After years of hard work, it’s no wonder you’d like to take a well-deserved break. Those who are fortunate enough to reap the benefits of years in the workforce often do so by acquiring a vacation home.
The idea of a vacation home in your favorite place on a sunny beach sounds dreamy, but it’s important to be both realistic and prepared when it comes to this investment. You want to make sure that the home will be right for you and your family, that it’s visitor-friendly, and that it’s worth your money.
Think you’re ready to tackle a vacation home? Consider some of the 5 tips below before taking the plunge:
- Financial Prep
- Payment Method
- Property Rentability
1. Make Sure You’re Financially Prepared
As buying a home is in the first place, buying a second home can be extremely difficult, especially when it comes down to money. In a recent survey, homebuyers cited their second most regretted mistake as not having enough money to support the purchase.
While you might have years of homeownership experience under your belt, buying a vacation home requires a lot more money the second time around. Not only will you likely have a second mortgage payment along with closing costs and other home-buying fees at the time of purchase, but you’re also going to have to pay property taxes, maintenance expenses, and insurance fees beyond that point.
Assess your current financial situation and whether you have enough wealth and credit health to justify the purchase of your vacation home. Buy under your allotted budget and develop enough savings to make sure you’re being wise with your money.
2. Decide the Best Way to Pay
It’s critical that you know your options when it comes to financing your second home. The simplest method is to use hard-earned cash. Obviously, this isn’t a realistic option for everyone, but if achievable, it can prevent you from committing to another hefty loan.
Another way you can access a lump sum of cash is to dip into your equity through a cash-out refinance. This entails replacing your existing mortgage with a new one with a lesser balance, resulting in a lower monthly payment and interest rate. You then receive the difference between the two balances in a cash amount that you can use for your second home.
You can also take advantage of the equity you’ve built in your primary residence with a home equity loan. If approved, you can put the money from the loan toward any home expenses you want. Keep in mind, however, with this option, your first home becomes collateral, and falling behind on payments means risking losing the home altogether.
Talk to a financial advisor who can lay out all the options there are for financing a vacation home so you can make the most educated investment.
3. Choose the Right Location
Once you make sure you won’t take a huge financial hit by purchasing a getaway home, you need to determine the perfect location. Not only will you have to love the home you’ll spend tons of time in, but you’ll need to be a fan of the surroundings as well.
Is it a beach home on the coast of a hotspot that brings lots of tourists? A log cabin in the heart of the mountains that isn’t easily accessible? Even if you fall in love with the house itself, research the area to discover details like crime rates, accessibility, parking, and especially rentability.
To make the smartest investment, weigh the perks of your vacation home against the drawbacks of the surrounding area year-round to determine where your family (and your wallet) will be healthiest and happiest in the long run.
4. Consider the Home’s Rentability
Research shows that two-thirds of vacation homeowners rent out their vacation homes when staying in their primary residence. But, don’t assume that you’ll be able to rent out every property you look at, or that you’ll be able to profit off rental payments at all.
Talk to your real estate agent to get an estimate of the potential monthly costs that will come with owning the home. Then, hop on popular vacation rental sites like AirBnb or Vrbo to get an idea of the rental prices for similar homes in the neighborhood. An expert in the area can help you consider off-season renting, vacancy rates, and other factors that impact rentability. Compare operational costs with rental income and you’ll know if renting is cost-effective.
When thinking about rentability, keep your potential tenants in mind and be the best host you can. What age group visits the area most? Can you afford to offer rental-friendly accommodations like Wi-Fi or kitchen appliances for visitors to cook at home? Most importantly, remember to think about these details prior to purchasing so you can make an informed decision.
5. Don’t Forget About Insurance
While you are familiar with securing a traditional homeowner’s insurance policy, insurance for vacation homes may be a new concept. Is there insurance specifically for vacation homes? Yes. Proper Insurance offers a commercial package policy specifically designed for the unique risks characteristic of vacation homes.
Designed to completely replace your current policy, there is coverage for building, contents, income, and liability. The standard vacancy clause is removed with no standard occupancy restrictions, and the commercial general liability responds to amenities such as animals and pets, liquor, pools, hot tubs, and more. There is also coverage for theft and damage caused by a guest. You deserve to have peace of mind knowing your property is covered with in-depth insurance for your vacation home.
Talk to your current insurer to determine the best policy for your scenario. A great question to ask your agent is the following. The goal is to be educated and make the best decision for your new business running a vacation home.
“If I entrust my vacation rental home to a paying Airbnb or Vrbo guest for 3 days, and that guest damages or is injured at my property is their property and liability coverage in place to the limits of insurance?”