value.

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