5 Essentials to Consider Before Buying a Vacation Home

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Wouldn’t it be wonderful to have a little place waiting for you on a tropical island or a woodsy lake? Apparently a lot of Americans think so: second home purchases were up by a nearly a third in 2013 according to the National Association of Realtors. The pros are pretty obvious. It’s a place where your family could make memories over generations; an opportunity to become part of a vacation community and make new friends you see year after year; and a place for getaways that require little planning. But there are also cons to owning a second home, compared to other vacation options. You may yearn for variety after spending a few summers in the same town, or the chores involved might make vacation feel like work. Here are five critical questions to ask yourself before you make the leap.

Does that vacation property meets your needs? Review the video below to find out.

Do You Have Enough Saved for the Down Payment?

You may have bought your primary home with only five percent down, but that’s not likely to happen for a second home purchase, which is considered a riskier deal from a bank’s point of view. Lenders may ask for 30 to 40 percent.

Have You Taken the Expenses Into Account?

Beachfront properties can take a beating from storms and sun, and houses that sit empty for long stretches or get beaten up by renters may have higher maintenance expenses. Some families have found themselves paying tens of thousands in maintenance costs for every week that they actually use their vacation home — money that could put you in a five-star hotel instead. One adviser recommended this rule of thumb: if the total costs from both your primary and second home add up to less than 30 percent of your income, you’re good to go. If not, think twice. Beyond maintenance, you need to account for homeowner’s association fees, furnishings, taxes and possibly the costs of an additional vehicle.

Do You Understand the Tax Implications?

Income tax rules governing your vacation property may be different than those for your primary home when it comes to mortgage interest deduction, profit from sale, profit from rent and other issues. Then you will have to note your property tax responsibility for the second home too. Consult an accountant to get a clear picture of the taxes you will owe.

How Stressful Will it Be?

Advertisements frequently tout “stress relief” as one of the benefits of a vacation home. But real-life owners know that in some ways, owning a second property can add stress to your life. First, there’s maintenance. Unless you are wealthy enough to pay a caretaker or other employee to maintain your vacation home, part of every “vacation” there is likely to be taken up by fixing, painting and making service appointments. “People become slaves to their homes,” Milton F. Pedraza, chief executive of the Luxury Institute, told the New York Times. For just the end of the season, there is a 20-point list of recommended maintenance chores for summer cottages. You’ll also need a plan in place for emergency repairs in your absence. Then there’s worry. Will you fret about possible break-ins or bad weather when you are miles away from your property? If you rent the property out, you will have to either pay a management agency or deal with the inevitable work of answering tenant queries and cleaning up after their messes.

Are You Buying as an Investment or a Luxury?

When the real estate market was on a long boom, many people saw a second home an investment whose value increase would offset expenses. But the crash changed that. Nowadays, experts are split on whether buying a vacation home is a good investment. Many warn that expenses eat up any rental income the property may generate when you’re not using it. “Financially, most vacation homes are probably a train wreck. I’ve had one for about 10 years and to be totally honest I’ve never made enough cash flow to cover my mortgage,” wrote real estate investor Dave Van Horn. Others point out that the market for vacation homes is recovering more slowly than the rest of the real estate market, so bargains might still be get-able that would put the buyer in the position to cover expenses through appreciation and rental income. And, the emergence of the sharing economy via companies like Airbnb have made it easier for property owners to get generate cash with vacation properties.