Tips For Purchasing Your First Vacation Home

Airbnb is great, and hotel rooms provide some awesome doses of luxury, but after a while, not having your own space in your favorite (and often frequented) vacation spot becomes a bit of a drag. Cue an ingenious idea: Why not purchase your own vacation home and rent it out for extra income while you’re not there? It seems simple, but it truly is anything but. Despite the challenges that face second house purchases, vacation homes now make up about 21 percent of all home sales. If you’ve decided to make an investment on a vacation space, keep the following tips in mind.

3 Tips For Buying A Vacation Home

Take A Hard Look At Your Budget

Costs for a second home go far beyond the initial purchase price. You must also take into account the following: insurance costs, property taxes, homeowner fees, furnishings, utilities, and more. If you do plan on renting out your home, you may be required to pay a fee to the city or homeowner’s association. Many second homeowners make the mistake of assuming their rental fees will cover the cost of their investment, but this often isn’t the case. Unless you have a steady stream of renters built up, and a bevy of cash to sit on while you wait for profits to roll in, you may be sitting in a pile of debt for an extended period of time.

Securing The Best Financing

To make your vacation home dreams a reality, you’ll need to have an airtight plan as to how you’ll fund your purchase.

Conventional Mortgage

Will you pursue a mortgage? When it comes to obtaining the right mortgage financing, expect lenders to look for a great credit score, a strong debt-to-income ratio, and documentation on your income and assets. Typically, you’ll be required to have a down payment of around 20 to 30 percent for a vacation home. In general, your total monthly housing payments can’t exceed 38 percent of your monthly gross income if you hope to qualify, and you can expect higher interest rates for a vacation home than you would with your primary residence.

Home Equity Loan

You might also consider a home equity loan from LendingTree.com if you have enough equity in your current property. If home values in your area are declining, you may be hard pressed to find a lender willing to approve a home equity loan, in the case your loan actually drains too much value from your principal property.

Hard Money

If you’re looking for a home in a popular vacation spot, you’re going to have difficulty finagling the prices to something you can afford. In these cases, you might consider doing your own house flip; that is, purchasing a below market value home and fixing it up to your standards. Then, instead of selling, you can choose to keep it as your rental property. Cue hard money. It can be hard to secure financing for these types of ventures from banks and other traditional lenders, but it’s generally much easier to secure, and you’ll get larger amounts of capital.

Take a highly populated area like San Diego, for example. If you’re looking to vacation in this sunny California spot, good luck finding something affordable, and even better luck looking for a traditional bank loan. In this case, you could use a hard money lending company like SDEquityPartners.com that will give you the capital you need to purchase the home and fix it up. It’s generally easier to get larger amounts of money from hard lenders, and it could be a wise route if you’re working with less than stellar credit.

Regulations Might Thwart Your Rental Dreams

If your plan is to rent out your vacation home for periods of time throughout the year, make sure the local regulations don’t thwart your ideas. In many cities and areas, there may be laws regarding the amount of time a home can be rented out. If your property is part of a homeowner’s or condo association, it’s likely they’ll have specific rules regarding who can stay in the home and the length of time that this stay can last. Sometimes, resort areas enforce rental programs, which will force you to furnish the property a certain way. If this is the case, you’ll be required to fork over a portion of your rent to the program.

If you’re considering making an investment in a vacation home, take all of the above facets into consideration.

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Jon Dulin

Hi, my name is Jon and I run Penny Thots. I've been interested in personal finance since high school and love writing and talking about it. You can learn more about me in the Authors section of this site.