Buying a vacation home can be a great investment, whether for personal use, rental income, or both. However, purchasing a second home is a big decision, especially if you need a mortgage. Here are the most important questions to ask yourself before you take the vacation property plunge.
How often will you use it?
Are you the kind of person who likes to visit the same spot year after year or do you like variety? The answer may determine whether it’s more worthwhile to buy or just rent a vacation home in that area once a year. And how much time can you reasonably expect to spend at your intended destination? This might be determined by how much vacation time you get each year as well as how far away your desired location is. You should also consider if weather at certain seasons make it hard or unappealing to get there throughout the year.
Can you afford a second home?
Even if you are able to purchase a vacation home without a mortgage, it is important to keep in mind all the additional costs you’ll be responsible for, including property taxes, homeowners’ insurance, utilities payments, maintenance and repair fees. Make sure you have enough in your income or assets to cover these costs continuously. A good rule of thumb is to keep all your mortgage debt, including your first home and second home loans, as well as the rest of your debt to less than 36% of your monthly gross income.
Can you qualify for a vacation home mortgage?
To finance a vacation home, you’ll need to qualify for a second home mortgage. Basic requirements include a debt-to-income ratio below 43%, a credit score above 640, a 10% down payment, and cash reserves of 2-6 months’ mortgage payments.
Will you rent it out?
With apps like VRBO and AirBnB, it’s fairly easy to list your property as a vacation rental. And if you are able to fill it regularly, this can help offset your ownership costs.
You’ll need to decide if you’re comfortable sharing your getaway with strangers and the risk of renters damaging things. Before renting it out, check local regulations to ensure it’s legally allowed. You should also talk to your tax professional about how having a rental property will affect your tax returns.
Will you hire a property manager?
If you do intend to rent your vacation home regularly, you may want to hire a property management company to handle the logistics. This includes the advertising, tenant-screening, handling contracts and deposits, arranging cleaning, and providing regular maintenance and repairs.
You may pay 20% to 30% of your rental income for a property manager, but it’s worth it if you lack the time to manage it yourself.
Buying a Vacation Home
A vacation home can bring years of enjoyment if you research the right location and timing before buying. Contact us today.
These materials are not from HUD or FHA and were not approved by HUD or a government agency.
