Things to Know Before Buying a Vacation Home

So, you want to buy a vacation home? It’s the ultimate dream: your very own escape where you can go for breaks, spend time with family, and even generate some rental income. However, before you start looking for the best place to buy a vacation home, there are a few things you need to consider. Let’s dig into how to buy a second home that meets all your needs and works out for you financially.

Costs of Owning a Vacation Property

Beyond the actual cost to buy a vacation home, there are other expenses to consider, some of which are exclusive to second homes and popular holiday locations. These include:

• Homeowners’ insurance, which can be higher for vacation properties, especially in coastal or disaster-prone areas.

• HOA fees, if applicable.

• Property management fees and cleaning costs if you plan to rent to others.

• Maintenance costs, which can be higher in coastal areas or areas that have cycles of freezing and thawing (think ski resort towns).

• Maintenance and repair for features like septic systems and wells, which are less common on urban properties.

• Local handy-person check-ins for properties that sit empty for long periods.

• Furniture, linens, and supplies for vacation properties that will be rented out.

A good rule of thumb is to budget 1% to 2% of a home’s purchase price annually for maintenance and repairs. You’ll also need to budget for taxes, utilities, and insurance.

Financing Your Vacation Home

When applying for financing, prepare for your lender to apply stricter standards for a vacation home. Lenders often expect a larger down payment for a secondary home than for a primary one. You may also need a higher credit score to secure financing.

If you plan to rent your vacation property, lenders may not count all of your projected rental revenue as income, and they may want evidence of rental demand in the area. Be realistic with your projections when you present your financials to avoid future issues.

Personal Use vs Renting

One of the biggest decisions when you buy a vacation home is how to balance personal use with rental income. This decision doesn’t just pertain to how you use the property; it also affects financing, taxes, property management, and location selection.

If you’re using the home primarily for personal enjoyment, focus on locations that are relatively close by and properties that match your lifestyle and interests. However, if you’re counting on rental income, focus on:

• Locations with proven rental demand.

• Furnishing the home in a way that will appeal to a broad range of renters.

• Limiting personal use during peak periods.

For taxation purposes, the IRS treats rental income as taxable depending on the number of days it’s rented out and how often you use it personally.

• If you buy a vacation home and rent it out for fewer than 15 days a year, you don’t have to report the rental income. In these cases, the IRS regards the rentals as incidental.

• If the property is used primarily for rental purposes, you have to report all the rental income, but you can deduct all your normal rental expenses. You can even claim a loss if your expenses exceed your rental income. However, you have to limit your personal use of the property to 14 days or 10% of the rental days, whichever is less.

• If you use the property personally for the greater of 14 days or 10% of the days it’s rented, it’s classified as a personal residence. You still have to report all the rental income, and you can deduct expenses, but only up to the amount of the rental income. With this classification, you can’t claim losses.

When you buy a vacation home, carefully consider how you plan to use it and the tax implications of each option. You’ll also want to keep careful track of rental days, personal use days, and expenses.

Best Places to Buy a Vacation Home

As with all real estate purchases, location is key. Here are some things to consider:

Travel Time

When you buy a vacation home, you’ll likely need to drive or fly there. Most experts suggest sticking to something no more than a 3 or 4-hour drive from your primary residence if you plan to use it yourself. If you’re going to rent it out, location is less of an issue.

Climate and Seasonality

Research property use in the areas you’re interested in and explore the rental market. Four-season homes are easier to rent out year-round, while beach properties and mountain rentals vary by the time of year. You can also find vacation homes that offer the best of both worlds. For example, if you buy a vacation home in Vermont, you can take advantage of skiing during the winter, and hiking the rest of the year.

Local Economy and Employment 

The best places to buy a vacation home have diverse industries and steady job growth. In these areas, the economy tends to be more stable, and properties are more likely to increase in value over time.

Tourist Traffic

If you plan to buy a vacation home and rent it out, the most popular tourist areas are a good bet, but think broadly to adjacent communities and emerging areas. For example, a possibly good place to buy a vacation home in Florida is the Florida Keys, where tourism is high year-round, and property values have steadily increased. However, Florida offers dozens of other active tourist areas where prices are lower and rental rates are just as high.

Beyond Florida, other popular vacation home markets include mountain communities in Colorado, Tennessee, and North Carolina, lakefront destinations like Michigan, Wisconsin, and Minnesota, desert locales in Arizona and Palm Springs, and wine country locations in California and Oregon.

Property Management Options

Unless your vacation home is close to your primary residence, you may need a property manager to open it up for renters, clean it between stays, and take care of basic maintenance tasks. Even if you don’t rent the property out, it’s a good idea to have a local person available to check on the property, do seasonal maintenance, and keep it looking occupied when you can’t get there.

Property managers typically charge between 15 and 30% of rental income and may charge additional service fees. Although this may seem expensive, good professional property managers can help you generate higher income through effective marketing and pricing and by offering a good customer experience.

Questions to Ask

Choose a property manager with plenty of experience in the area. Some questions you can ask to find a reliable person or company are:

• What services are included in your management fee? Are there any extra charges?

• How many properties do you manage during the season?

• How do you market properties, and how do you price them to attract bookings?

• How do you screen renters?

• What’s your process for cleaning, maintenance, and restocking between stays?

• How often will you send me reports, updates, and payouts?

• Who will be my main point of contact if I need to speak to you?

• Do you handle guest communications, checkouts, emergencies, and disputes directly?

• Do you have recommendations from other property owners to share with me?

If you plan to handle property management tasks yourself, be realistic about the amount of time it will take. There’s quite a bit of work involved in handling it effectively, but some owners do enjoy doing it themselves.

How to Buy a Vacation Home

Although we associate vacation homes with relaxation and family time, there’s a lot involved in choosing one. Do your research, talk to other people who have vacation homes, and spend some time looking into different markets, rental potential, and property management options. Once you’re ready to buy, work with a real estate agent who has experience in the area and who understands the local rental market. If you’re prepared and have considered your options carefully, your second home could be well within reach.