Financial Considerations Before Buying a Vacation Home

Financial Considerations Before Buying a Vacation Home
Before You Sign on the Dotted Line, Consider These Important Factors

Are you dreaming of the chance to own a vacation home where you can escape whenever you need to relax and recharge? According to the Vacation Home Counties Report from the National Association of Realtors in 2021, vacation home sales rose by 16.4% in 2020. In the continued aftermath of the COVID-19 pandemic, where many more professionals are working from home, there continues to be growing interest in the second-home market.

Is a vacation home purchase right for you? Consider the factors below to help you decide.

Consider the Pros and Cons

As with any big purchase, weighing the positives and negatives can help you see the bigger picture. When thinking of buying a vacation home, some advantages may include the following:

  • It’s a valuable investment. As with most well-maintained property, a vacation home will likely increase in value as time goes on. This is especially true if you purchase property in popular areas near the beach or in the mountains. So, you may be able to sell your vacation home one day for a tidy profit.
  • You can supplement your income by renting. Unless you’re moving into your vacation home full-time, you’ll be able to rent it out when you’re not there, thereby gaining an income stream.
  • You can vacation for longer periods of time. When you own the space, you can stay as long as you like with no added cost. If you work remotely, you could even work from your vacation home and extend your time there even further.
  • Improved quality of life. Not only can having a vacation home boost your finances but having your own private escape can improve your mental health and inner peace, as well.

Of course, there are two sides to every coin. Disadvantages of purchasing a vacation home may include:

  • They are expensive. It can be incredibly expensive to buy and maintain a vacation home, especially in a popular area. It’s an additional mortgage, property taxes, utilities, and insurance. So, you need to be sure you have the income to support these additional costs.
  • It can take away from other financial goals. If you’re spending money on a vacation home, think through how that will impact other goals, such as your retirement savings or your kids’ college fund.
  • You’ll have another home to worry about. Consider all the ongoing worries you have with your current home – security, maintenance, etc. – and know you’ll have similar concerns for a vacation home.
  • Lack of variety with your vacations. Buying a vacation home means you’ll likely be vacationing in the same place often. In a couple of years, will you still want to be visiting the same area? After all the money that goes into a vacation home, you may feel obligated to keep going back to ensure you’re getting your money’s worth, even if you’d rather expand your travel horizons.

Get the Full Financial Picture

Not only will buying a vacation home mean two mortgages but there are other, less obvious costs that will add up, as well. You’ll want to ensure that you’re accounting for what your vacation home will actually cost for the full 12 months so you can be certain that it’s something you can afford. Some expenses to look out for include homeowners’ association fees, any required landscaping or infrastructure projects, and any hidden local costs that come along with maintaining a vacation home, such as the need for flood insurance in low-lying or coastal areas or pipes that are at risk of bursting in freezing temperatures.

And while renting out your home can help foot the bill of a vacation home, you must be very cautious about who you rent to. Guests typically won’t care about your bills or any damage they may cause, so carefully evaluate each potential renter and have a rock-solid vacation rental-by-owner contract in place to protect you and your home.

Related Article: Smart Financial Moves for Empty Nesters

Consider How Your Vacation Home Will Impact Taxes

As with any significant change in your finances, you’ll want to think about the ways purchasing a vacation home will impact your taxes. Chances are, you’ll be able to take advantage of a mortgage interest deduction on your home and lower your taxable income. You may also be able to write off any interest on a home equity loan. Ultimately, a lot of it will depend on how much you’re really using your home. If the Internal Revenue Service recognizes your home as more of an investment instead of a second home due to the fact that you hardly use it, then different tax rules may apply. So, you’ll want to consult a tax professional to discuss how your unique circumstances will play out.

If you’re planning on renting out your vacation home, your taxes will be impacted even more by this purchase, as you’ll have to report rental income on your taxes. If you end up doing a lot of renting, your vacation home will be considered a side business of sorts so you may be able to deduct a lot of the expenses that go with maintaining your rental. However, if you do a solid mix of renting and vacationing, things may get a bit trickier. Again, talking with a tax professional can help you get a clear picture of just how much your taxes will be impacted.

Is a Vacation Home Purchase in Your Future?

Buying a vacation home can be incredibly exciting and, as previously stated, comes with quite a long list of advantages attached to it. However, it’s imperative that you consider all aspects of the purchase before you sign on the dotted line. So long as the positives outweigh the drawbacks, having a special place for your family and friends to get away can be both a meaningful and practical purchase.

If you think you would benefit from a conversation about how buying a vacation home will fit into your larger financial plans, contact Alphastar Wealth by emailing, or to schedule a complimentary discovery call, use this link to find a convenient time.

Illuminated Advisors is the original creator of the content shared herein. I have been granted a license in perpetuity to publish this article on my website’s blog and share its contents on social media platforms. I have no right to distribute the articles, or any other content provided to me, or my Firm, by Illuminated Advisors in a printed or otherwise non-digital format. I am not permitted to use the content provided to me or my firm by Illuminated Advisors in videos, audio publications, or in books of any kind.

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