Strategies for buying the perfect vacation home

• Decision-making strategies: 6 questions to ask yourself
• 1. Can I afford?
• 2. Should I buy it with my friend, my brother, another family?
• 3. How will I use the home?
• 4. Where should my vacation home be?
• 5. What kind of house will it be?
• 6. What are the tax implications of a vacation home?
• The last line

Everyone knows the standard summer safety tips: swim only when a lifeguard is present, apply sunscreen liberally, drink plenty of fluids. But there's one item your financial advisor would probably like to add to that list: Beware the sudden, seemingly unstoppable urge to buy a second home in the place where you just spent two idyllic weeks on vacation. As one financial website puts it, summer is "a time to relax, kick back and make dumb financial decisions. "Buying a home may not be such a stupid decision, but it has to be one made with the head and not the heart – and only after consulting with financial, legal and real estate experts.

If you decide to buy a vacation home, you'll be part of an emerging trend that the National Association of Realtors (NAR) has been tracking since 2003. The 2015 NAR survey reports that vacation home buying rose to a record high in 2014, with an estimated 1. 13 million vacation home sales. The typical buyer had a median household income of $94, 380 and purchased a property with a median distance of 200 miles from their primary residence. Lawrence Yun, NAR's chief economist, calls it "amazing growth" that nearly doubled the total number of vacation home sales over the past two years.

What's behind it? Yun attributes it to the fact that "affluent households have benefited greatly from the strong growth of the stock market in recent years" and that there has been "long-term growth in the number of baby boomers approaching retirement and buying second homes." in a few years to convert to their primary home. "Linda Rheinberger, regional vice president of NAR, lives in Las Vegas -" ground zero when the market fell " as she describes it – believes the reason for the increased interest in buying a vacation home now is that" people are tired " Considering the next shoe is going to drop, the outlook on their finances is "calmer" than it was a few years ago "and they don't want to put off buying the vacation they desire.

Note: This post is about purchases made primarily for the personal use of the buyer or his or her family, and not made primarily as an investment. (See vacation home or income producing investment? ) Interestingly, the number of vacation properties for investment purposes has fallen for the fourth year in a row.

Decision-making strategies: 6 questions to ask yourself

When it comes to deciding on a vacation home, Karyn Glubis, a realtor in Tampa, Florida, has this advice: "Take your time. You don't have to buy the first property you fall in love with … just like dating, there will be another choice that may be a better choice in the long run."

And before you" I do "say, ask yourself these six questions:

1. Can I afford it?

This is probably the most important question of all. For the answer to this one, solve heart, engage brain (and the brains of your trusted financial advisors). Calculate the cost of owning a vacation home, including:

• Mortgage payments
• Property taxes (which can be higher for non-residents than residents)
• Insurance (post Sandy, flood insurance on the East Coast has skyrocketed)
• water , gas, electricity
• Association membership in resort developments
• Garbage removal
• Landscaping
• an alarm system
• The cost of having someone watch over the property while you are away

And for the inevitable emergencies, you need a "slush fund." Financial advisor David Monberg suggests you set aside 1% to 2% of the purchase price of your home.

A calculation that can help answer the question, is it worth it? "Question: estimate the number of weeks you will spend each year in your second home and multiply the weekly rent at a favorite vacation spot. Is the rent more or less than you would spend on the second home? Andrew Novick, a Pennsylvania-based financial planner, says, "A good rule of thumb is to keep housing costs for one or two homes under one-third of your income. "

Owning a second home is as much a lifestyle as it is a financial investment issue. Monberg suggests starting with a thorough financial analysis – what are your long-term goals and how will buying a second home affect them? "Will it take you away from your savings plan or investment model? Is this a new target or one that has already been included in your plan? Are you willing to invest another five years in the timeline to accumulate enough for retirement, for the education of your children? "There are no guarantees, he says:" You can't factor in a "perfect scenario" – the market will go up and it will go down. You must take into account the bad times and the good, because there will be both. "

For wealthy families: Considering the financial implications of purchasing a vacation home, Nikolay Djibankov, a financial advisor with the Matterhorn Group at Morgan Stanley Wealth Management, explains that this is typical for families with an In value of less than $10 million, the key questions are: "Can we afford it, what impact will it have on our cash flow and our long-term wealth plan if we liquidate assets or finance the purchase with a fixed or variable mortgage? "For those with a net worth of more than $10 million, the issue becomes" how to structure the purchase of the property to mitigate estate tax liability when the property is passed on to children and grandchildren? Structures such as the Qualified Personal Residence Trust (QPRT) can be useful – consult a reliable executor for this purpose. "

2. Should I buy it with my friend, my brother, another family?

Shared ownership is one way to make buying a vacation home financially feasible, but as realtor Lee Williams warns, "Get all the terms in writing. Nothing will strain or ruin a friendship faster than not having had a full discussion about potential issues before the deal is done. If you are buying with another family, you will use both at the same time? What are the guidelines for guests? What happens when one family uses the home more than the other? "And what happens when a family gets fed up and wants to sell?

3. How will I use the house?

Do you really want to use this second home in a way that makes it worth the purchase? Tyler Gray, a financial advisor in Oklahoma, asked a client who was buying a vacation home if he would find himself in the same place for the next 15 to 20 years. "He replied," No, of course not! "We sat in silence for 10 or 15 seconds before the light bulb went off in his head …. For him, a much better plan was to simply rent a vacation home so he wouldn't feel tied to one place. "

If you plan to rent out your home to help offset costs, be realistic about the income you can generate and be sure to review all construction documents and association bylaws (if you are moving into a resort community) and familiarize yourself with local laws that affect rentals. (For more information, see Buying a Second Home to Rent: Dos And Don'ts. )

Peggy Fucci, a realtor in South Florida, recommends contacting your broker to oversee the rental of the property if this is the path you want to take. Remember, too, that being a landlord may not be something you want to be, and having someone else manage your property and rent for you can carry a hefty fee – sometimes as much as 50%.

4. Where should my vacation home be?

If you're like most vacation home buyers, you want to buy in a place that's completely different than when you live full time. Rheinberger says 9 out of 10 people want a climate, a landscape, just about anything other than their primary residence. Forty percent of all vacation homes are in a beach area.

To see which are the most popular destinations for online searches for vacation rentals, visit Trulia's interactive website. Click on a city and you will see which are the five most popular destinations in this area. According to this map, top five in the U.S. are Ocean City and North Wildwood, New Jersey; Kissimmee, Florida; Ocean City, Maryland and Marco Island, Florida.

If you want to rent out your house, you should buy in an area that attracts tourists. Ben Kinney, a real estate agent in Washington, suggests checking out Airbnb, HomeAway, VRBO, LoveHomeSwap, VRBO and Flipkey to see what the favorites are on these sites.

To make sure you really like a place, rent before you buy. Novick recommends that its clients do this for one year.As he points out, "it can be an expensive mistake if the perfect vacation home is in the next town over. "Spend time in all four seasons in your future vacation home. "What's cheerful in the spring can be loud and chaotic in the summer," warns realtor Siben.

Sharon McIntosh, a realtor in New York City, bought a 1920s Montgomery Ward kit house two years ago and has been renovating and restoring it ever since. She recommends looking at transportation options. "How are you going to get there? If the drive is longer than two or three hours, you don't want to drive every weekend. I set my limit after two hours, " she says. "How do your guests get there? It's great to be on a train route, even a bus route is good for some. "Also to consider, she says: Do you need hiking, swimming, access to restaurants, cultural activities? If the latter, consider a college town. Do you want to get away from it all or with others who share your interests?

If you have young children, make sure there is enough entertainment for them as well. Contact local school district, recreation department and religious institutions to get a sense of what is available for children. Talk to parents at the local grocery store and playground.

5. What kind of house will it be?

The majority of vacation home buyers purchase a single-family home; 27% purchase a condo and 18% purchase a townhouse or townhome. Tammy Barry, who does sales and marketing for Heritage Harbor Ottawa Resort in Illinois, says buyers must decide whether they want "the turnkey, maintenance-free lifestyle of a townhome or condominium community or the extra space of a single-family home. "However," vacation homes are places to spend time with friends and family; open floor plans and flexible spaces that can be converted into additional sleeping areas if needed are what people want most. "

According to the NAR survey, the size of vacation homes dropped by 200 square feet from 2013-2015, but some in the business would like to see it drop even further. Dan Dobrowolski, founder of EscapeHomes, designs 400-square-foot cottages, many of which are at 75.000 dollars to start. It promotes them for their beauty, affordability and portability. "We can produce and deliver a new authentic cottage-style vacation home within 60 to 90 days, and people can start living in it immediately. "Who's buying these" tiny homes "? According to Dobrowolski, "young couples and families, empty nesters, single men and women, name it. "Recent clients have included a Silicon Valley couple putting their property in vineyards and professors at the University of Iowa settling on a lake. " (See also Financial Considerations About Buying a Small Home .)

6. What are the tax implications of owning a vacation home?

Current laws offer several tax breaks that can help make second home ownership more affordable. If you use the property as a second home rather than a rental property, you can deduct mortgage interest as you would for a primary residence.You can also deduct property taxes. If you rent your property for more than 14 days, the rules get more complicated. (For more information, see Tax breaks for second homeowners .)

The last line

When to buy, where to buy and whether to buy a vacation home is a decision that requires careful decision making. Research, rational calculations and advice from a variety of experts from financial advisors to real estate attorneys to realtors. As real estate agent Melanie Siben says, "You better love, love, love the house you're going to buy, because if investment potential is the reason you're buying this house, you definitely need to rethink it. "