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A vacation home is a significant investment that can pay off in fun and value. Here’s what to look for when shopping for investment real estate
There are two great reasons for buying a vacation home: You want one and you can afford to buy it. Buying a vacation home as an investment, however, should not be your primary motivation.
Some vacation properties can also be good investments. Others aren't. As recent history has shown, real estate prices can go down as well as up, and there are no guarantees.
There are, however, some guidelines that can help you find a vacation home that will provide value along with pleasure.
The Rules Have Changed - Consider first whether you want to buy or rent and, if you choose to buy, where and how. There was a time, back before tax-reform legislation in the 1980s, when there were compelling tax advantages to financing a second home. You're still able to deduct mortgage interest on one such home; but, unless it is income-producing property with its attendant complications, the once-valuable depreciation write-offs are gone. To help decide whether buying a vacation home is right for you, consider the following.
How Often Would You Use the Property? - If you plan to spend just one week, or even two, out of every 52 at a vacation home you purchase, you would probably be spending a lot of money for each day there. Mortgage payments continue all year long, as do payments for insurance, taxes, and necessary regular maintenance. If you'd be paying full price but getting only part-time use, consider renting.
There are good reasons for buying a vacation home, not the least of which is a simple desire to own the place and do what you want with it. But renting lets you experience vacation life in different places, and is relatively affordable. Rents can run from $500 to $2,000 a week or more, depending on location and amenities. At the end of your stay you close the door and forget about the place. Financial planners say that if you're just looking for a few weeks of vacation a year, it's probably cheaper in the long run to rent. An extra attraction to renting is that it gives you a chance to test different locations before settling on one to buy.
How Desirable Is the Location? - The old real estate saying goes like this: "What are the three most important things about selling a house? Location. Location. Location." The same holds true for a vacation home. Are you looking at a simple cabin in the backwoods or a comfortable house or condo in or near an attractive resort area? A rural hideaway may be great for hunting, hiking, or just getting close to nature, but don't expect its value to appreciate as fast as a more comfortable place located near amenities.
With the graying of the Baby Boom generation, some analysts predict an increasing demand for country getaways in the future. That great population bulge is rapidly approaching an age when many can be expected to spend the money they've been working for and take life a bit easier.
Keeping that in mind, the best investment for future resale would probably be a fully equipped getaway that could double as a second home, perhaps on waterfront property or with privacy-protecting acreage. Amenities are important. Younger people often don't mind minor inconvenience, but older people look for microwaves, dishwashers, and even hot tubs. That condominium on the ski slopes should not be "bare bones."
You Don't Have to Be Rich - The vacation home doesn't have to be a stand-alone house. A condominium purchase can let you have a home in a terrific location that would be otherwise unaffordable.
For value today, look for that house, condo, or timeshare in a location that has activities in more than one season. Keep in mind, too, that vacation properties often become retirement homes. So safety, taxes, and the availability of cultural opportunities should be considered. With those things in mind, look for bargains in lesser-known places; investigate upswing markets, places that haven't yet become overrun or overpriced.
Look for areas where the local economy is strong and taxes are low. You don't have to be near a city, but you should be within a reasonable distance of populated areas to have access to services like quality medical care.
Another reason for being near more populated areas is that such a location allows you the opportunity to try to rent out your property when you're not using it to help cover mortgage payments and, perhaps, sell at a profit later on. With the right choices, returns can exceed the future payoff from stocks.
Tax Considerations - If you rent your home for 14 days or less a year, you do not need to report the rent. Beyond that, however, the IRS considers the rent taxable income. But you may then be able to deduct all of your rental expenses if you had a net profit on the property (deductions are limited if you report a loss). These are guidelines only; your specific tax obligations should be discussed with a qualified tax advisor.
Source: Internal Revenue Service.
Location Winners - Florida is, as it has been for years, a number one location for vacation homes. While Florida's east coast has been traditionally the most popular (and expensive), the west coast has also grown in popularity in recent years. Elsewhere, properties within driving distance of popular resort areas have a good chance of healthy appreciation while giving you the realistic option of renting when you're not there. Although prices are generally higher on the west coast, other winners include Oregon's northern coast and Colorado's ski resort areas.
But the best location for you is one where you feel at ease and that is convenient to get to from your primary residence. Depending on how you live, that could mean a three-hour drive or a five-hour airplane flight.
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