Considering buying a second home in your dream vacation spot? A recent study by Marketwatch.com has ranked the top 10 best places to buy a vacation home, with Kissimmee, Fla., Cape Cod, Mass., and the Poconos Mountains of Pennsylvania claiming the top three spots. Whether or not your ideal destination finds itself in the top ten list, here are a few considerations to take before you decide to buy a vacation home.
Rentals and Profit
If you plan to rent your vacation home when you’re not using it, remember that vacation rentals require a lot of maintenance, since they must be managed similarly to hotels. “They’re providing anywhere from maid services, to laundry services, to front desk services… so you’re seeing a much higher charge for management,” says Frank Kowalski, regional vice president for the National Association of Realtors.
High management fees will shrink the net profit, says Arleen Hardenstein, who serves as the president of the Monterrey County Association of Realtors in California.
If you plan to use the property for investment purposes, consider a location where there is year-round vacation traffic, which will yield higher profits, says Ken Liddy, managing broker at Stowe Realty in Vermont.
Of course, if it’s purely a vacation home you’re seeking, then choose a location that suits your personal desires.
One area that can trip up vacation homebuyers is tax policy. “People need to realize that a vacation rental has a different set of rules as to how it’s treated for taxation purposes,” Kowalski says.
Your property may be taxed differently depending on whether it is used for investment or for vacation.
Those who designate a vacation property as an investment may not reside in it more than 14 days per year, as mandated by federal income tax law. “Once they exceed 14 days, then it no longer qualifies as a rental property,” which means that the property may not qualify for certain tax deductions such as depreciation and real estate taxes, Kowalski says.
Rules and regulations differ, so make sure to research the market where you are looking to buy. The local Chamber of Commerce can be a good resource, as are websites such as Realtor.com, Zillow.com and trulia.com.
Familiarize yourself with local ordinances regarding short-term rentals, as some areas will not allow rentals shorter than 30 days, Hardenstein says.
“It’s important for people to understand where they’re buying, what’s surrounding them and what the advantages are of buying in that particular neighborhood,” Hardenstein says.
Experts recommend working with a real estate agent and property manager that is knowledgeable in your market area of interest, as well as in dealing with vacation and second homes.
Liddy, a real estate agent in Stowe, Vt., says he commonly sees vacationers fall in love with a location and decide to buy a property without taking the time to consider their options.
Homebuyers should weigh the pros and cons of the location and consider similar markets so the decision is not made in haste or based on an emotional reaction to happy vacation memories.
Another issue is the size of the home. If buyers plan to invite friends and family to spend time in the vacation home, they should consider one with multiple bedrooms and bathrooms, as well as ample off-street parking, Hardenstein says.
When choosing a location, don’t overlook travel expenses to and from the home, Kowalski adds. If the destination requires a flight, travel costs could increase exponentially over the years.