Should You Buy into Your Vacation Home Dreams?
During the dull, gray days of February and March in the Pacific Northwest (PNW) it is appealing to dream of sun and sea or sun and ski. A closet full of clothes and a kitchen stocked with your favorite food and beverages can certainly make quick breaks to a vacation home appealing! A second home in California or Mexico or a cabin retreat near Mount Hood or Mount Bachelor could be your ticket to easy, breezy vacations at the drop of a hat with your family and friends.
Or, is a vacation home just another financial drain? Will you wake up mid-summer and think “The PNW is glorious in the summer, why would I want to get in my car or on a plane to go somewhere else?” Below are just a few topics to help you start your holiday home investigations before you sign on a dotted line.
Are you ready to commit to just one vacation location for the foreseeable future? If you sink significant funds into a home, you should want to be there instead of paying for a hotel or vacation rental in another location. Also, unless you have a reliable property manager in place, there will be upkeep and maintenance to take care of on your second home. You may very well need to spend your precious vacation time painting or fixing a window or buying a new furnace.
Is it within easy travel distance to your primary home? If you need to jump on a plane to get there you are less likely to spend the occasional weekend or have a last-minute getaway at your vacation home. And, as noted above, there may be unexpected work to do if your second home is hit by a storm or a tree lands on it or another disaster occurs. The ability to get there in a reasonable timeframe to manage disaster situations is an important consideration.
Will you want to retire there? If you are considering buying a second home with an eye to retire there, you should consider if there are activities and amenities that will interest you when you reach retirement age.
Are there medical facilities that can provide care as you age? Is the house laid out in a way that will accommodate any age-related mobility issues? Will you want grown children and their future families to stay with you when they visit you? If so, is there space for them? Or, are there hotels or rentals nearby?
Should you rent it out? If you have dreams of rental proceeds offsetting the costs associated with a second home, do you have time and resources available to manage the rental process? Will you be able to use the house when you want to? Or will you need to rent it out to others during the peak season and stay there in the off-season? Owning a ski chalet you can only stay in when the snow is gone or a beach house that is only available in unbearably hot weather conditions may not fit with your vacation ideals.
If you do rent it out, is there a long-term market for rentals? When the economy is going strong, vacation rentals are at a premium – more people have ready cash available for travel. But when the economy takes a downturn, second homes are often the first asset to be sold. Will the location of your home be desirable enough to maintain your original purchase price? Is it already saturated with other vacation homes chasing short- and long-term renter dollars?
Will you be able to meet your long-term financial goals? If you buy the vacation home of your dreams will you still be able to retire at the age you originally set? Are there other savings priorities such as funding college educations or creating financial security for unexpected future expenses that will be affected by investing in a second home? Oftentimes there are hidden costs such as property taxes, HOA fees, maintenance fees and so forth that need to be factored into your financial planning.
Have you researched the tax implications thoroughly? It’s always a good idea to involve your CPA in discussions about investing in real estate. As tax codes change, your CPA should be able to help you navigate what is tax advantaged, and what isn’t.
Allen Capital Management | Allen Trust Company can help you with questions regarding financial planning and tax preparations. If you are one of our clients, or would like to be, please contact us at (503) 292-1041 or via email at firstname.lastname@example.org.