If you’ve finally decided that it’s time to consider a vacation home, you’re far from alone. Vacation home sales have skyrocketed in the past five years, and thanks to the economic recovery in place, interest rates are lower than ever. While buying a vacation home isn’t for everyone, for homeowners who are ready to make the jump, investment in a second home as a vacation home can be both a rewarding and fulfilling decision. Once you’ve decided on a vacation home, here are some tips to help make the smartest financial choices throughout the process.
Is the Property Worth It for Potential Rental Income?
The first question to ask when it comes to purchasing a vacation home is how you plan to use it. Since most people only stay in their vacation home a few weeks out of the year, it makes sense to most people to try to rent it out the rest of the year. So one of the top things to remember when looking at a potential vacation home is location.
Ask yourself; is this a home others would want to stay in? What’s around the area to attract tourist to the neighborhood? Get to know local real estate vendors and get a feel for the market. Doing this will help make it easier to decide the rental value of your new vacation home.
Analyzing Potential Costs of the Home
One thing that almost always goes forgotten is that a home needs to be maintained, and unless your vacation home is nearby or you are enlisting the services of a property manager, you’ll be the one doing the maintenance. Most vacation homeowners discover that at least some of their vacation time ends up going to fixing their vacation home. This is time and money that is almost never calculated in the equation. So if you purchase a vacation home, especially one in need of some TLC, it’s important to add this to your total costs.
How Will a New Property Affect Your Taxes?
Whereas there used to be a loophole which allowed property owners to get away with purchasing a second-mortgage to use towards the purchase of a new home while putting the mortgage on your taxes, this possibility doesn’t really exist anymore. Taking out a second mortgage on your home is, therefore, a really bad idea. If you can’t purchase your new home with cash outright, then take out a mortgage for the second home with enough of a cash overlay to make it workable for you and your bank. Not doing so could create a tax nightmare for you later on.
Another thing to remember is that in general, vacation homes are considered rental property, whether or not you do choose to actually rent the property out to other travelers. Tax-wise, you have 14 days in every calendar year where the home can be rented to another party without reporting any of the income on your taxes.
Can You Afford a Second Mortgage?
Once you are ready to buy a new home, it’s a good idea to calculate payments on loan amounts in advance so that you have a good idea of how much it’s all going to cost in the end. Taking stock of all the costs involved with purchasing a new home is important, but getting an idea of just how affordable your new home may be is paramount. One tool that comes in handy is an FHA mortgage calculator which can give you an idea of what kind of costs you’ll be looking at with your new home.
Once you’ve got an idea of how much it’s going to cost and have cash on hand for a down payment (often this can be as high as 25%) the mortgage loan process is rather straightforward.
Selling a Vacation Home Can Affect Your Taxes
It’s important to remember that not only does second home ownership affect your taxes, but selling a second home has an effect on your taxes as well. Make sure that you are familiar with all the relevant laws affecting your taxes if you decide to sell your vacation home later. At least in some cases, it may actually be smarter for your tax bracket if you sell your existing home and move into your vacation home! While that’s usually uncommon, if you can envision vacationing there year-round, it’s a realistic option.
If purchasing a vacation home is in your sights, don’t delay and start getting your finances in order today by setting up an appointment at your local CHROME store! At CHROME, we’ll help ensure your finances are aligned and in place to help you get the best rate possible on that second mortgage, remaining by your side every step of the way during the home lending process to maximize your money.