What people should know before buying a vacation home.
Thanks for the A2A! There are certainly many things to know before buying a vacation home – especially if you’re planning on investing in it as a short-term rental property. To ensure making a smart investment decision, take the following factors into account when before buying a vacation home rental:
1. Consider the location
The location where you want to buy a vacation home has to be attractive not only for you, but also for your future tenants. If you want your home to make positive cash flow, it needs to have good occupancy rates – meaning it should be occupied by a tenant when you’re not occupying it yourself. This should allow you to yield a good rental income. So, you need to choose a location for buying a vacation home that is accessible and easily attracts guests.
You also need to think about the seasonal changes as well. Ask yourself, will your vacation home make a profit during low peak seasons or will you have to put in money from your pockets to make up for losses during vacant periods?
2. Consider laws and regulations
Before buying a vacation home, check whether or not vacation rentals are permitted in your area. There have been many ongoing regulations imposed on short-term rentals. Some cities have regulations on the number of days your property can be rented out. The last thing you want is to invest in buying a vacation home rental and then find out that you are investing illegally. There are high fines for investors who are caught and you could possibly lose your license.
3. Rent it yourself
A great tip suggested by many vacation homeowners is to rent the property yourself before buying it. This way you can get to see how the property is and the amenities it provides (or lacks). Try renting it out for at least a month to see what kind of maintenance expenses the property requires. Your vacation rental property is your second home. So, if you rent it out yourself and enjoy the stay, then for sure guests will enjoy it too.
4. Consider maintenance costs
If you’re considering buying a vacation home far away from where you live, then it’s going to be difficult to get there quickly if an emergency happens or something is destroyed. So, it’s recommended to set aside money each year specifically for maintenance and upkeep expenses, generally around 1-2% of the value of the house. Obviously, you will save money by doing any repairs yourself, but that’s only possible if you live close to your rental property. Otherwise, you will need to hire professional property management to take care of the property.
5. Consider your financing options
A loan for a second home is slightly more complicated and has higher rates than that of a first home. Unlike the loan you applied for when buying your primary residence, second homes don’t qualify for FHA or VA loans, and it is hard to get mortgage insurance for one, so typically the mortgage rate is slightly higher than that of your first home.
Of course, the usual debt-to-income ratio still applies to second homes. You need to prove that you can make mortgage payments on both your homes for 2-5 months in order to qualify for a loan. Additionally, if you plan on buying a vacation home and renting it out for more than a couple of weeks per year, then you’ll have to pay a higher mortgage because it will be considered as an “investment property”, not just a vacation home.
6. Consider insurance
As with any type of property, insurance is needed to help cover any future damages that may occur. As for vacation home rentals, the National Association of Insurance Commissioners recommends reviewing the policy for your existing home to see whether any of that coverage could be extended to your vacation home.
However, if you are buying a vacation home for making money in real estate, the Nationwide Insurance Company won’t cover under the existing policy because your property is considered a “business activity.” If you do rent out your vacation home more frequently, you might want to consider applying for a stand-alone commercial or business liability policy.