Deck chairs on dock overlooking lake of vacation home.

Buying A Vacation Home: A Complete Guide

9-Minute Read
Published on December 26, 2023
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Are you tired of the uncertainty that comes with staying in hotels during vacations? Do you dream of owning a property in a serene location like a beach house or a mountain cabin? If so, you may be considering buying a vacation home.

Should You Buy A Vacation Home?

While having a vacation home can be a great and fulfilling investment, it requires you to review your finances to determine whether buying a second home makes sense for you. A vacation home does come with many benefits, but there are some drawbacks, too.

Pros

By purchasing a second home, individuals can gain exposure to a potentially appreciating asset and generate income through rental opportunities. Investing in real estate and owning a vacation home is also a wise strategy for building wealth. There are more benefits that come from owning a vacation home, including:

  • Saving on lodging: By owning a vacation home you can avoid expensive hotel rates and fees.
  • Cooking for yourself: Having a kitchen will make it easier for you to cook while on vacation, allowing you to save on dining expenses and enjoy more personalized meals. This can be especially beneficial to those with dietary restrictions.
  • Providing more space: A vacation home typically has more room to relax, entertain, and accommodate additional guests, which can enhance your vacation experience.

Cons

While there are many advantages to owning a vacation home, there are some downsides as well:

  • Two mortgages to pay: A potential downside of having a second mortgage is the risk of taking on additional debt and potentially overextending oneself financially.
  • Act as a landlord: Being a landlord of a vacation home you rent out can be a drawback if the homeowner struggles to find tenants or incurs additional costs related to maintenance, repairs and property management.
  • The property may not appreciate: If the value of the second home doesn't appreciate over time, it may result in financial loss on the investment.
  • Risk of default: There is a potential risk of default on a vacation home during a financial crisis, as homeowners may be more susceptible to difficulty paying on two homes compared to one primary residence.

What Qualifies As A Second Home?

When it comes to mortgages, a property falls under one of three categories: primary residence, second home or investment property. The main difference lies in the purpose of the property, While a primary home is typically intended for personal living, a second home is a residence that is occupied by the owner for a portion of the year.

To be considered a vacation home, your vacation property must meet the following requirements:

  • Must be occupied by the owner for a portion of the year
  • Cannot be another person’s primary residence
  • Must be accessible year round
  • Must be a one-unit dwelling
  • Cannot be subject to any rental, timeshare, or property management agreements

It’s important to note that different lenders may have additional requirements and restrictions. Therefore, it’s advised to discuss your expectations and intention for the property with your lender at the beginning of the process.

What Second Home Status Means For Renting Out Your Vacation Home

A second home is a property owned solely for recreational purposes and is often located in a desirable location such as a beach or mountains. It serves as a gateway from the primary home. If you're interested in renting out your vacation home, there are certain requirements and restrictions you should be aware of. The length of time the owner occupies the property is a crucial consideration. To qualify as a second home for tax purposes, the owner must demonstrate personal occupancy for at least part of the year, ensuring that the property is primarily used for personal enjoyment rather than as an investment property.

There are various loan options available to homeowners who want to rent out their property long-term. For instance, an investment property loan is designed to finance the purchase or refinance of properties intended for rental purposes. This loan typically offers competitive interest rates and favorable terms, allowing owners to capitalize on the rental income generated by their vacation home.

Additionally, homeowners can turn to Airbnb and other peer-to-peer apps to generate passive income by renting out their vacation homes. These platforms connect property owners with potential renters, allowing owners to maximize their earnings while minimizing the time and effort required in managing rentals. Reviewing the legal and tax implications associated with using these platforms is essential, as they can vary from country to country.

How To Buy A Vacation Home: Key Steps Of The Purchasing Process

Buying a vacation home is like buying a primary home. Here are four key steps and what you should expect along the way.

1. Determine Whether You Can Afford It

If you're thinking about purchasing a vacation home, it's important to consider whether it's feasible based on your current financial situation. While rental income could be a possibility, owning a second home comes with numerous expenses that may only be partly covered by the rental income. And that’s only if you decide to rent it out.

Before making a decision, determine if you can afford the total cost of owning the home. To calculate the total cost, include mortgage payments, property taxes, insurance and estimated maintenance costs. If you plan to rent it out when you’re not using it, consider income you may generate and subtract it from the total cost. However, you’ll also need to factor in potential losses, such as vacancies or unforeseen repairs.

When figuring out if buying a second home is best for you, start by asking yourself these questions:

  • How much will I use the home?
  • Will I rent the home to others?
  • How much mortgage payment can I afford each month?
  • Am I prepared to take a loss on the property?
  • What will I do if the property doesn’t generate revenue as planned?

2. Decide What Type Of House You Want

When choosing the right type of vacation home, for example a condo or a single-family detached house, make sure it suits your lifestyle, needs and preferences. Condos offer lower maintenance responsibilities, prime locations and shared amenities, but may come with limits on customization. A single-family detached house provides greater privacy and control, with increased maintenance responsibilities and potentially higher upfront costs.

The type of property also depends on your ideal location. It’s best to research potential areas based on proximity to amenities, climate and overall vibe. Evaluate amenities, future resale value and the balance between community living and personal space. Visit properties to get a firsthand feel for the neighborhood and seek guidance from a local real estate professional to navigate the decision-making process effectively.

3. Determine Whether You Want To Rent Your Second Home

To decide whether to rent your vacation home, you should consider several factors, including return on investment (ROI). Begin by reviewing the value of the property, then consider the mortgage requirements, including the interest rate, down payment and closing costs.  Compare other properties in the area to assess the average rental rates, too. Last, consider additional expenses, like maintenance costs, homeowners association (HOA) fees, home improvements, property taxes and homeowners insurance. These expenses can vary based on local regulations and the property’s value.

Remember that some lenders may have limitations or restrictions on renting vacation homes. Check in with your lender when considering renting your second home.

4. Qualify For A Second Home Mortgage

If you need to purchase the home with a mortgage, make sure you meet the following requirements to qualify. Keep in mind these will vary by lender.

  • Credit score: Lenders typically require a minimum credit score of 620 for a second mortgage. This score reflects the borrower’s creditworthiness and ability to handle additional debt.
  • Debt-to-income ratio (DTI): This show how much of your income goes toward paying your debt. The maximum debt-to-income ratio is typically around 43% for most lenders.
  • Down payment: Lenders may require a higher down payment for a second mortgage because it additional mortgage. A minimum down payment of 10% is typically required, depending on the loan.

Once you’ve determined that you’re eligible and secured approval for a second home mortgage, you can start finding an experienced real estate agent to aid in your search for a second home.

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Other Considerations When Buying Your Vacation Home

If you're thinking about purchasing a vacation home, it's important to consider all the potential costs, not just the price of the house.

Maintenance And Repair Needs

To make sure you’re financially ready to cover these expenses, you should consider budgeting 1% of your home’s purchase price for maintenance. While this may not be a perfect measurement, it can be a good rule of thumb for calculating how much you should have in savings. Additionally, it’s important to consider the age and condition of your home. Older homes typically require more maintenance and can be more expensive to keep in good condition.

Insurance

If you're planning to buy a property that is situated near water or heavily forested, it is essential to estimate the amount you will spend on insurance. Such areas are at a higher risk of experiencing environmental hazards such as wildfires, hurricanes and flooding. Homeowners who own vacation homes in coastal areas, for example, may require hurricane insurance to protect their investment from damage caused by severe storms. Similarly, if you own a vacation home in a flood-prone area, you may need flood insurance to protect against water damage caused by rising water levels.

Taxes

It's worth noting that second homes are eligible for the mortgage interest tax deduction. However, there are certain requirements to qualify for the deduction. The same goes for reporting your rental income. For example, If you rent your home for less than 15 days, you’re not required to report any income to the IRS. However, certain rental companies (if you use them) may report your income – even if it was less than 15 days.

In terms of paying taxes on your rental income, keep in mind, you may be able to deduct any related expenses. It’s recommended you work with a tax professional to ensure that you report and deduct the correct amounts.

Buying A Vacation Home With Friends

One way to make purchasing a vacation home more affordable it to ask friends or relatives to co-own the property and share the costs.

While sharing a vacation home is not uncommon, it requires a lot of cooperation and compromise. Here are some questions that to ask when debating on sharing a vacation home property:

  • What happens when one of us can’t pay for our share of the mortgage?
  • Is everyone else able to cover their portion?
  • What if the person responsible for making payments is late one month?
  • What happens if someone decides they want out of the deal?
  • Can everyone else afford to buy out their share?

Buying A Vacation Home FAQs

Now that we have gone over the specifics of buying a vacation home, let's look at some frequently asked questions about buying a vacation home.

Is it harder to get a mortgage for a vacation home?

Getting a mortgage for a vacation home can be challenging. Lenders consider vacation homes higher risk due to the potential for default. However, there may be various types of home loan options available. It’s important to review your financial situation and consult with a mortgage lender to find the best fit for you and your financial needs.

How much should I spend on a vacation home?

The cost of a vacation home can vary widely depending on factors such as location, amenities, and size. It’s important to consider your financial goals and priorities when determining how much to spend on a vacation home. Also, consider the maintenance costs, property taxes and potential rental income when budgeting for a vacation home.

Is it better to buy a vacation home or an investment property?

A vacation home and investment property both offer potential financial benefits, but they have different considerations. Vacation homes can provide relaxation and enjoyment, but they may not generate a steady income. On the other hand, investment properties offer the potential for steady rental income.

How can I afford two homes?

Affording two homes can be difficult for some and requires the right financial strategies. One option is using a home equity loan to buy another house. A home equity loan allows you to borrow against the equity in your existing home and use the funds for the purchase.

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The Bottom Line

As you can see, if you want to buy a vacation home, you must ensure that you’re ready. Speaking with a mortgage lender and real estate agent will help you determine if the time is right. If you’re ready to get your home away from home, you can start the process to buy a vacation home today.

Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.