What to Consider Before You Buy a Vacation Home
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This is Your Money Matters from The Wall Street Journal. Welcome to Your Money Matters. I'm Jennifer Strong in New York. A second home can mean endless headaches, unexpected costs, and shattered plans. Joining us with what you need to know before you buy is reporter Jeffrey Brown. Jeff, you say if you're going to take the leap, it should be for the right reason. What do you mean?
Well, the people I interviewed, most of them suggested that you buy because it's a place you really want to have. You want to have it for vacations or maybe for a retirement home someday. They cautioned against buying a second home purely as an investment, unless you're really a pro at this and you know what you're doing and want to spend a lot of time working at it.
No one who owns a home will be surprised to hear that costs can really add up. But what are some of the pitfalls with a second home that we might not think about?
I think the common denominator from the people I interviewed was being overly optimistic about finances. So people buy a home and they look at the big costs, the mortgage, the down payment, taxes and insurance and things like that. And then they look at the rental rates and they say, well, if I can rent it 15 or 20 weeks a year, I'll make money on it and pay for my vacation home. And what actually happens is that the costs are higher than that because you have breakdowns and repairs and cleaning and maybe a fairly high commissions for brokers who get you renters and that sort of thing. Even the online outfits that people rent through now can charge pretty high fees. So the big mistake is not counting all of those things in and then overestimating the rental income.
You assume if you can rent it half the year, you'll make a lot of money, but you may not rent it half the year. There are renters who bow out at the last minute. or weeks that just don't appeal to people. It's difficult to get the money right, and you need to have a big buffer to make these calculations work.
And how should somebody go about picking a location if they're going to make this kind of purchase?
Why should you buy a vacation home for personal use rather than purely as an investment?
Well, the people I talked to suggested finding a hot location, obviously, a place that people want to go. So if you're looking for a winter location, Florida is a good place because you can be fairly assured of warm weather in Florida, whereas some of the other southern states you can't. but you also need to look at the competition on the market. So if there's a huge building boom going on, it may mean there'll be a glut of vacation rentals and you won't get the rental income that you're counting on. It needs to be all of those things, plus a place that you want to go yourself if you're going to use it as a personal vacation place and not just as a rental property.
We're talking to Jeffrey Brown about vacation homes and you're listening to Your Money Matters from The Wall Street Journal. Thanks for listening, everyone. Jeff, something else you warn about in your piece is not to get tripped up by local rules.
Well, this is right. There may be local ordinances that affect who you can rent to or who you cannot rent to. You have to be very careful not to discriminate against people. That may include you need to look into things like can you bar 20-somethings or teenagers who are coming on spring break, you know, that may not be the kind of household you want to have in your place. There may be rules that say you can't do that. There may also be rules from the Homeowners Association, if you're in that kind of community, that say what is the minimum amount of time you can rent? Is it one night and you can rent through Airbnb? Or do you have to rent for a minimum of a week or a month or something like that? And those rules can be crucial, and you can get into big trouble for violating them.
I imagine there have to be any number of tax implications as well if you're trying to count this as a second home.
Yeah, there are taxes to worry about at various levels. You may have local taxes. There may be a visitor and tourism fee that you have to pay on top of a sales tax, which might be paid to the state.
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