BARGAINS ABOUND IN VACATION HOMES
The residential real estate market is roaring back as homes in many markets once again sell at record prices. But in one segment of the housing market, bargains still abound—vacation homes.
In many areas where vacation homes are popular and plentiful, median sale prices remain 15% or more below their peaks.
The Reason: Vacation homes are expensive discretionary purchases. Plus the 2017 tax law change reduced the amount of mortgage interest and property tax you can deduct often making vacation homes more costly to own, particularly the higher-priced units. And in many areas, there also is a significant supply of vacation homes currently on the market, helping to depress prices.
Tip: Buyers tend to get the best deals on vacation homes in the off-season—so look to buy “sun” vacation properties in the winter and ski homes in the summer months.
But be aware that buying a vacation home differs from buying a primary residence in some crucial ways. Here’s what you need to know…
WHAT TO BUY
Four key considerations when selecting a vacation property…
Vacation homes immediately adjacent to desired features are the safest investments. Developers always can build more homes near the beach or near the golf course—it’s the properties right next to these things that are in limited supply, and so they are the most likely to at least hold their value and potentially even gain in value. And if there are no properties between you and your stunning view, you don’t have to worry that one of your neighbors will expand his/her house or allow a tree to grow in a way that blocks that view.
Properties right next to amenities inevitably cost more than those even a short distance away. If that strains your budget, opt for a smaller home right next to the amenity rather than a larger one farther away…or opt for a home next to the amenity in a slightly less upscale area.
Older vacation homes can become upkeep nightmares. Ask vacation home owners about their biggest complaint, and most will say maintenance. Having two homes means maintaining two homes, and upkeep issues can be magnified in a vacation home because it likely is unoccupied much of the time. A drip or leak could cause extensive damage before it’s spotted. A broken furnace might not be noticed until the home’s pipes have frozen and burst. The older the vacation home, the more maintenance issues there are likely to be.
Helpful: To minimize maintenance issues, have a neighbor or caretaker look in on the property when you’re not around, or buy a vacation condo rather than a freestanding house.
The distance from your primary residence to your vacation property will play a major role in determining your satisfaction with it. If the total travel time is longer than four to five hours, you might not use or appreciate the property as much as you expect.
Peak season probably isn’t the only time you’ll visit. You might love a ski chalet in the winter or a beach house in the summer, but it usually is best to buy a second home in an area that has some appeal during multiple seasons. The cost of buying a vacation home might curtail your ability to do other traveling, so it should be someplace that you enjoy visiting whenever you feel like getting away from your primary residence.
FEES, RULES AND INSURANCE
Discuss zoning rules with the town or county building department before buying if you hope to expand or rebuild your vacation home. Vacation home areas often have particularly strict zoning laws to prevent landowners from hindering access to an amenity (such as the shore), altering the character of the region or overdeveloping the land around a popular amenity.
Also, ask at the town offices if there are any special fees or requirements that apply to the property because of its location.
Examples: The owner of a cabin in the woods might be required to pay a special fire-control fee. The owner of a waterfront property might be required to install a special high-end septic system the next time the septic system needs to be replaced.
Also, investigate insurance costs and availability before you settle on a vacation home area. Homeowner’s insurance rates have been rising rapidly in wild fire areas, particularly on the West Coast, and some insurers are now refusing to issue new policies in high fire-risk areas.
If a property is at risk for floods, usually defined as in a flood zone area, you might need to purchase a separate flood insurance policy—standard homeowner’s insurance does not normally cover flooding. Your only source of insurance could be a federal agency with strict policy limitations. This could cost thousands of dollars a year on top of your homeowner’s insurance rates.
PRICING AND FINANCING
It isn’t always easy to determine what a vacation home is worth. Recent sales of homes that seem comparable based on their size and neighborhood might not be truly comparable at all. With vacation properties, differences in things such as views or water access can result in substantial differences in value.
Drive by properties mentioned as comparables, if possible, to confirm that their views and/or water access truly are similar to the property you’re considering. Work with a real estate agent who is not just familiar with the area but who also has extensive experience in the purchases and sales of vacation homes such as the one you hope to buy.
Be very cautious about buying a vacation home unless you can do so by paying cash or nearly all cash—especially if you already have a sizable mortgage on your primary residence. Paying two mortgages—plus the maintenance and taxes on two properties—can become a crushing financial burden. But some vacation home buyers might choose to take out a mortgage, even though they could afford to pay cash, to take advantage of today’s still relatively low interest rates. If so, get quotes from at least three or four lenders or brokers—rates and terms offered on second-home mortgages can vary dramatically.
TAXES AND RENTAL INCOME
If you use your vacation home as a second home, not a rental property, you might be able to deduct your mortgage interest and property taxes up to certain limits just as you do with your primary residence. Renting out a vacation home, on the other hand, can complicate your taxes. You might have to pay income tax on the money paid to you as rent. The rules are complex. Talk to a qualified accountant.
Nevertheless, some vacation home buyers intend to defray the cost of ownership by renting out the property when they’re not using it. This rarely works as well as they hope.
Many vacation homes are highly seasonal and command attractive rental rates only 10 to 12 weeks each year—and that’s during the weeks when you probably want to use the property yourself.
If you don’t live very near your vacation home, you probably will have to pay a property-management company to handle tenant selection and coordinate maintenance. Expect this company to claim 12% to 25% of your gross rental receipts.
Meanwhile, tenants often don’t take very good care of rental properties, leading to high upkeep costs.