Generally, those who buy a vacation home have disposable income. They can afford the expense of a second home in addition to their primary one. Whether or not that is a good idea depend on several factors, which may or may not be pertinent to their decision. Just because they have the funds to purchase a second home does not necessarily mean that is the best use of funds. If that is their choice, determining where to buy is extremely important. Do they want it to be easily accessible from their current residence, or are they comfortable flying to the destination? Will they need to rent it out in order to make it financially feasible? In addition to financing, maintenance and insurance must be a part of the overall budget for the home. So, if purchasing a vacation home is what they choose to do, they need to consider any financial drawbacks that might affect the decision.
Advantages
1. Additional Tax Benefits
Property owners already are enjoying deducting mortgage interest and property taxes from their primary residence. A vacation home provides another avenue to enjoy those benefits. For staying in the vacation home just 14 days out of the year, they can claim the mortgage interest up to $1 million for the primary and secondary properties combined. Seeing it as an investment that will pay off over time may be an additional incentive for their choice. Property taxes are written off for the vacation home in the same manner as they are for the main home.
2. Equity Building
A vacation home builds equity along with the primary residence. Of course, how much depends on the same factors as it does for the primary home. Realtors will say location, location, location. The equity they accrue can be a real boon to their retirement income, or if they have managed to pay down the mortgage, it may be an alternate choice for retirement living. Either way, they are increasing their wealth by increasing equity in the property. If that does not appeal to them, they can use equity from one to perhaps pay off the other, or combine the equities in both and choose an entirely different property in which to retire.
3. Income Source
The owners can decide to rent out the vacation home, especially if it is in an ideal location. If they rent it fewer than 15 days a year, they do not have to report the income they earn from it. However, if they rent it at least 15 days out of the year, they can deduct the costs related to it as an income property and still deduct the regular interest for the time they do not rent it for a win-win situation. Registering the property with Airbnb is a great way to find renters. Their website is easy to navigate and provides verifiable renters at a nice income to them.
4. Convenience
Having all the necessary accoutrements already in place when they go on vacation is a definite plus. All they have to do is pack and go. They may not even have to pack if what they need is already stowed at the property. Properties located in active recreational locations, especially, are great places to stow paraphernalia, such as snowboards, skis or 4-wheelers, that is used only during the times they visit. The comfort and freedom of knowing what and who to expect provide the opportunity to become a part of the community, which has benefits of camaraderie and familiarity.
Disadvantages
1. Possible Risky Investment
A vacation home can be riskier, so financial institutions require a larger down payment. For that reason, buyers may pay more for it in terms of increased interest charges and possible mortgage insurance for down payment under the usual 20%. Generally, mortgage insurance is at a higher rate than that of a primary home. Banks take into consideration that if a financial downturn occurs, trying to keep two mortgages current can be very difficult, and people will generally opt to save the primary residence rather than the vacation home.
2. Lack of Variety
Going to the same place year after year can become boring. Buyers who know themselves well enough to know they want the monotony of returning there year after year may feel confident they are choosing well. People who enjoy exploring different places may soon tire of the same destination, and having to pay for ongoing upkeep of a vacation home will take funds away from a more diverse destination. They must decide if the trade-off is worth it.
3. Security Risk
A vacation home sits empty most of the year, giving unscrupulous people the chance to break in. Thieves look out for this type of property and target those that they know will be empty for long periods of time. They often watch you come and go and may even be full-time residents themselves. This is one reason to become friendly with neighbors, who will possibly look out for anything untoward. In addition, a home disaster, such as a leaky pipe, can cause untold damage during their absence. Depending on location, various natural disasters can wreak havoc, as well.
4. Added Expenses
Having someone to look after their home when they are away may create an additional expense for which buyers had not planned. All other expenses associated with a secondary home are added to the household budget. Everything is doubled, including utility bills, furniture, insurance, and, of course, the mortgage and taxes. Maintenance and upkeep can be a drain on resources as the years go by, so a good financial cushion is definitely desirable. They can plan for the type of maintenance that will be required based on the location and type of property.
Time shares and co-purchasing with friends are also viable options when deciding the type of vacation home to purchase. Before buying with friends, however, they should be aware of compromises they will likely have to make. Also, be certain that the friendship can weather a joint purchase.
