There are few things in life more emotionally satisfying than the realization that you’re finally able to afford a second home, that weekend or vacation retreat that not only gives you a place to get away from it all, but can also transition into your retirement home.
However much you think of it in terms of pleasure, the purchase of a vacation or retirement home requires as much planning and thought as you give to choosing a primary residence. You may feel you don’t have to be bound by the practical restraints of locating near a good school, or being close to work, but there are still some very important pragmatic factors to consider before you rush into a purchase.
Buyers are less impulsive than before and the combination of the 2008 economic downturn and the home search capabilities of the internet have hastened that change. According to Barbara Watkins, an Associate Broker at Benson and Mangold Real Estate with 40 years of experience selling Talbot County homes, people now do more research. “It used to be that buyers would look at just 3 to 4 houses before making an offer, but with the internet they can preview dozens of homes before visiting the ones they like and deciding on a purchase.”
It makes sense to be practical, because if you buy a house that doesn’t work for you and put it back on the market within a couple of years you can generally expect to take a loss on the property. A year or two is not enough for substantial appreciation in real estate values today, and even if you break even on the selling price, you’re still going to have to deduct the expense of an agent’s commission and probably legal fees.
Of course, if you fall in love with a place and have the means to indulge your fancy, you can buy it without worrying about the investment aspect. But even so, there are things for vacationers with stars in their eyes to consider.
Most people have a vision of the kind of getaway place they’d like to have – a rustic cottage in a quiet Eastern Shore town, or perhaps a home with dock on the waterfront. But, often, what we actually do with our free time has little in common with that fantasy. It helps to make a list of the leisure time activities you enjoy, in their order of importance. If first-run movies and dining out are high on your list of fun things to do, are you really going to be happy in a remote location with no entertainment facilities nearby? If you can’t think of anything worse than sunburn and tend to get seasick, you won’t enjoy a community where most of the social activities are centered on the water.
You should also calculate how often you intend to use your weekend retreat and how much time and money you’re willing to spend traveling back and forth.
Think about how you’re going to maintain the property, too. Do you want to spend your “relaxing’’ vacation doing repairs and maintenance? If not, include the cost of hiring someone in the price of owning the place.
Another important question to ask is how seasonal changes affect your choice. What seems like a delightful little house perched on the water that offers a spectacular view in summertime may become less enjoyable when the wind whistles over the water in the winter.
Speaking of winter, who is responsible for plowing your road? Are there separate fees for garbage collection? Is there an association fee? Is Fido a welcome addition to the community, or are pets banned altogether? Services and privileges you take for granted in your primary home may be “extras” in a vacation community. Ask as many specific questions as possible.
In financial terms, investigating before you invest in a second home is especially important because the vacation home is the most volatile segment of the real estate market. It’s the first to be affected by changes in the general economy. And when cutbacks begin in a specific locale, nearby second homes immediately begin to appear on the market because recreation expenses are the first part of the family budget to come under scrutiny in tough times. A second home is almost always a luxury and, like other luxuries, when it’s time to economize, it gets crossed off the list very quickly.
To protect yourself against fluctuating markets, try to find a vacation area that appeals to you but still has a fairly stable growth pattern that’s neither explosive nor leaden.
After you’ve settled on an area and start to look for a place to buy, remember that although you’re thinking of shedding all your daily cares when you travel to your chosen getaway spot, rules and regulations still apply.
Barb Watkins says, “A lot of people just don’t think of checking out property when it’s a vacation home the way they would if they were buying a full-time, retirement place. So, they find out later they can’t add a porch or a pool because of zoning restrictions, for instance, and they get very upset.”
Local laws aren’t automatically going to be relaxed just because you’ve come to a place to relax. In some small, rural towns, restrictions are even tougher than they are in urban areas. So, if you’re planning on adding to a house, or putting in a swimming pool, make sure in advance that your plans are acceptable before you buy.
In fact, some planned communities insist that home buyers conform to a long list of architectural requirements, including the materials and colors people can use in their homes.
As Added Income
One appealing aspect of the second home market is the dual purpose it can fulfill. You can use it yourself as a vacation spot during the off season, and you can also make money on it by renting it out to other vacationers for part of the year.
In places in Talbot County, for instance, it’s not unusual for homeowners to be able to make an entire year’s worth of mortgage payments by renting for just the summer months between Memorial Day and Labor Day, especially the waterfront homes. However there are parts that are simply, for whatever reason, not desirable. If you look for a home in a resort area and plan to pay for it, at least in part, by renting it out again, make sure you can get the kind of rent you expect by checking with local real estate agents. They’ll be able to tell you what nearby homes rented for in previous years.
There are a lot of other factors that come into play when you plan to make a vacation home pay for itself.
You do face the possibility that you could get a bad tenant, and the legal headaches are yours alone. However, a local real estate management company can help you solicit and screen tenants, collect deposits and rents, maintain the property, and even arrange for maid and other special services for vacationers. But the cost is high.
Barbara Watkins says, “Make sure you know, before you buy, what your actual rental profit is going to be. If you buy a vacation rental, management companies generally charge between 20 – 30 percent to handle it for you. So even if you get a $20,000 rental, a portion goes to the management company, and then you have to pay utilities, association fees, taxes and mortgage payments out of yours. So your profit might only be $10,000 by the time you get through.”
You also will have to expect, if you share your vacation home for part of the year by renting to others, to spend more over the course of time for furniture and appliances than you probably would spend if you were using it yourself. Even if you opt for comfortable, less expensive furnishings for your second home, high-ticket renters expect a vacation retreat to be attractively furnished. Renters also tend to be a little less careful with someone else’s property so you’ll probably have to replace furniture, appliances, and carpeting more frequently.
And, look into the tax aspects of renting very carefully. The rules governing the amount of time you can stay in your vacation home and still consider it an investment are extremely complex and detailed, and require a real tax expert to decipher. Make sure you get that important information, too, before you buy.