Vacation Home Sales Are Through The Roof
Vacation homes. They were once the purview of the rich and famous, the glamorous and wealthy, the lucky ones who had enough expendable income to pay for not only a primary residence but also a pleasant place to escape. But no more.
The demand for vacation homes has skyrocketed, owing to pandemic-related factors such as a major increase in remote work. For many workers no longer confined to a cubicle, the idea of working seaside, mountainside, or this side of paradise is becoming a reality.
Add to that record low mortgage rates, and it’s easy to see why homeowners have set their sights on making their dream getaway their new home-away-from-home. According to real estate brokerage Redfin, mortgage applications for second homes increased by 84% in January 2021 as compared to the same time last year.
Buying a vacation home, however, isn’t all about wishes and wants. It takes careful planning, calculating, and having a clear understanding of what you can manage financially. Here are some planning tips to help you decide if you really want to make that dreamy vacation home a reality.
Why A Vacation Home?
The benefits of owning a vacation home are plentiful: No more hotels with questionable cleaning practices. No searching the internet for places to stay, preferred dates, and competitive prices. No disappointment when the week you booked – the only remaining week available – turns out to be the rainiest seven days of the year. But with your own vacation home, you can go whenever the urge to relax hits you.
You won’t be competing with other vacationers for the best room, the best view, or the best price. You can whip up something in your own kitchen and eat whenever. You can lounge to your heart’s content without housekeeping knocking at the door. And you can have friends and relatives over – as many as you want, when you want. Clearly, ownership has its benefits.
Is A Vacation Home A Good Investment?
A vacation home shouldn’t be thought of as a guaranteed investment because, as with any property, its value is impacted by location. If your vacation home boasts a stunning oceanfront location that offers nearly year-round swimming, boating, or fishing, chances are it will be in demand when and if you decide to put it on the market. But a vacation cabin that’s off the beaten path and far removed from the comforts of daily living might be a much harder sell.
The amount of money you make when you sell a vacation home can also be impacted by the economy. In a stalled economy where jobs are scarce and budgets tight, there may be a limited pool of buyers so selling a vacation home might not be easy, and if you are able to sell you might not reap the profit you were expecting.
In terms of making money, you might have the option to add to your cash flow if you decide to rent out your vacation home when you’re not using it. Keep in mind you’ll need to pay tax on your rental income if you rent out the home for more than 14 days in a calendar year. You can, however, deduct rental expenses such as utility bills, insurance, and maintenance.
How Do You Pay For A Vacation Home?
According to the National Association of Home Builders, Americans own 7.5 million second homes. But taking on the financial demands of a second home requires serious consideration. Mortgage rates are higher than those for first homes, and the loans can require a heftier down payment – 30% isn’t unheard of. In addition, the lender can demand that you have a stronger credit score than was required for your first home.
In response to some of the financial restrictions that impact buying a second home, some real estate experts suggest that you shouldn’t buy a second property unless you can pay cash. A National Association of Realtors survey, conducted in 2020, found that 49% of vacation home buyers pay cash.
Some homeowners tap into the equity that they’ve built up in their primary residence as a means of financing their second home. By using a cash-out refinance of your first home, a home equity line of credit (HELOC), or a home equity loan you can access money that can be applied to the down payment on your second home or that can be used to buy it outright. Be aware, however, that you can only deduct the interest on a second home loan if the loan used to buy it is secured by that home, not your primary residence. As always, when one door closes, another one opens.