Dreams for Sale: Considerations Before Buying a Vacation Home

Dreams for Sale: Considerations Before Buying a Vacation Home

Vacation living can be fabulous. The stress of daily meal preparation, schedules and work commitments fade away, allowing you to reconnect with family and friends in a way that can be challenging to do in your regular life. As soon as you return home from a great vacation, it is common to think, “How soon can we return?!” The purchase of a second home in your favorite vacation spot may seem like a dream come true or even a “necessity” after the shelter-in-place experience of 2020. And given the current hot real estate market, it may feel like a good financial move as you consider the price appreciation you could experience after your purchase and how much you’ll save on hotel bills. And all that could be true but buying a second home is a big commitment worthy of careful consideration. Here are five things to think about before you dive in:

Cost: Can you afford it? This might seem obvious, but beyond the initial cash outlay for the purchase, there are insurance, maintenance and possibly property management expenses to consider. If your vacation home will sit vacant for the majority of the year, hiring someone to keep up the yard and make sure there aren’t any unwanted visitors—human or animal—should be added to your list of expected routine expenses.

Location, Location, Location: Is your ideal vacation home within driving distance from your primary residence, or does it require a full day of travel or a plane ride to get there? While the image of a remote, tropical paradise may be dancing in your head, homes in faraway places aren’t likely to be used very often making them expensive on a per visit basis. Additionally, the maintenance and insurance requirements can be more significant—or potentially impossible to obtain—if your piece of paradise is in a flood, hurricane or forest fire zone.

Investment Potential: Will your vacation home simply be a “use” asset or are you expecting it to do double duty as an investment asset as well? While it might seem like you just can’t lose when investing in real estate, estimate the expected return on your investment by viewing comparables in the area to determine if the money could be better invested elsewhere. Most vacation homes aren’t used as often as planned, so buying a place with rental potential can help offset the expenses you’ll incur and possibly put it in the affordable range or better yet, make it profitable.

Tax Impact: If you decide to rent your vacation home for more than 15 days per calendar year, the IRS will want their share of your income. However, you will be able to deduct operating expenses like insurance and repairs based on the number of days it was rented versus maintained for personal use. And like your primary residence, mortgage interest expenses and property taxes are deductible to a point. According to the IRS, a married couple filing jointly who itemize their deductions can deduct interest on mortgage debt up to $750,000 and property taxes up to $10,000. 

Exit Strategy: Do you plan to pass your vacation home to your kids someday or sell it when the market is particularly hot? Perhaps today’s vacation home is where you plan to retire. Thinking about your ideal ownership time horizon before making a purchase is important. If you plan to be in it for the long haul, finding a place with year-round appeal that will work for your family now and in your Golden Years makes sense.

If buying a piece of Shangri-La means sacrificing your long-term financial goals in other areas, the cost is too high. But for many, owning a vacation home is a dream realized.

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Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.


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