Your Home Away from Home
You’ve worked hard and now it’s time to relax
If you’re considering a Vacation or 2nd Home, you’ve achieved a measure of wealth, established a significant level of consistent earnings – or both. You’ve likely worked hard for many years and you’re now ready to enjoy the fruit of your labor. Congratulations! While you research 2nd home destinations and review your investment strategies, there are many things to consider.
Find a 2nd home location that fits your budget
We’ve all heard of vacation destinations like Martha’s Vineyard, Key West, Aspen, Scottsdale, Lake Tahoe, etc. – destinations some folks dream of and aspire to call home. While these are wonderful places, they’re a bit pricy. Don’t be discouraged. Interesting and affordable options exist. Examples are: St. Augustine, FL, Sandpoint, ID, Portland, ME, Kalispell, MT, Beaufort, SC, or Sheridan, WY. Take a look.
Ask all the right questions
- How often will you visit your vacation home and how far away must you travel?
- Can friends and family easily and affordably travel to the destination to be with you?
- What are the costs to maintain the home, and will you rent the home at times or carry all expenses?
- What is the resale market like and could you sell the home without difficulty in the future?
Vacation home alternatives
Some people want to vacation in more than one location. Some people like one place to call home, with their own furniture and personal items. There are timeshares or vacation plans, yet they may be hard to sell in the future. You could consider a rental program. Enjoy your property for 4-6 weeks per year and place it in a rental plan for the balance of the year. There are many options. Consider each carefully.
The benefits: Special places bring special memories
Special memories with family & friends are an integral part of owning a 2nd home – and possibly the greatest benefit of all. You’ll be able to escape to a special place with those who are dear to you, to enjoy some recreation, adventure or to simply relax together in a quiet place for a while. Surely there will be many wonderful moments, and these special memories will be cherished for years to come.
Vacation and 2nd Homes Gallery
Buying a Vacation Home
Many vacationers find they love a location so much they think, "Wouldn’t this be a great place to return to again and again? Why not consider a second home here?" You are game. And why not if you can afford it? A second home can be a wise investment, a hub for family and friends, and a place you can rent when you’re not using the home, and you could write-off the expenses.
However, this is more than just an emotional decision, and one that needs to be approached in much the same way you found your primary home. Vacation homes come in many styles, locations, and with a dizzying array of amenities, from big stone fireplaces to hot tubs, and ski-in and ski-out locations.
There are other considerations before you buy or rent. Will your second home sit empty most of the time because it's too far from your main residence, or too expensive and difficult to get to by air? What if there’s a downturn in the economy and you want to unload it? Good luck!
Before you sign anything, here are four more points to consider:
- Do you have consistent earnings and adequate liquidity for this purchase?
- What about maintenance expenses and who will handle the details?
- Should I rent before buying?
- What are the tax consequences of renting the property?
- Does the sentimental, nonmonetary value of having a family hub for generations to come outweigh the hassles?
Understand maintenance. As with primary homes, your vacation home requires upkeep – mowing the lawn, cleaning the interior, and checking a roof for leaks after a winter storm or summer hurricane. In such cases, you may be able to locate a conscientious repair service, or you may decide it's wiser to buy in a planned vacation community where a manager is on call. Regardless, it’s important to factor in the cost of that extra pair of hands as you budget for this purchase. Real estate agent Desmond Milvenan, CRS, GRI, with Engel and Volkers in Austin, Texas owns a second home in New Mexico. Though she loves it, she now thinks about finding another property that entails less maintenance. "This is an older property that always seems to need something. We wanted a house and yard and not a condo, but it has involved expense and upkeep," she says. Milvenan put her house in a rental pool, which worked well. "There's someone there all the time for maintenance, which works well for this remote property," she says.
Consider renting before buying. While renting may be expensive, it can be a great gauge of what life in that location will be like. Rent in a desired location multiple times and in different seasons. You won’t always “live there” when it's 80 degrees, sunny, and with picture-perfect blue skies. Gerrett Snedaker, CRB, a real estate agent with Better Homes & Gardens Real Estate Mason-McDuffie, in Sonoma, Calif., suggests renting in an area for at least six months to a year.
Many real estate firms specialize in vacation rental properties and listings can be found online with detailed reviews. Milvenan rented before she bought. Part of her incentive to buy was that she wanted to rent the same house every year and leave some of her belongings there. It wasn’t allowed, so she decided to buy a home.
Buy and rent strategies. If you can achieve a reasonable cash flow, owning a second home may work out very well. There are plenty of folks out there that would rent your charming cottage by the sea or home in the mountains. Before you do so however, check the rules if you're in a community with a homeowners' association (HOA), or review the bylaws of your condo or cooperative apartment. Some developments have restrictions and may not permit renting, or may only allow renting for certain periods of time or within other constraints – such as renting for at least 30 consecutive days to the same person. Some cities and communities are cracking down on online rentals by making it illegal to do so. Reasons vary, from hotels in the area complaining about lost revenue, to neighbors who complain about having a parade of strangers in nearby homes. You also need to speak with your CPA, so you know how rental income will effect your taxes. There are rules about how many days of the year you will rent vs using the home as a second home/for personal use.
The basic guidelines, says accountant and financial advisor Shawn Shaughnessy of Padgett Business Services in Highland, N.Y., is that if you rent out your house for fewer than 15 days it's considered personal use, and you do not report the income and/or expenses. The 14 days don't have to be consecutive, but if you rent for more than 14 days, you must report the income. There is a silver lining. You can deduct related rental expenses and depreciate assets. As a mixed-use home, you report the income and allocate expenses, including depreciation based on actual rental activity, says Shaughnessy. Hiring a professional tax preparer is highly recommended to sort through all the necessary minutiae. If your home is really a bed and breakfast, that involves different and additional considerations. Many municipalities treat them as hotels, which means the gross income is subject to sales and occupancy taxes.
If you do rent, get an agreement in writing, so it's the equivalent of a legal contract. You might want to have a lawyer draft a contract that's binding, or work with a reputable property manager. A local property manager can be very helpful in managing multiple tasks and can be your eyes and ears locally to watch your property. Milvenan found that when guests said there would be four people using the home, often eight showed up, or two cars morphed into five, and pets, not allowed, were also brought along.
Don't ignore a second home’s potential sentimental value. It's not all about money, maintenance, and convenience. A family vacation home may be passed down to future generations, it could be transferred to a trust and used by your children at appointed times, it might become your primary residence one day. Snedaker has seen that occur in his area, particularly among San Franciscans with a second home, who eventually transition to the second locale. It could be a future down-sizing strategy.
Barbara Ballinger is a professional writer, author, blogger and speaker who has long focused on real estate, design, and personal finance. She has co-authored many books, including Successful Homebuilding and Remodeling, The Kitchen Bible: Designing the perfect culinary space, and The Garden Bible: Designing the perfect outdoor space. She regularly contributes to the National Association of Realtors® Website and magazine.
Margaret Crane is a nationally known freelance writer, blogger and journalist who has co-authored with Barbara Ballinger several books and articles on real estate, design and family business. Her byline has appeared in Realtor® magazine. With more than a half-dozen titles to her credit, Margaret’s latest design book is The Kitchen Bible: Designing the perfect culinary space.