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5 Questions to Ask as You Shop for Your Vacation Home

Posted by Steph Kaye on Saturday, May 21st, 2016 at 9:47pm.

If you are in the market for a vacation home, Lang Premier Properties suggests five questions to be asked prior to the purchase of your dream getaway.  

1. Where to buy?

It is not uncommon for casual vacationers to long for a home to escape to while vacationing at a prime destination.  The question of where to buy is a logical one and largely depends on how far you'd like to drive or fly.  Your budget also factors in greatly as well as whether you'd like to rent out your new property in your absence.  

More than 80% of vacation home buyers elect to purchase property within driving distance of their primary homestead.  Half of the population of vacation home owners enjoy a getaway located within 50 miles of their home.  If you intend to get away frequently, close proximity to your home is likely important and it is unlikely that you will be flying to Fiji for a three-day weekend.  

While most vacation home owners do not rent out their properties, you might need the rental income in order to supplement mortgage payments.  If this is the case, consider the selection of a popular, highly desired vacation destination where short-term accomodations are highly sought after.  Such spots would include destinations near oceans, lakes or rivers, and mountain recreation areas.  

Consider the long-term needs of your family and whether you need a property that can accomodate your future needs as your family expands.  In addition, a location with a variety of recreational amenities might be a bonus in order to allow for evolving interests.  

Golfing might be your current hobby of choice, however you might decide that you are passionate about boating in the future.  If you intend to purchase a vacation retreat as a future retirement nest egg, it is important to check out the type of structure and location that would allow for you, as a senior citizen, to live safely and comfortably.  You might live to regret the two flights of stairs you purchased twenty-five years earlier as well as the bumpy, dirt driveway leading to your humble abode miles into the woods.  


2. Can you afford to own and maintain a vacation house?

Let's talk numbers.  The last thing anyone wants is for their dream vacation home to be the cause of a financial crisis.  Look beyond the sale price and think about the cost of ownership.  

Second homes often mean higher down payments or elevated interest rates as dictated in the terms of a mortgage.  However, there are ways to get creative about financing so as to avoid emptying your children's college savings accounts.  You might even be able to leverage the equity of your primary residence or divert pretax funds from an IRA.  Consult an experienced mortgage broker and forgo dealing directly with a single lender. 

Those seaside communities you've been eyeing just might have a higher risk of hurricanes, floods, or forest fires.  Make sure you know what home owner's insurance will cost you.  This could be a complete drain on your finances and lead to scary surprises during escrow.  Get several insurance quotes before you ever sign a purchase agreement.  

It is easy to underestimate the cost of home maintenance, especially when it comes to roof replacements, exterior paint jobs, and a myriad of additional long-term projects.  Set aside two percent of your home's value annually in order to account for maintenance.  Professionally managed rental properties will pocket 20-50% of the rental income.


3. Are you being smart with your money?

Investors have created a climbing trend in the number of second home purchases.  Rental properties outnumber vacation homes by a wide margin and, while property values can fluctuate, residential real estate investment is a great way to diversify your portfolio.  If you plan to invest in a second home, look for a home that is valuable as a part-time rental property as you will be unable to enjoy it as much as you think you might.  

Prior to making an offer, learn as much as you can regarding local zoning laws, construction standard and development plans, and other factors that could negatively impact the value of your second home. 

4. Will this purchase affect your taxes?

Plan on April 15 carrying a whole new meaning.  Mortgage interest and property taxes on first and second homes can be claimed as Schedule A deductions.  In order to avoid being accosted by the IRS, you should be aware of some differences regarding the taxation of second homes.  For starters, homes rented out less than 15 days during a given year are categorized as "personal use" properties.  Owners are not mandated to report any rental fees as income, but no other deductions (minus mortgage interest and property taxes) are allowed.  In the event that you rent out your second home for 15 or more days during the year, the paperwork shall be multiplied tenfold.  The IRS requires that all rental fees must be reported as income and operating expenses can be deducted against the rental income, with deductions allocated according to the number of days the property was rented versus the number of days it was reserved for personal use. You may also deduct travel expenses related to maintaining the rental property in some circumstances, however no travel deductions are allowed for properties rented out for fewer than 15 days.

All profits from the sale of second home will be subject to capital gains taxation.  The only way around this is to move into your vacation home and adopt it as your primary residence for two years prior to selling. 

5. What is the truth regarding time shares & joint ownership?

More than 3 million U.S. households own time shares.  Nearly 85% are happy with their purchase. Time shares are a bit of a dichotomy in that buyers can acquire deeded ownership of a house or condominium for a specified period of time each year, while other deals consist of purchasing time at a specific resort or destination without the benefit of a deed.  All time-share owners are financially responsbile for annual maintenance fees that must be paid to a management company and most contracts allow you to trade for time at other resort destinations.

Time-shares may be bought and sold like any other form of personal property, however sellers do not typically get anywhere near what they originally paid, making time-shares a rather poor investment.  

If you do lean in the direction of purchasing a time-share, make sure to carefully examine the obligations and benefits of ownership prior to signing any contracts.  

Shared ownership via purchase with a friend or relative is a great way to pool resources, however make sure you have a clearly written contract that spells out the details of the partnership and stipulates exactly what will happen if either party wants out of the deal.

If you'd like to learn more, please don't hesitate to message Lang Premier Properties online or call us at 1-855-526-4466.

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