Editor’s note: Part 1 of a two-part series.
I met a good friend for coffee when he asked me what I thought of taking equity from a principal residence and using it to purchase a vacation home.
My knee-jerk thought was, “Don’t do it!”
I look at real estate purchases other than a principal residence as an investment and a vacation home is not an investment.
But, I inquired with him further.
He considered a vacation home as a place you can call your own to enjoy with your family who would look forward to going to relax and unwind.
I started getting past my objectivity and then reality struck.
I explained to him some things to consider from a financial aspect, including potential tax consequences in owning a vacation home.
I thought it would be best if I highlighted several factors to consider when purchasing a vacation home.
Buy in a location you enjoy
Enjoying the area and finding it to be your frequent go-to vacation is probably the main reason for considering a purchase.
You may look at it as a place to make memories with your family and friends.
There is a level of comfort that is offered in vacationing in your own home, which will also be less stressful than looking for a hotel or a rental.
You may later find you also want to discover new locations for vacationing, but you may feel you need to go to your vacation home to get your “money’s worth,” to check in on it and to do some maintenance.
Make a plan
Having a plan is a good idea even if you intend not to rent it out because it is good to know what it will cost you.
If you tend to work a lot and take limited vacations, consider the costs compared to staying in someone else’s vacation home or in a hotel.
The cost per day could exceed your expectations.
Do you plan to retire in this home? Do you have kids in college who could stay in the house? Do you have friends, relatives, and clients who you can offer to use?
These are all factors to consider.
If you plan to rent it out, you may lose some convenience as well as comforts because of time constraints or you may not have high-quality furnishings, a pool or hot tub, water and snow gear, or personal items accessible.
Plus, there are tax ramifications regarding how much you use the property or rent it out that must be considered.
Consider all the costs
Whether you rent your home out or keep it for your own use, it is good to know all the costs.
This is when having a relationship with a local real estate broker is vital.
In addition to your loan and interest payments, you will also have property taxes, insurance, and furnishings to purchase. Depending on the location, you may have association dues as well as snow removal and winterization costs.
In Part 2, we will take a look at the tax considerations as they can get complicated.