What to consider when buying a vacation home

A wise friend once told me, “Think twice before you buy a vacation home.”

Those words were spoken by a real estate professional who owns a large portfolio of investment property. Buying a vacation home is not an idea to take lightly. It will change your life, routine and monthly cash flow until you sell the home.

Before you proceed, consider the following:

Your budget

When you purchase a vacation home, even if it is a condominium, your monthly expenses will significantly change. Often, they will not just increase but double. Even if you own the home outright, you will be paying monthly for utilities, property tax, and insurance. You will be paying these expenses even if you are not able to visit the home for months at a time. A home in the mountains may be inaccessible during the winter months. But it may be necessary to run the heater around the clock at a low temperature so that the pipes do not freeze. This can create a surprisingly high gas or electricity bill. This expense is for maintenance purposes only. It brings no joy, but it is necessary.

Before looking for a home, pencil out your budget. Can you afford to purchase the home outright, or will you have a mortgage? Have you saved enough for a down payment? Can you still live comfortably if you are paying for the additional expenses of a mortgage and the costs associated with living in and maintaining a vacation home?

While day-to-day operations can be outsourced to a property management company, you are still financially responsible for maintaining the property. Your budget should help guide you in your decisions moving forward.

Location, location, location

One of the biggest mistakes that vacation home buyers make is buying their homes in markets that are driven by second home buyers. While it might seem like a logical choice, the reality is that when the economy starts to decline, the vacation home is one of the first expenses families typically eliminate. Often, this is because they need to let go of their vacation homes to protect their primary residence.

As a result, these markets can be much more volatile and unreliable than markets with more balance between vacation homes and permanent residences. And when neighbors start selling their properties, it will impact the entire real estate market, putting your investment at risk of losing value. This may not matter to you if your property is only a private vacation home and you plan to own it forever. But if consideration is ever made to turn the property into an investment home, this may affect your bottom line.

Not all homes or neighborhoods are created equal. A home that is on the water with a beautiful view is much more desirable than a home located on a busy street or near a major highway. Also, consider whether parking is available for guests. In the mountains during the winter months, street parking is often prohibited so that snowplows can maintain the roads. In the summer months, street parking may be available at a home near the beach.

Is the lot large enough to expand the home or add an accessory dwelling unit (ADU) as your family grows? Do your research in advance so that, as a homeowner, you are not surprised by the city ordinances in this new location.

Additional factors to consider are the crime rates, transportation options, amenities, schools, and overall condition of the neighborhood. Are you considering buying the best home in a so-so neighborhood or the least desirable home in the best possible neighborhood? All factors will eventually impact the resale value of your home.

Condition and age of the home

Purchasing a 20-year-old home that will need a new roof in five years may not be a top concern when you are purchasing your vacation home. But those five years can pass quickly, and the time will come when the roof must be replaced. To minimize surprises, hire the most reputable home inspection company in the region while your home is still in escrow to address any hidden problems and future expenses that may not be obvious. If the roof is covered with snow, damage will not be visible. Someone will need to physically inspect it. The final home inspection report may also provide you with a helpful tool to negotiate the costs of future expenses with the homeowner before closing escrow. If not, at least you will be aware of future expenses and can adjust your budget accordingly.

Maintenance costs

Maintaining a home does not have to be difficult and can be outsourced to a property management company for a cost. Often though, vacation homes have characteristics that make them more difficult and costly to maintain. Many people buy vacation homes in the mountains or by the water, not realizing that there could be additional upkeep than that to which they are accustomed. They are caught by surprise when their waterfront home needs to have the deck replaced because it rotted from moisture, or that their cabin in the mountains needs to be repainted every five years due to extreme weather.

Also, since you may not be at your vacation home weekly or even monthly, small issues that you would be aware of at your primary home could go unnoticed for months, until a significant issue has surfaced, causing costly, unplanned repairs. Do a bit of research regarding home maintenance before you buy a home in a region where the weather is different than what you are used to.

Insurance

The insurance industry has changed in California due to the recent natural disasters. This, in turn, has impacted the property and casualty insurance market. Many California insurance carriers are pulling out of the state and no longer providing homeowners coverage. This could affect your ability to find insurance for your vacation home. If your home has unique features, such as a log-cabin building style, you will need specialized insurance and may have a difficult time finding an underwriter to provide full coverage. This insurance will also be costly. When you find a home that you are considering purchasing, call your insurance agent to discuss the coverage, anticipated usage, and cost of vacation homeowner’s insurance.

Never consider purchasing a vacation home on a whimsy, especially while you are on vacation in a different mindset. If you do decide a vacation home is desirable, treat it as a business transaction. Do your due diligence, evaluate the pros and cons, and become familiar with the housing market and region in which you are considering a purchase before you commit to this decision. At first thought, owning a vacation home may sound dreamy, and it can be, until you need to pay for your first major expenses. Then, the reality of home ownership sets in.

Teri Parker is a vice president for CAPTRUST Financial Advisors. She has practiced in the field of financial planning and investment management since 2000. Reach her via email at [email protected].