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Shopping for a Vacation Home? Read This First

For many Americans, owning a vacation home is a long-time dream. Now that you’re entering retirement, it’s time to make it happen. But don’t run out and buy the first beach house you find — here’s what you need to know to make your vacation rental purchase a smart investment.

Choosing the Right Location

Buying the cheapest vacation home you can find will cost you in the long run. If your vacation home is off the beaten path or cosmetically challenged, it will be near-impossible to rent it out for profit. Even if you don’t plan to use your vacation home as a rental, you may choose to sell it someday. If you buy in an area with low demand or declining property values, you could end up losing money.

Rather than prioritizing affordability, seek vacation homes in areas with high demand. You may pay more for the home, but you’ll enjoy rising property values and high rental revenues. However, that doesn’t mean you have to buy in a super-upscale market. Look at areas adjacent to popular travel destinations and urban centers. You’ll get lots of tourism traffic from people who want to see the sights without paying for overpriced accommodations. Vacaville, CA, is a great example of one such destination — with easy access to Napa, Sacramento, and San Francisco, as well a charming downtown of its own, Vacaville is a great spot to buy. And at an average listing price of $455,000, you skip the seven-figure prices found in its neighboring cities. Wherever you plan to buy, research homes in the area so you get a great home at a good price.

Deciding Whether to Rent

Renting out a vacation home lets homeowners recoup some of the cost of their second home, especially if they’re only vacationing a few weeks each year. However, operating a vacation rental isn’t for everyone. If you’re running a vacation home, you’ll pay more in insurance and spend a lot of time and money maintaining the property. Either you market and maintain it yourself, visiting the property between each guest to clean and make repairs, or you pay a property management agency to handle it for you. Either way, that’s money out of your pocket. According to Rented.com, the average property management fee in the U.S. is 28 percent.

Despite the effort involved, renting out a vacation home is a popular choice. If you don’t rent it out, you’re spending money on mortgage payments and property taxes for a home you only use a handful of times per year. And just because a house is vacant doesn’t mean you can skip maintenance. As with any home, a vacation property requires routine upkeep, from lawn care to household repairs. You’ll also need a good security system to ensure you don’t end up with any unauthorized tenants or vandals while the home is unoccupied.

If you do decide to rent out your vacation home, make sure the numbers add up in your favor, and purchase an insurance policy that covers vacation rentals. Vacation rental property insurance should cover injuries sustained at your rental property, damage to the property, and lost rental income due to property damage. If saving on insurance is a priority, opt for a unit in a multifamily complex over a single-family home, skip the pool and hot tub, and install a fire detection and security system.

If you plan to sell your vacation home someday, consider transitioning it from a rental property to your primary residence before selling. As TurboTax explains, homeowners who live in a property for two of the five years before they sell can claim the primary residence exclusion on capital gains. For singles and couples filing separately, that’s a $250,000 exclusion. For married couples filing jointly, it’s $500,000 tax-free.

Buying a vacation home sounds glamorous, but the truth is, there’s a lot of work that goes into maintaining a second home. That’s doubly true if you plan to operate your second home as a vacation rental. However, by purchasing a home in a strong housing market with high short-term rental demand, you’ll enjoy a vacation home that’s a sound investment and a great asset to your retirement.

 

Image via Unsplash

Guest blogger: Jim McKinley

Moneywithjim.org

mckinley@moneywithjim.org