The second home market is booming! In fact, recent studies by THE NATIONAL ASSOCIATION OF REALTORS? report that 23% of all homes purchased in 2004 were for investment, while another 13% were vacation homes. There are about 72.1 million owner-occupied homes in the U.S.
Many lenders require buyers to put down at least 20% on a second home, and some require 25% or more. Renting out a vacation home is a good way to cover some of the cost, but lenders often factor in a 25% vacancy rate when determining your qualification for the loan. The lesson is clear: Don’t be overly optimistic on rental income–and you’re nuts if you think the vacation home will pay for itself immediately and in perpetuity. A vacation home can be just about self-sustaining, but it takes careful planning and hard work. You shouldn’t buy a second home on the assumption that it will pay for itself. If you plan to rent your vacation home, it’s a smart idea to post the rent 10% to 20% higher than your monthly mortgage payment in order to cover costs. Chances are you’ll have to hire someone to maintain the property in your absence, and unexpected repairs are a given. Also remember that the most lucrative times to rent are the same times when you and your family will want to enjoy the getaway–summer and Christmas. You’ll also have to decide what type of property you want: a house or a condo. Condominiums are great because routine maintenance is included in the association fees, so you won’t have to hire anyone to cut the grass or make routine repairs.
Here are several steps you should keep in mind when considering a vacation home purchase.
- Start with a plan. You should start with a business plan just as you would if you were starting any new business. To be confident of a sound investment takes a lot of research.
- Make sure you are purchasing with your wallet not your heart. It’s easy to get caught up and sign on the dotted line when you see that gorgeous beach home or perfect ski resort.
- Learn about the area. Is it a new area? Or is it an older, more developed area? This makes a lot of difference, because if you are looking to purchase in an area that’s well developed, there’s less to worry about. But in an emerging market you should exercise caution to be sure that there are not so many new developments that the inventory exceeds demand.
- Leave your options open. You may want to buy a vacation home with no intention of ever renting it out. But while today it may be financially feasible to not rent your home, you’re never sure what the future will bring. It’s wise to purchase in an area that allows you to easily rent your property.
- Use your real estate agent. Pick your agent’s brain. Ask tons of questions. Scour through his or her Web site and absorb as much information as possible. After all, your agent is getting paid to be knowledgeable in this area. Use his or her expertise to your advantage.
- Look for large, reputable developers. Developers do more research than any single buyer could ever dream of doing. They invest thousands of dollars into researching the market, tourism, growth and inventory. So if you follow large developers, your chances of failing are significantly less.