4 Things You Need to Know Before Buying a Vacation Home
July 20, 2016 | Your Finances
As we hit the peak of this summer season, you might be thinking about how great it would be to have your own vacation home. It’s that desire to make the most of summer that led Rich Postlethwait, a mortgage loan officer from Barrington, Illinois, to first consider buying a second home.
But he didn’t make the decision lightly. Before they purchased their two-bedroom cottage, Postlethwait, 52, and his wife, Lisa, 49, crunched the numbers to make sure they could afford it. “Ultimately, what made me comfortable with the purchase,” Postlethwait said, “was that my wife, who is an occupational therapist, decided to go back to work part-time.”
Daniel Lagerborg, a Wealth Management Advisor with Northwestern Mutual, sees people fall in love with the idea of a vacation home all the time. But he urges them to think about how it will impact their broader financial plan before they make the decision to buy. Here are his tips to help ensure you can afford the vacation property you’re dreaming about.
1. Don’t expect to recoup your investment. Many people purchase vacation homes and expect to rent them out to defray the costs. But Lagerborg doesn’t recommend that buyers count on that income.
“We find that most people want to use the property during the best times to rent it,” said Lagerborg. For that reason, he recommends that buyers see rental income as a bonus.
Counting on the property appreciating in price is also risky since “the demand for vacation properties is very cyclical,” said Lagerborg. “When the economy is good, demand goes through the roof; and when the economy is bad, demand falls through the floor.”
2. Be realistic about the costs of ownership. As a mortgage professional, Postlethwait had a clear idea of the costs of ownership before deciding to purchase his vacation home.
He crunched the numbers using a “full Excel spreadsheet of what our fixed costs would be, like the mortgage, taxes, insurance, utilities and homeowners’ association fees,” he said. He recommends that anyone considering buying a vacation home do expense analysis as well, to make sure there are no surprises.
Even though it may take longer to save up for it, Lagerborg also urges buyers to consider making a large down payment.
“If somebody has a robust income,” he said, “I think they are fine putting 30 percent down. But if somebody has a tighter income or they’re entering retirement, it’s better to put down 50 percent to 75 percent.” That way, if vacation home prices drop significantly because of an economic downturn, you can still sell at that reduced price if you need to without owing additional money.
3. Don’t derail your financial plan. While saving for a vacation property might be one of your financial goals, Lagerborg cautions that it shouldn’t be at the expense of other priorities. Before starting to put money aside, he recommends that clients consider how on track they are for their other goals, like saving for retirement and taking care of kids’ college education.
That was something Postlethwait considered since he and his wife have four kids. “I was really thinking about future college expenses,” he said, “as we considered whether we could afford a vacation home.” But with his wife’s additional income, Postlethwait found that they could own the cottage they dreamed of without endangering their other goals.
4. Don’t overspend. When you’re buying a vacation property, it’s easy to let emotions affect the decision. Many people fall in love with a particular location or property and want to make an offer even if they know it’s over their budget.
But Lagerborg cautions against this. “I recommend that my clients find seasonal rentals in many different places [before deciding to buy] so that they can find what suits them best,” he said. “It allows them to make a more deliberate decision about what they really need and want in a vacation home. The result is they’re less likely to overspend.
If You Can’t Afford It, It’s Difficult to Enjoy It
As the owner of his own vacation property, Lagerborg knows firsthand that these retreats can provide your family with summers full of priceless memories. Having worked with vacation home owners, he’s seen these beloved homes passed down through generations. But he’s also seen that if you’re worried about whether or not you can afford the property, those concerns can easily overshadow the time you spend there.
Postlethwait is glad he made sure it was the right decision for his family before buying. When they’re at the cottage, they can simply relax and enjoy the retreat. “We feel like we are on vacation when we’re only an hour and 45 minutes from home,” he said. “We can really leave all our worries and responsibilities behind.”