What do you need to know before buying a vacation home?

4 min read
Life Events

Have you thought about buying a vacation home?

Ever come back from a vacation and felt like maybe you could stay there a bit longer? Maybe you want to make it a bigger part of your life? Here’s what you need to know to pull it off.

The summer vacation options were understandably a little different this year. Instead of a flight to a tropical paradise or a European excursion, maybe it was a road trip to a lake cottage or a camping trip. Instead of a fancy hotel in a busy city-center, maybe it was a quiet Airbnb off the beaten path. Either way, you went, you had a good time, and as it happens with a lot of people when they vacation, maybe you said to yourself “I should get a place here…” wherever “here” was.

It’s always a tempting option. Perhaps you went on Zillow and started looking at home prices and thought, “hmm...not as astronomical as I thought it would be.” Perhaps you brought it up to your friends in the group chat when you were talking about the trip. Perhaps you were talking with a friend when they mentioned their parent’s lake cottage that they grew up with and you thought about how great it would be to have something like that in your family.

However it happened, it’s in your head now and maybe, just maybe, you want to do something about it.

What you need to know before buying a vacation home

The Mortgage: The process for borrowing money for a vacation home is not the same as it is for borrowing for a primary residence. Here are some of the negatives: the interest rate will be higher, you’ll need at least 20% for a down payment, and there may be some stipulations in the terms about renting the property out when you’re not using it. The good news is that if your lender is OK with you renting out the property when it’s not in use, they might be able to use some of the potential rental income to help you in the qualifying process. Either way, the underwriting process for any mortgage is generally not a simple process as anyone who has been through it can attest. This is only amplified for a vacation property.

Insurance: You’re obviously going to need additional homeowners insurance for an additional property, but what other coverage are you going to need on top of it? Well, if you’re going to be renting it out for income, you’ll need an umbrella policy and you might want to examine increasing your liability coverage as well. Bad stuff can happen and if it happens to the people renting your vacation home, you don’t want them to come after your assets if and when they sue you. The good news is that umbrella policies are generally pretty inexpensive. The bad news is that homeowners insurance policies for rentals tend to be more expensive. You’ll want to make sure you examine this before you buy anything.

Property Management: You’re not going to be living at this vacation home full time, at least not right away. Someone is going to have to take care of it for you when you’re not there. Property managers are a lot like contractors and finding a good one can be tough to do. But unless you want to be down there all the time fixing sinks, unclogging toilets, and cleaning things up, you’re going to need one. This is a cost that you need to include when it comes to budgeting everything out. Get quotes, get reviews, and do your research because they’re going to be the ones making sure that your vacation house doesn’t fall apart. You really don’t want to make a mistake with this choice.

Renting it out: For a lot of people, generating rental income is a necessity in order to afford their vacation home. If you’re going to be relying on that rental income, you’ll need to make sure it’s going to be rented. As anyone who has either used Airbnb/VRBO can tell you, it’s not as simple as throwing up a few photos and calling it good. You’ll need to make sure you find and present a place that people will actually want to visit. There are some places that will curate everything for you, but at a minimum you’ll need to set schedules for when you want to visit and book well in advance to make sure that you’re maximizing your income.

Exit Strategy: In an ideal scenario, you’ll buy a vacation property that you can pass down through the family for generations to come and the whole extended family will use it to create hundreds of fond memories. In reality, you’ve bought an asset that is now subject to capital appreciation and will be a part of your estate. If you’ve bought with friends or family, this becomes more complicated as ownership percentages are factored in. Either way, you need to make sure you have the details of ownership figured out, written down, and agreed to before you buy anything. Additionally, you’ll need to make sure you update your will/estate plan to reflect any particular instructions you might have. I cannot stress how important it is to make sure this is concrete and in some sort of legal document. The last thing you want to have is a legal dispute between you and a family member or friend because someone wanted to do something with the property that wasn’t agreed upon.

How Farther can help you buy your vacation home

We’re here to help you plan your future and if part of that future is buying a vacation property, we can help you figure out how to do it. As we’ve identified in this post, buying a vacation home is not something to be done on a whim. There are a lot of things to keep in mind and it helps to have someone on your side, helping you figure everything out.

Setting a timeline: Most of us don’t have tens of thousands of dollars lying around for a vacation home purchase. It’ll take time to save up for that down payment and we can help set a realistic budget for it and invest the money properly for that goal.

Prioritize and Automate Your Savings: A lot of people get lost in the drudgery that comes along with saving for the future. Buying a vacation home is interesting; figuring out the savings plan, choosing the right investment portfolio, and prioritizing your cash flow is anything but interesting for most people. We’ll utilize our technology to take care of the tedium while you just focus on saving and we’ll help you make adjustments along the way.

Let’s find that vacation home and get started on the plan to help you get there. Let’s go Farther… away to the vacation home you deserve!

Ryan Koenig

Principal Advisor @ Farther

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