10 Investment Tips for Buying a Vacation Home

By: Rebecca Fairley Raney  | 

Want to invest in a vacation home? Inviting as the idea may be, there's a lot to think about before taking the plunge. See more real estate pictures.
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You've discovered this great resort community. You've had a great time there. And you'd love to go back any time you want and serve as the arbiter of great vacations for others. And hey, if you make some money along the way, there's nothing wrong with that.

Congratulations. You've taken your first step toward buying a vacation rental.

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But investment experts warn that you should never look at the idea primarily as an investment. If you need investment income, then put together a solid portfolio of blue chip stocks. A vacation house will never provide the returns of a diversified portfolio.

However, if you love a particular beach house and cherish the time you spend there, then you're on the right track. Yes, you can share this experience with others. But to make the purchase work, you have to be the house's No. 1 renter.

Let's look at 10 ways to make the most of your vacation home investment.

10: Buy Only What You Can Afford

It's not hard these days to figure out what you can afford. The Internet is virtually choked with mortgage calculators to help you figure that out. You simply enter what you make and what you owe, and the calculator will tell you how much more the banks will lend you.

The lending environment has changed substantially over the past decade. Since crazed lending practices of recent years have ended, the banks have started imposing stringent requirements on applicants. You need a 20 percent down payment, and you need for your monthly outlay for houses and cars to go no higher than 36 percent of your income.

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Even if you view the vacation home as a potential way to earn income, don't count on that income to help you pay for the house. Keep in mind that you don't have to buy the ultimate beach house with high ceilings and private docks. It's OK to start small.

9: Factor in Extra Costs

The sand and salt water may be beautiful, but they definitely cause extra wear and tear on a home at the beach.
The sand and salt water may be beautiful, but they definitely cause extra wear and tear on a home at the beach.
©iStockphoto/Thinkstock

Once you know what you can afford for the loan, take another look at total costs for running the house.

At the very least, you'll have to cover taxes, insurance, maintenance and utilities. If you live more than an hour away, you might have to factor in the cost of a caretaker or property manager. Also, when you figure maintenance costs, get an idea from someone who lives in the area full-time about what it really takes to keep a house in good condition.

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In beach and mountain areas, sand, salt, wind and ice can raise a home's maintenance costs substantially. A beach house may need to be painted every two or three years, and a mountain house may need annual deck repairs.

Whatever you do, when you figure the costs, inflate the numbers. If you're figuring on a worst-case scenario, you'll rarely run across a surprise.

8: Buy an Existing Home Instead of Land

The idea of building a house to suit your dreams is very appealing. However, in resort areas, it can quickly turn into a nightmare.

To build a house from the ground up, you may have to deal with coastal authorities, local building restrictions, aggressive homeowners associations and sketchy contractors who work for beer money -- if they feel like it.

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Coastal commissions in some states are so controlling that they define which plants you can grow. In ritzy resort areas, homeowners associations won't even let you paint your deck unless you use a contractor on an approved list.

Granted, not all resort areas come with these caveats, but the process of building a house rarely comes in under budget. If you want to keep your costs under control, stick with a house that's already there.

7: Don't Buy a Timeshare

Timeshares are a risky venture, which is why you hear about so many people trying to get out of them.
Timeshares are a risky venture, which is why you hear about so many people trying to get out of them.
©iStockphoto/Thinkstock

Even in a good economy, it's hard to sell a timeshare. In the current economy, it's so tough to sell these properties that the scammers are swooping in. In 2009, a state consumer affairs official in Florida described the problem as "almost epidemic."

Here's what happens: Someone calls the owner of a timeshare and says he has a buyer or will start paperwork to sell the property. And there's always a fee, generally in excess of $1,000. Once the fee is paid, the seller never hears from this person or his company again.

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Bottom line: If there are so many people who want to get out of timeshares that they create a robust market for scam artists, then there's something wrong with this concept in buying.

6: Work With an Agent Who Knows the Area

You drive to a little country town, and sure, it looks great. It's picturesque. The boats bob gently on the lake. The little corner grocery carries artwork by local craftsmen. But I bet you didn't know that the road that leads off to the most exclusive neighborhood is closed for five months out of the year.

A real estate agent would know that.

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Resort communities are charming, but they can carry problems that are hard to live with. In the mountains, you've got tough driving conditions. At the beach, you've got parking problems. A real estate agent will help you envision that winding road to the cabin when it's covered with ice.

The agent can also be a great resource for little-known information on hidden bonds, community events and that group that likes to run naked through town every year on the solstice.

5: Make Sure the House and Location Make a Good Rental

Location, location, location: A house on the beach will be much easier to rent out than one three streets over.
Location, location, location: A house on the beach will be much easier to rent out than one three streets over.
©iStockphoto/Thinkstock

Your idea of the perfect vacation may mean going to a place with no television, no cellphone and no sight of your neighbor's fence. But that's generally not what people who rent vacation homes want. If you're really going to work to rent out the property, make sure it's well suited for vacationers.

You need to be on the beach. Not near the beach. You need a house with lots of cots and sleeper sofas so it can bed down as large a group as possible.

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Ideally, the home will be in the thick of things. Keep in mind that not all people enjoy tracing their way through winding roads. Think of your vacationer as someone who wants to find the house, park the car and never get in the car again for the entire week or weekend. They want to walk to the beach, walk to the store and walk to the trailhead.

These types of properties generally cost more, but they make better rentals.

4: Research All Four Seasons Before You Buy

It's a good idea to visit the area in which you plan to buy during every season. Though the hiking may be great, the roads may be impassible for part of the year. Or the beach may be beautiful during the peak of summer, but as winter approaches, the area may be plagued by the smell of fish.

By renting houses in different parts of the community during different times of the year, you're ensuring that you know how the community fares as the calendar unfolds. If you're gung-ho on the idea of renting the house to make money, you need to be able to collect those rental fees for as much of the year as possible.

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3: Don't Buy Outside the Country

If you love Mexico, plan a vacation there: If you're purchasing a home, though, it's less risky to stay inside the country.
If you love Mexico, plan a vacation there: If you're purchasing a home, though, it's less risky to stay inside the country.
Medioimages/Photodisc/Thinkstock

In other countries, rules about title and ownership are not as clear as they are in the United States. For example, in Mexico, you can buy the house but only lease the land. The government owns the land. And the government can take it back at any time.

In many countries, you run the risk of your property being ransacked or nationalized. Think of most of the world as a place where there is no 911.

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At the very least, if you want to buy overseas, read the State Department's report on the country. It's an authoritative guide that will help you assess whether the risk is worth the money.

2: Approach Joint Property Investments Carefully

These types of agreements can start wars even in the warmest families. But if you're convinced that your family can weather disagreements about buying, selling, renting and using the property, then build a few precautions into your contract.

First, set down some rules about the percentages of ownership accorded each party and what rights those percentages confer. If you put in 70 percent of the money, does that mean you're entitled to 70 percent of the proceeds from rent? And if the property is sold, do you get 70 percent of the sale price? It stands to reason that you would, but just to be on the safe side, get it in writing. Sometimes people remember numbers differently when money is involved.

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Also, are you allowed to sell your share of the property? If so, can you sell it to anyone you want?

In any event, you want to make sure you know your partners in the deal very well, and make sure they're willing to spell out every detail of the rights and privileges accorded with joint ownership.

1: View the Home as a Form of Recreation, Not an Investment

Be sure you're buying a vacation home for the right reasons -- a place for your family to gather for years to come is priceless.
Be sure you're buying a vacation home for the right reasons -- a place for your family to gather for years to come is priceless.
Goodshoot/Thinkstock

Investment experts will be the first people to tell you that you'll never make the money on a vacation house that you could make on other investments. So if you buy one, make sure, above all, that this is a house and an area you enjoy. It will be worth the cost if you spend as much time there as possible, put your heart and soul into caring for it or plan to keep the home in the family for future generations. You can't put a price on that.

For more information on buying a home, check out the links below.

Originally Published: Mar 29, 2011

Buying Vacation Home FAQ

Is owning a vacation rental profitable?
Investment experts warn that you should never look at a vacation rental primarily as an investment. However, an owner who rents out a second home may collect anywhere from $11,000 to $33,000 or more a year in rental revenue, so it can certainly put some extra cash in your pockets.
What are the disadvantages to owning a vacation home?
One of the major disadvantages to owning a short-term vacation home is the higher than average maintenance, cleaning, and repair costs. Since you likely won't be living nearby, you'll also need to employ the services of a property manager, which can take a chunk out of your monthly profits.
How much money do you need to buy a vacation home?
Much like purchasing a primary residence, you'll need money for a down payment and pre-approval for a mortgage. Since you already own another house, you may have a higher debt-to-income ratio, so you need a 20 percent down payment and for your monthly cost for houses and cars to go no higher than 36 percent of your income.
Where is the best place to buy a vacation home?
You should buy a vacation home somewhere that you love and want to go back to over and over. After all, you may be it's number one tenant. You should also consider the real estate market, distance to popular spots like the beach or downtown, and the popularity of the area, as you want to choose a place that is frequented by tourists.
How far away should a vacation home be?
This depends on your preference, current location, and how often you're planning on visiting. If you're hoping to use the vacation home frequently, you may want to be able to drive there in a few hours. If you're planning to rent it out, the home should also be somewhere that tourists want to visit. Talk to a real estate agent in your area and take these things into consideration as you identify a few potential spots to purchase a vacation home.

Lots More Information

Related Articles

  • Bankrate.com. "Mortgage Calculator." (March 22, 2011)http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx
  • Howard, Clark and Mark Meltzer. "Clark Smart Real Estate: The Ultimate Guide to Buying and Selling Real Estate." Hyperion. April 10, 2007.
  • Karpinski, Christine. "Profit from Your Vacation Home Dream: The Complete Guide to a Savvy Financial and Emotional Investment." Kaplan Business. July 1, 2005.

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