5 Questions to Ask Before Buying a Vacation Home

Although purchasing a vacation home can be exhilarating and very exciting, it is crucial that you don’t get caught up in the excitement without asking yourself a couple of these questions…

• Where is the best place to buy?: Buying a vacation home is a bit like getting married: After enjoying the destination as a casual visitor, it’s time to make a long-term commitment and settle down. Choosing the right property solely depends on where you live, what you can afford, and whether or not you will rent out the property when you’re not there. How will you get there? According to the National Association of Relators, approximately 80 percent of vacation-homeowners choose houses within driving distance of where they live, or 50 miles from their primary residence. Will you need rental income? NAR states that most homeowners of vacation homes do not rent out their property when they’re not there. However, if you were having trouble paying your mortgage payment it would be a great idea to do so. Experts say that choosing a vacation home in a popular location, where short-term lodging is high, would be great for rental properties.
• Can you afford to buy a second home?: Calculating numbers is the first real step when considering purchasing a vacation home. It is important to look beyond the sales price to calculate the true cost of ownership. The 3 main key factors include: financing, insurance, and maintenance.
• Is it a smart investment?: Recent figures from the National Association of Realtors show an upward trend in the number of second homes purchased for investment purposes, with rental properties outnumbering vacation homes by a wide margin.
• How will a second home affect your taxes?: Just like your primary home, a vacation home is likely to have a major impact when tax season rolls around. According to the National Association of Tax Professionals (NATP), mortgage interest and property taxes on first and second homes alike may be claimed as Schedule A deductions. However, to avoid unfriendly encounters with the IRS, buyers should be aware of some important differences in the way second homes are taxed.
• Are time-shares or joint ownership good options?: According to the American Resort Developers Association, more than 3 million U.S. households currently own time-shares. The term “time share” actually encompasses two distinct forms of vacation ownership. In some cases, buyers acquire deeded ownership of a house or condominium for a specified period of time each year, while other deals involve buying intervals of time at a resort without actually holding a deed to the property. Although time shares may be bought and sold like any other form of personal property, the Federal Trade Commission warns that sellers typically get less than the original price, so brace yourself for what could be a considerable loss if you have a change of heart. Another form of shared ownership is to buy a vacation property jointly with a friend or relative. Pooling resources is not a bad idea if your relationship with your sibling or fishing buddy is on solid footing. Just 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.