February is the month we receive the most calls from our clients inquiring about the potential purchase of a vacation home. Most have just spent time on the beaches of Hawaii, slopes of Colorado, or in the desert air of Arizona and now they are enthralled with the idea of purchasing property in these locations. If you or your loved ones have found yourself discussing this exact thought, here are some issues to consider when discussing if a purchase is right for you.
Why are you buying?
Before buying a home, we encourage clients to really consider their motives. Are they purchasing it for family retreats? Are they purchasing it with the intent of moving post retirement? Or are they purchasing it just for the status symbol?
For those that intend to use a vacation home as their principal residence once they retire, please consider the following: medical care facilities, proximity to children and grandchildren in retirement years, and the estate taxes accessed by the estate. Purchasers also look at this as a potential investment opportunity, with the ability to receive rental income and price appreciation to potentially offset other expenses. Online vacation rental sites have made it easier than ever for owners to rent out their properties:
Where should you buy?
Current hotspots for vacation home purchases have included Florida, Colorado and Arizona. The specific area has greatly differed as some enjoy being away from the busy main areas and being able to relax with family. Others have loved the resort areas that makes enticing friends and family to visit much easier, as well as subsidizing rental income. With 34% of all vacation homes being more than 500 miles away, a major factor to consider is travel costs associated with the new location. This has caused some buyers to underutilize their purchase and not get the number of family visits they initially anticipated.
A good way to research potential markets is leveraging the depth of information the internet can provide. Clients have utilized tools like:
Zillow.com: Ability to search by location and price
Realtor.com: Involves real estate agents, connected with National Association of Realtors (NAR)
Although these tools can be great for the information gathering stage, we highly encourage clients to visit multiple times to learn the area trends and locals before making any final decisions.
How much can you afford?
The median purchase price for vacation homes in 2013 was $168,700, with prices actually rising 12.5% during the year. On average buyers were making a 30% down payment and taking advantage of historically low-interest rates1. If you plan on renting the property, most banks charge a higher interest rate than a typical mortgage on a personal residence. This step is where we highly encourage everyone to consult with their financial professionals. It is important to bring all parties involved in your financial planning together to ensure prudent and accurate advice is given.
What unusual ownerships costs will you incur?Property Insurance: Insurance for location-specific risk: Sinkholes, hurricanes, wind and flood
Property Taxes: Can vary substantially depending on where the property is located. Look up homes previous tax history before making an offer
Homeowners Association (HOA) dues: Dues for pools, guard houses, golf courses, health facilities and general maintenance.
Potential Tax Issues
We also advise clients to consult with their tax professionals when making this important decision. Issues can arise when seeking rental income from the property you have purchased, as there are very specific income tax laws regarding the rental of vacation homes. Those rules go well beyond the scope in which we could cover in an article. Each state also has varying laws regarding taxes on estate issues and income. These can be important factors when considering the timing of your move and the amount of time spent at your new property. Having residences in multiple states can also cause complex estate issues. The type of ownership can be critical in ensuring that estate expenses upon death are minimized.
1 Association of Realtors Survey, 2013.