Real estate investors get intrigued by the popularity of vacation home investment. But they have to consider a few things before deciding to invest. In this article, we will explore the pros and cons of investing in vacation homes. It will work as a roadmap for you to cherry-pick the right property.
Vacation Home Investment
Vacation home is a second home which can be an investment for personal use or rental purposes. You can spend quality time with your friends and family in a vacation home. It can be an ideal requirement place. Some people prefer to use vacation property solely for personal use. Conversely, many investors go for renting the property. To gain the financial benefits, investors have to select the right property in the right location.
What are the benefits of Investing in Vacation Home
Personal Vacation Home
Hotel accommodation cost is one of the highest costs among the vacation expenses. You can avoid spending your hard-earned money on hotel accommodation expenses by investing in a vacation home. It helps to plan vacations without thinking about the availability of hotel rooms during the peak seasons. Moreover, you can decorate it according to your taste.
Earning Additional Income Short term rental property
Vacation home rental guarantees a steady inflow of passive income to pay mortgage and maintenance expenses. Buying vacation homes in tourist destinations creates high demand among tenants, especially during peak seasons. During off-seasons, you can lower the rent fee to attract tenants. You can list your property for short-term renting on the most visited renting sites like Airbnb, and Booking.com to maximize your earning.
Property Value Appreciation
Value of vacation homes may appreciate over time which makes it a considerable investment opportunity. You can diversify your portfolio by adding real estate. You can also use it as your permanent residence once you retire. Furthermore, the property can be used for solving any unforeseen financial emergency.
Claiming Tax Benefits
You can deduct your property taxes and mortgage interest of the vacation home depending on how it is used. If you rent the property, you can deduct repair, maintenance, occupancy tax, property depreciation, listing fee, mortgage interest, insurance premium, and other expenses while determining tax. Tax professionals can help you to optimize tax benefits.
What are the Cons of Investing in Vacation Homes
Property Management Hassle
As a homeowner, you have to pay property maintenance expenses (such as repairs, cleaning decoration, etc.). If you rent the vacation home, it will require regular maintenance after each tenant checks out. One of the major hassles is managing the property from far away. Regular maintenance, finding tenants, negotiating and dealing with them in person can be difficult. But you can hire a property manager to conduct this task. They can manage the property efficiently as they have enriched knowledge about the property’s location.
Down Time Loss
Market demand for different locations may fluctuate with the vacation seasons. During vacancy, you have to pay the necessary costs anyway. In the case of renting, advertising and listing costs have to be paid. You need to plan strategies to offset the downtime loss. Here you can lower the rent, and offer incentives to attract tenants during off-seasons.
Higher Down Payment
The down payment cost of a second home is higher than primary residence. Usually, the down payment of a second home is at least 10%. This substantial amount creates a burden on the homeowners. Additionally, the homeowners need to have a higher credit score to avail of loan from banks for buying a second home.
Buying the Right Vacation Property for Investment
After evaluating the pros and cons of investing in vacation homes, you need to develop a strategy for purchasing property. There are a few important factors that have to be considered before investing in vacation homes.
Choose the Right Location
Profitable vacation property investment depends much on the property location. Buying property in tourist destinations can boost income. Moreover, you should consider locations that remain in demand during multiple seasons. The additional maintenance cost of buying property in the selected area is another important factor.
Evaluate Rental Demand
Research about the market trend of the locations. Look into the rental rates and occupancy rates to augment the prospective income. Know the seasonal demand and calculate the occupancy rate. For example- the occupancy rate of rental properties near beach areas in the summer season is much higher. To calculate the occupancy rate, input the number of occupied rooms, divide it by the total number of rooms, and then multiply by 100.
Consider the Responsibilities
Being a homeowner, you have numerous responsibilities even if the location is far-flung from your residence. There are many ongoing costs and property management hassles that you need to consider. Though you can outsource a property manager, it will come with a burdensome amount of expense.
Select a Financing Option
At first, ask yourself “Am I in a financial position to buy a second home?” Contemplate all the expenses related to the investment. If the answer is positive then look into the available financial options and select the best one. Here are some of the financing options:
- Conventional loans
- Cash-out refinance
- Home loan
- Shared ownership of property
Calculate Return on Investment
You have to calculate the probable expenses to find out the potential return on investment. Some of the expenses are: down payment, property tax, HOA fees, property maintenance and repairing costs, insurance expense, home listing fee and property managers fee.
Then determine rental earnings, property appreciation value, and tax advantages and deduct all the expected and unexpected costs. This is how you calculate the return on investment. If the result seems satisfactory, you can go ahead and buy your dream vacation home!
Pitfalls to Avoid While Investing in Vacation Homes
Inadequate Location Research
Before buying a vacation property in an unknown area, you need to research by going above and beyond. Learn about the geographical location and weather conditions of the area to avoid any uncertain occurrence. hazardous weather conditions can damage your property.
Not Predicting Unexpected and Hidden Expenses
Predicting every possible expense is essential to project a reliable return on investment. There may be additional taxes or fees in the vacation home area. To add the decorative touches and furnish the home, you have to pay a large amount of money. Anticipate the utility bills and fixed costs in your total expenses.
Depending on Rental Income to Pay Expenses
You cannot solely count on rental income to cover mortgage and other expenses. Your property remains vacant during the off period when you have to pay the regular expenses. If you consider hiring a property manager, you may have to bear high-cost. This cost is usually paid with the major portion of rental income.
Fail to Purchase Right Insurance
Your insurance policy should cover the liabilities of rental property damage. Tenants may cause extensive damage to the property while staying. Insurance policies of vacation homes may be different. Insurance companies find vacation home insurance riskier. Because the damages due to accidents in vacant homes can be severe. Your vacation home’s location can be prone to natural disasters like floods or cyclones. The insurance policy must include the assurance of covering the damages caused by natural catastrophes.
Summery
Investing in vacation homes seems like a dream but it comes with many challenges. Before investing, you must give thought to factors like the location, rental demands, expenses, and local vacation home laws. Does it seem like a tiring process? If yes, you can consult the real estate agents. Their expertise will guide you to increase earnings from your vacation home investment.
