Investors can sometimes get caught up in the prestige and lure of owning a vacation home.
While a vacation home can be a good investment, this is not something anyone should rush into buying without some careful planning and due diligence. Here are a few questions you should ask yourself prior to buying a vacation home.
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4 Essential Questions to Ask BEFORE Purchasing a Vacation Home
Question #1: What is the purpose of buying a vacation home?
Do you want to buy a vacation home so your family will have their own place at the beach or another destination spot?
If so, you might be able to accomplish the same thing by renting a home from another owner at a flat monthly rate. The advantage here is that if your family grows out of or tires of the vacation spot, you can simply not renew the rental agreement.
Another benefit is that you do not have to pay the property taxes, insurance, furnishings, etc. On the downside, you will not benefit if the vacation home appreciates a lot in value.
Is the vacation home going to be used as an investment?
If so, take some time and interview other homeowners. A great place to find these owners is on VRBO or HomeAway. Call them up and ask them specific questions, such as: how is the rental market, what is your average nightly rate, what percentage of days is your house rented a year, would you buy another vacation home again in the same location. Most people love to help others out, and they like to impress people with their knowledge.
If you are buying the house as an investment property, then you should be able to find out what all your expenses are going to be, and if you do your homework correctly, you should be able to accurately estimate what your income will be. Once these two figures are worked out, then it should be a no-brainer if you should buy the property or not.
Question #2: Are you going to finance the vacation home?
A vacation home is a luxury purchase, so proceed with caution if you are going to finance the property. Most mortgage companies are requiring at least 20% down (I’ve heard as much as 40% in some cases) before they will bless any loan.
When you are working your numbers out, do yourself a favor and estimate the income on the low side and the expenses on the high side. Nothing is more heartbreaking than to hear the horror stories of investors who are paying out of pocket each and every month just to keep the lights on in their vacation home.
One of the best pieces of advice is to purchase a cheaper vacation home in the beginning. This will give you an opportunity to see if you and your family use the property enough or if it is a good investment. If you find that owning a vacation home is not for you, then a cheaper house should be easier to sell. Remember, there are more potential buyers for a $100,000 house than there are for a $500,000 house.
Question #3: How are you going to handle renting out the property?
There are many ways you can have your property rented out: do it yourself and advertise it on various websites, rent it out to only friends and family, or have your property management company handle all the bookings. My suggestion is to do a combination of all three, especially if this is a true investment property.
If you are going to do the bookings yourself, make sure you have the time to break away and talk to a prospective renter. Remember: most potential guests do not call after 5pm or on the weekends; most call during normal business hours. If your job does not allow you the opportunity to break away and talk to these guests, you might want to pay someone a commission who does have the time.
Question #4: Do you know your exit strategy?
Every good business plan has an exit strategy, and buying a vacation home is a business. As with any business, the plan can always be updated and changed, but you should know what your exit strategy is before you purchase.
Do you want the property to appreciate to a certain level before your sell? Do you want to get out of the property when your family is getting tired of going to the same vacation spot time after time?
When you are thinking of your exit strategy, think about how you could get rid of the property if you really had to. These are not always fun things to think about, and they are really hard to plan for. But the more you are prepared, the better off you will be in the future if something unexpected comes up.
Buying a vacation is a good investment, but it is not for everyone. You need to plan and think through the good and bad scenarios to see if such an investment is right for you and your family.
If someone, such as a homeowner or realtor, is putting a lot of pressure on you to buy a vacation home, really take your time and study all the facts. Most of the time, there is a reason why they are putting on a full court sales pitch.