Ah, the vay-cay! We work for it, we live for it — typically fifty weeks of the year. When the time finally rolls around, many Americans have their own slice of heaven in which to spend their well-deserved time off: a vacation home. Whether it’s a cottage by the beach, a house in the mountains or a condo on the Las Vegas Strip, it begs you to unpack and relax.
If you’re thinking about buying a vacation home, there are some things you should consider.
Buying a Vacation Home Means Managing two Mortgages
If you’re not a member of the 1 percent, you may find that managing more than one mortgage is challenging. Your vacation home should be a haven, not a place that stresses you out because it costs so much every month. So, before considering the purchase, make sure that you can comfortably afford the extra payment every month.
“The basic rule of thumb is that your housing costs – including those for your primary home – should be a third of your overall income,” cautions Jay Mastilak, senior vice president for PNC Investments. Housing costs, as most homeowners know, add up to more than a mortgage payment. You’ll want to consider all of the costs listed below as part of the total cost of your vacation home.
Up-Front Costs of Buying a Vacation Home
Think back to when you purchased your primary residence. Remember the piece of paper they handed you at the closing table? You’ll get another one when you close on the vacation home, itemizing just how much it cost to purchase the home, above and beyond the purchase price. Closing costs are a bear, as any homeowner will attest. These include:
- recording fees
- loan origination fees
- credit report fee
- title insurance premium
- private mortgage insurance
- points
- homeowner’s insurance
- escrow deposits
- miscellaneous fees
Many of these expenses can be avoided if you pay cash for the purchase, according to the experts at the University of Rhode Island.
Ongoing Expenses of Owning a Vacation Home
Aside from a monthly mortgage, other costs you’ll likely incur include:
- annual condo or homeowners association fees
- annual property taxes
- insurance
- landscaping costs
- maintenance costs
- security during the off-season
- travel costs
- utilities
Maintenance fees may be particularly high on homes that are very old, very large or have pools or other amenities that need regular attention.
Vacation House Rentals: Renting Your Second Home
One way to offset the cost of your second home is to find a tenant to rent your home while you’re away.
If you want to let out for a substantial portion of the year, you’ll have to take taxes into account. U.S.-based homeowners must adhere to a “14-day Rule” that states a vacation home can be rented out for up to two full weeks without being taxed. Any longer, and the rental income is subject to federal income tax.
If you are considering renting out the home, don’t forget the obvious risks of opening your home to tenants, such as wear-and-tear or trouble collecting rent. And you’ll want to calculate how long of a period you will need to rent the home to cover costs: Christine Hrib Karpinski, author of “How to Rent Vacation Properties by Owner,” reports that in most places, vacation homes need to be rented out at least 15 weeks out of the year for a homeowner to break even.
Overall, one of the biggest considerations when purchasing a vacation home is determining if you can afford it. Then, consider how often you’ll use the home and if it’s feasible to rent it out when you aren’t using it. If the numbers crunch, those 50 weeks of work become even more worth it.