17 Reasons Not to Buy a Vacation Home
Many people think owning a second home in their favorite vacation destination will save money over the long haul. But owning a vacation home can mean lots of hidden expenses and issues that might turn a vacation dream into a nightmare. Find out what to watch out if you're thinking of buying.
A vacation home should cost no more than 30 percent of total income, including taxes, insurance, and HOA fees. Even if you can afford it, there's a chance that other loans or costs (such as your kids' college tuition) could make paying for a vacation home difficult. Although the down payment can be financed by using the equity in a primary residence, that means higher costs overall.
A vacation home has to be at least partially furnished right away to make it livable. This usually means purchasing some kitchen items, bed linens, towels, a table and chairs, mattresses, and pillows. According to some interior designers, fully furnishing a vacation home costs between 5 and 10 percent of the purchase price. If renting out the property is a consideration, it's best to choose durable (and sometimes pricey) items over cheap ones.
Vacation homes often have different insurance requirements than your primary residence. Beach locations usually demand flood insurance, as hurricanes and flooding affect coastal areas more frequently. Flood insurance in inland locations may cost $300, but an extra $1500 near the beach. California homes may require earthquake insurance. Some insurance companies charge a 20 percent surcharge for any vacation home, too.
Don't forget to factor in the cost of heating and cooling your vacation property. A northern location needs to be heated, often for half a year. If the house is occupied during the winter, some insurance companies insist that the heat be kept at a minimum temperature. Oil and propane heat are a regular expense, and there is also a cost to replace the fuel.
Maintaining a property includes inspecting furnaces yearly, as well as checking and caulking laundry rooms, bathrooms, and kitchen areas for water damage. Sometimes, damage cannot be prevented. Ice and snow can burst pipes. Wet, heavy snow can damage trees, and homes at beach locations can be wrecked by storms. Fixing any of these problems, which might not be entirely covered by insurance, can be costly.
General home maintenance adds extra work, extra expense, or both to any home. Mowing, yard cleanup, and snow plowing are often the responsibility of the homeowner. In beach locations, sand and salt water can damage windows and siding. There is also the maintenance that needs to be done on any home, such as gutter cleaning, changing HVAC filters, replacing damaged window screens, checking for insects such as ants or termites, getting chimneys cleaned, and checking attics and basements for signs of moisture or mold.
Buying a house or a condo in a resort area often means dealing with an HOA (Home Owners Association). These groups charge a monthly fee, for which they take care of all outside work. This means less upkeep for the homeowner and usually includes some amenities as well, like a pool, tennis court or gym. However, HOAs can also put limits on renting out the home, so proceed with caution.
Many homeowners decide to rent out their vacation home in order to cover their costs. Assuming the weekly rent homeowners charge is equal to one mortgage payment, the house must be rented out for 12 weeks -- and that doesn't cover other expenses. Some HOAs also limit the amount of time that a property can be rented out. While a homeowner can hire a property management service to take care of marketing, bookings, and payment or use Airbnb or VRBO, these services are an additional cost to the homeowner.
Maintaining a home that is being rented, often from afar, is tricky. The house must be cleaned in-between guests and prepared for new visitors. A property management service will charge 25 to 50 percent of revenue, and can't ensure that there will be no damage done to the house, either.
If you choose to rent out your vacation home, it is no longer considered a secondary residence but an investment property, and the owner becomes a landlord. The down payment might need to be higher than for a primary residence because there is no mortgage insurance option available on investment properties.
If a house is rented out for less than 14 days a year, the IRS doesn't get involved and there are some tax breaks for landlords. However, all rental income must be reported, and if the landlord also spends time in the house, it is no longer rental property and those expenses cannot be deducted. Property taxes on rental properties may be higher than on residential properties, too.
Before making a decision to rent out the property, even for a little while, check your insurance policy. Insurance companies are particularly leery of the scenario in which the house is rented out for short periods but frequently, because the more tenants a house has, the more likely there will be of some kind of damage. Also, once the home is rented out frequently insurers no longer consider it a home but a business. Long-term rental requires landlord policies, which cost about 25 percent more.
Even if the homeowner is the only person who will ever use the home, it may make sense to have a caretaker -- usually a major expense. Vacation home maintenance companies can handle mowing, plowing, and check on the house if the homeowner can't. They can board up a house before a hurricane, check on the pipes after a big freeze, or take care of emergency repairs. This service could cost several hundred dollars per month, or an hourly rate based on what gets done.
Everything you do in your primary residence also needs to be done in the secondary one. There will be laundry, dishes, and garbage disposal. Many rural communities lack garbage pick-up, so trash will either have to be hauled to a town dump, or carried back home. Houses that are used for just the season need to be shut down at the end of it, with all the pipes drained and utilities disconnected. Also, all personal effects and objects need to be removed from a house that is going to be rented out, even for a little while.
For those who want to sit back to enjoy the view or spend their time exercising might be very irritated by the amount of time they have to spend taking care of their vacation home. What if the greenery outside beckons and the faucet is leaking and needs to be fixed? If this will be a major headache, consider a hotel instead.
To justify the sizable outlay of cash for a second home, most people will need to make frequent use of it. But if other getaway locations become more appealing, extra cash that could be used on a vacation elsewhere will likely be tied up in maintaining and paying for the vacation home that has lost its allure.
Renting might be a more affordable option, particularly if the house will only be used seasonally. A house that costs $25K a year to own might cost half that if it's only rented during the summer or winter. Renting could also be less hassle, since the problems with upkeep belong to the owner, not the renter.
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