If you’re like many Americans, you dream of having a beach house, a desert escape, or a mountain hideaway. Perhaps you’re tired of staying at hotels and want the comforts of home at your fingertips.
You’re ready to make this dream a reality. Before you do, consider these steps.
How to Buy a Vacation Home
1. Choose a Home That Fits Your Needs
As you begin your search for a vacation home, carefully consider your goals and needs. Start with the location. Do you prefer an urban or rural area? Lots of property or a townhouse with just a small yard to care for?
Consider what amenities are important to be close to. Where is the nearest grocery store? Is a hospital accessible?
Think about your goals for the property. Is this a place that only you and your family will use? Do you plan to rent it out from time to time? Or maybe you plan to be there only a couple of weeks out of the year, using it as a rental property the rest of the time.
The answers to these questions will have a cascade effect on the other factors you’ll need to consider, from financing to taxes and other costs.
2. Figure Out Financing
Next, consider what kind of mortgage works best for you, if you’re not paying cash. You may want to engage a mortgage broker or direct lender to help with this process.
If you have a primary residence, you may be in the market for a second mortgage. The key question: Are you purchasing a second home or an investment property?
Second home. A second home is one that you, family members, or friends plan to live in for a certain period of time every year and not rent it out. Second-home loans have the same rates as primary residences. The down payment could be as low as 10%, though 20% is typical.
Investment property. If you plan on using your vacation home as investment property to generate rental income, expect a down payment of 25% or 30% and a higher rate for a non-owner-occupied loan. If you need the rental income in order to qualify for the additional home purchase, you may need to identify a renter and have a lease. A lender still may only consider a percentage of the rental income toward your qualifying income.
Some people may choose to tap equity in their primary home to buy the vacation home. One popular option is a cash-out refinance, in which you borrow more than you owe on your primary home and take the extra money as cash.
3. Consider Costs
While you determine the goals you’re hoping to accomplish by acquiring a vacation home, try to avoid home buying mistakes.
A mortgage lender can delineate the down payment, monthly mortgage payment, and closing costs. But remember that there are other costs to consider, including maintenance of the home and landscape, utilities, furnishings, homeowners insurance, property taxes, and travel to and from the home.
If you’re planning on renting out the house, determine frequency and expected rental income. Be prepared to take a financial hit if you are unable to rent the property out as much as you planned. For a full picture of cost, check out our home affordability calculator.
4. Learn About Taxes
Taxes will be an ongoing consideration if you buy a vacation home.
A second home qualifies for mortgage interest deduction and property tax deductions as long as the home is for personal use. And if you rent out the home for 14 or fewer days during the year, you can pocket the rental income tax-free.
If you rent out the home for more than 14 days, you must report all rental income to the IRS. You also can deduct rental expenses.
The mortgage interest deduction is available on total mortgages up to $750,000. If you already have a mortgage equal to that amount on your primary residence, your second home will not qualify.
The bottom line: Tax rules vary greatly, depending on personal or rental use.
5. Research Alternatives
There are a number of options to owning a vacation home. For example, you may consider buying a home with friends or family members, or purchasing a timeshare. But before you pursue an option, carefully weigh the pros and cons.
If you’re considering purchasing a home with other people, beware the potential challenges. Owning a home together requires a lot of compromise and cooperation.
You also must decide what will happen if one party is having trouble paying the mortgage. Are the others willing to cover it?
In addition to second home and investment properties, you may be tempted by timeshares, vacation clubs, fractional ownership, and condo hotels. Be aware that it may be hard to resell these, and the property may not retain its value over time.
6. Make It Easy to Rent
If you do decide to use your vacation home as a rental property, you have to take other people’s concerns and desires into account. Be sure to consider the factors that will make it easy to rent. A home near tourist hot spots, amenities, and a beach or lake may be more desirable.
Consider, too, factors that will make the house less desirable. Is there planned construction nearby that will make it unpleasant to stay at the house?
How far the house is from your main residence takes on increased significance when you’re a rental property owner. Will you have to engage a property manager to maintain the house and address renters’ concerns? Doing so will increase your costs.
7. Pay Attention to Local Rules
Local laws or homeowners association rules may limit who you can rent to and when.
For example, a homeowners association might limit how often you can rent your vacation home, whether renters can have pets, where they can park, and how much noise they can make.
Be aware that these rules can be put in place after you’ve purchased your vacation home.
8. Tap Local Expertise
It’s a good idea to enlist the help of local real estate agents and lenders.
Vacation homes tend to exist in specialized markets, and these experts can help you navigate local taxes, transaction fees, zoning, and rental ordinances. They can also help you determine the best time to buy a house in the area you’re interested in.
Because they are familiar with the local market and comparable properties, they are also likely to be more comfortable with appraisals, especially in low-population areas where there may be fewer houses to compare.
The Takeaway
Buying a vacation home can be a ticket to relaxation or a rough trip. It’s imperative to know the rules governing a second home vs. a rental property, how to finance a vacation house, tax considerations, and more.
Ready to buy? SoFi offers mortgage loans for second homes and investment properties. SoFi also offers a cash-out refinance, all at competitive rates.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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