Oh, the vacation home. The perfectly curated lawn, the swing chairs. The fireplace, the wine cooler, and that incredible view. The promise of fantastic memories with friends and loved ones.
Yes, vacation homes are incredibly tempting. And, in the right situation, they can even be good investments.
However, before you decide to give in and buy the vacation home of your dreams, ask yourself these questions.
1. Why am I buying this vacation home?
Are you buying a vacation home because you want a weekend getaway or a place to relax by the beachside with your family? Because if you are, you can look for rentals. You don’t need to buy the property. What is the advantage of renting a vacation home? Well, if you decide you don’t like the beach that much after a year, you can simply not renew your rental lease.
If you’re going to use the house as an investment, you need to do some research. First and foremost, you need to see how much demand there is for similar properties. If there are a bunch of apartments on the beachfront, for example, you should talk to the owners to find out how they’re doing and what kind of demand exists for their properties. After you’ve done this, compare the expected returns with your budget allotments to make sure you’re making the right call.
2. How am I going to pay for it?
The first thing you should mentally calculate after you hear the price of a property is 20%. Ok, you can use a calculator if you want.
Why 20%? Well, that is what most loan agreements require you to submit as down payment. Once you’ve done this, you can go ahead and calculate the EMI, interest and taxes. Consider your worst case scenario when you are creating a budget. So, your budget should allow for the minimum income this property might net you while incurring the maximum expenses. You don’t want to be caught in a situation where you hoped you’ll earn twice the rent that you’re currently getting.
3. What is the renting situation going to look like?
Are you going to be your own landlord or have a property management company handle your vacation home? Who are you going to rent it to – people you know, or clients who approach you through agents? Ideally, you should be open to both.
If you’re going to handle the bookings yourself, make sure you perform a proper background check on the people who apply.
4. What is my exit strategy?
Look, things go wrong. If your vacation home is a business, you have to treat it as such. And in any business, you need to have contingencies. At every step of your investment, you need to have a sound plan in place in case you want to remove yourself from the equation.
Maybe you find that the property rates have appreciated enough to justify a sale. Maybe you’re tired of dealing with renters. Or maybe, you’re just tired of the beach. I know, these aren’t exactly rosy scenarios, but you need to make sure you are prepared if and when they do occur.
So, buying a vacation home can be great under the right circumstances. But you need to make sure you’ve though things through. Like any other investment, you must ensure that you and your family will be taken care of even if things go south.