How to Stay Smart When Buying a Vacation Home
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How to Stay Smart When Buying a Vacation Home

  • How to find your weekend home in the mountains and make money.
  • Consider how often you would live there, if you would rent it out, and if the property would appreciate.
  • Figure out which mortgage financing plan works for your lifestyle investment below.

As a changing work life makes it easier to work from anywhere around the world, homebuying decisions have gotten more complex. You might spend most of your workdays in the city, but your job is flexible enough that you could actually get some use out of a vacation home in the mountains, where property is cheaper.

With the right planning, attaining the vacation-home-in-the-mountains lifestyle is easier than you might think. And if you’re excited to make the dream a reality, it starts with understanding your objectives in the context of how property investing, mortgage financing and tax rules work.

Defining Your Lifestyle Objectives

The term “vacation home” often implies owning a second home only after you own a primary residence, but that’s not a rule. It’s a lifestyle choice, so buying a home that’s not intended as your primary residence is often called “lifestyle investing” – and you don’t have to own a primary residence first.

If you’re considering making a lifestyle investment, there are 4 long-term goals you’ll want to consider first:

1. Extent of personal use – How often will you inhabit the property yourself?

2. Rental income – Is this something you want, or need, to offset costs when you’re not using the property?

3. Property appreciation – Consider this, and don’t forget about offsetting maintenance costs over time, too.

4. Future plans – Is there a possibility you would live in the property full time in the future?

Property Use, Financing And Tax Options

Based on your assessment of these 4 goals, you’ll then decide which property ownership option is most suitable from usage, financing and tax perspectives. When it comes to getting a loan, there are 3 options for you to consider:

1. Primary residence loans are used for buying a home to live in. Good news about a primary residence loan is, you can buy for as little as 3% down (if the loan doesn’t exceed $417,000), mortgage rates are the lowest they can be, and you get significant homeowner tax benefits. You must live there for at least one year, and then you can rent the property out as much as you want.

2. Second home loans are intended for buying a vacation home for personal use only. With a second home loan, you can buy for as little as 20% down, and mortgage rates and tax benefits are the same as primary residences. But make sure you read the fine print on your lenders’ second home loan – most agreements say you can’t rent the home out.

3. Investment property loans are for buying a home you want to rent out. These loans allow you to use the home when it’s not rented, and the rental income can help you qualify. Rates are between 0.25% and 0.375% higher than second home rates, and while you can sometimes get a rental property loan with 20% down (if the loan doesn’t exceed $417,000), down payments often start at 30%. If rental income exceeds expenses each year, the income is taxable. If expenses exceed rental income, these losses can create lower taxable income each year, or the losses can accrue as an offset to capital gains taxes when you sell. Be sure to ask your tax advisor which one fits your tax profile.

Who Can Advise On Your Best Approach

For expert advice on a lifestyle investment that fits your needs, it’s helpful to seek out a real estate agent and lender to get started. You can also talk to a financial advisor to discuss how a lifestyle investment fits into your overall investing strategy.

Once you have a real estate agent, they’ll help you find homes, clarify local transaction fees, taxes and commissions, and advise you on local zoning and rental rules.

Your loan advisor will help analyze your options, asking questions like: can you afford to own in the city and the mountains? Or, is it better to rent in the city and buy in the mountains where it’s cheaper? And if so, they’ll show you which of the three options above is eligible given your employment profile, and most efficient from a budget and tax standpoint.

If you’re thinking about making a lifestyle investment, keep these tips on hand to help you through every stop of the process. Happy house hunting!

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Tali Wee writes about finances, home improvement and interior design for Zillow.
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